Nigeria’s over-reliance on income from crude – oil sales make up around 90% of foreign exchange earnings and about half of government revenues – means the ability to fund its yearly budget very much depends on the external forces of the energy market.
After a sharp decline in the global demand for and price of crude triggered by the novel coronavirus pandemic last year, Nigeria, Africa’s biggest oil exporter, had to cut the size of its record 10.6 trillion naira ($34.6 billion) budget for 2020 as well as lower its oil price benchmark from an initial $57 per barrel to $28.
The downward revision came as a combination of a record contraction in demand for the commodity amid stalled economic activity and the collapse of an output pact between the world’s top producers Saudi Arabia and Russia sent prices down by as much as a third.
The Nigerian economy fell into its second recession in four years after contracting in the second and third quarters following the crash in global oil prices as the pandemic spread around the world.
In the aftermath of last year’s budget financing constraints as a result of instability in the global crude oil market, Nigeria lowered its output target and expected oil price benchmark for 2021.
The government hinged the N13.08 trillion ($34.4 billion) 2021 budget on an oil price benchmark of $40 per barrel and a daily oil production estimate of 1.86 million barrels per day, compared to $57 per barrel and 2.3 million bpd output target for 2020.
Three weeks into 2021 and the outlook for Nigeria is bullish, however, going by the recent recovery in oil prices as mass Covid vaccinations are rolled out across the world and the latest forecast on oil by Goldman Sachs. The American investment bank had in December said it expects benchmark Brent Crude to average $65 per barrel this year.
Goldman doubled down on its bullish tone this week in a note quoted by Reuters, where it said oil prices will be supported this year by the upcoming massive economic stimulus package in the United States and the low probability of much Iranian oil returning to the global market.
A $1.9-trillion Covid relief package proposed by President Joe Biden will stimulate the American economy and lead to a rise in U.S. oil demand by around 200,000 bpd over 2021 and 2022, the bank said.
The stimulus package provides welcome relief for Americans struggling financially because of the pandemic. Newly-inaugurated President Biden favours stimulus that puts money in the pockets of average citizens and along with his Democrat counterparts, has publicly urged U.S. Congress to swiftly pass the plan, warning of the need to juice the economy amid rising unemployment, homelessness, and hunger.
The bank also expects that the issue with the Iranian nuclear deal will not be resolved soon, meaning its oil won’t be reaching the global market just yet, which would have caused a new oil supply glut.
“Delays in a full return of Iran production would reinforce our bullish oil outlook since we already forecast a tight 2022 crude market with low OPEC spare capacity,” Goldman Sachs analysts said in the note.
While this year should be better – compared to the catastrophe that was 2020 – in terms of revenues for Nigeria as oil prices recover, Africa’s largest economy is still struggling to shake off a 2016 recession, caused by the oil price collapse of late 2014. Economic growth hovered at around 2% before the consecutive plunges in gross domestic product last year.