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Financial Derivatives Company: What higher oil prices mean for Nigeria
As Brent crude hovers around 61 dollars, analysts at the Financial Derivatives Company say this would imply higher export earnings to fund Nigeria’s budget and raise external reserves. They also note that a potential increase in petrol pump price in Nigeria could further depress consumer disposable income and push inflation upwards. Pelumi Osode, Senior Economist at FDC joins CNBC Africa for more.
Thu, 11 Feb 2021 14:13:00 GMT
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AI Generated Summary
- The surge in oil prices implies higher export earnings for Nigeria, benefiting the budget and external reserves.
- The removal of fuel subsidies could lead to higher petrol prices, impacting consumer disposable income and spending.
- Nigeria's GDP outlook is influenced by compliance with oil production cuts and the global economic recovery.
As Brent crude hovers around $61 per barrel, analysts at the Financial Derivatives Company have noted the implications of higher oil prices for Nigeria's economy. The increase in oil prices implies higher export earnings, which could fund Nigeria's budget and boost external reserves. Pelumi Osode, Senior Economist at FDC, highlighted the factors driving the oil price recovery, including tight supply from oil-producing countries and draining stockpiles in countries like China and the United States. This surge in demand has propelled oil prices to pre-pandemic levels, benefiting oil-dependent countries like Nigeria. Osode emphasized the positive impact of higher oil prices on Nigeria's budget, noting that the current price levels exceed the country's oil price benchmark of $20 per barrel. This surge in oil prices is expected to increase export earnings, revenue allocation to various sectors, and boost foreign reserves, leading to a decline in fiscal deficits. However, Osode cautioned that the long-term outlook for oil demand is uncertain due to the global shift towards cleaner energy sources. She emphasized the need for Nigeria to diversify its economy beyond oil to ensure sustained economic growth beyond 2021. In terms of the average Nigerian consumer, Osode highlighted the potential impact of higher oil prices on petrol pump prices. She noted that the government's policy of removing fuel subsidies could lead to an increase in petrol prices, which would in turn raise transportation and logistics costs. This could further erode consumer disposable income, putting pressure on households and businesses. Osode acknowledged the short-term challenges posed by the removal of fuel subsidies but emphasized the potential long-term benefits of the reform. Despite the initial pain, she believes that the reform could lead to a more stable and regulated pricing mechanism in the future. Looking ahead, Osode shared insights on Nigeria's GDP outlook for the year. She mentioned that Nigeria's compliance with oil production cuts could impact economic activities in the sector. While she expects a contraction in the oil sector initially, she remains optimistic about a rebound in demand towards the end of the year. Factors such as vaccine rollout and global economic recovery could drive increased oil production and economic growth in Nigeria. Overall, Osode's analysis provides a comprehensive overview of the potential implications of rising oil prices on Nigeria's economy and consumer dynamics.
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