Should oil price average $55 barrels per day this year and recent oil production trends in the country continue, Nigeria could see about $5bn (N985bn) oil revenue shortfall, PricewaterhouseCoopers has said.
PwC’s economists, in a new report published this week, said this financing hole could widen to about $10bn in the event of a re-emergence of Iran oil production in the second quarter of the year as price is expected to hit a low point of $35 per barrel, slowly recovering to an average of $45 per barrel.
They said significant debt issuance and cuts to recurrent expenditure would be needed, adding that state governments could struggle to borrow from the financial markets to pay their workers.
According to the report, some highly-indebted states may miss planned interest payments on their debts.
If oil production falls by 15 per cent through bunkering and other supply disruptions, gross oil revenues will fall to a third of the 2013 level (about $43bn), it stated.
“Combined with difficulties of administering tax collection from unstable parts of the country, we would expect the Federal Government to fall over three months behind on paying employee wages and government bond yields on US dollar-debt could approach 20 per cent,” the economists noted.
They said that they expected that if the oil price continued to stabilise, the Central Bank of Nigeria’s recent adjustment of the exchange rate regime would be sufficient to ease pressure on the naira this year.
“However, if oil prices deteriorate further, a further 10 per cent devaluation of the naira will be necessary in 2015,” they stated.
They said any deterioration of the political and security landscape could unnerve investors and tip the country into recession.
If a ‘medium’ political shock occurs against the backdrop of a severe oil price scenario, the report predicts that Nigeria’s economy could see zero growth or even contract in 2015 and 2016.
It, however, stated that despite the uncertainties generated by the volatility in oil prices and the significant drop in government revenue, the Nigerian economy would continue to grow, even if oil prices fall to $35 per barrel and average just $45 in 2015, provided there was no deterioration of the political and security landscape.
A Partner and Chief Economist at PwC Nigeria, Dr. Andrew Nevin, said, “Our modelling and forecasts show that while the economy will continue to struggle even under the most benign scenario, it will be able to realise growth averaging four per cent for the period.
“Despite oil’s importance to the Nigerian exchequer, the real economy is largely insulated against falling oil prices. This is driven by the fundamental structure of Nigeria’s economy and how the oil and public sectors interact with the non-oil sector.”