Christmas may have come early for the Nigerian Government as the bonny light crude oil price rallied to close around $48.32 per barrel yesterday, a jump of nearly 30 percent since November 2, 2020.
This comes as a much-needed boost to the Federal Government who had seen the national budget deficit reach a massive N3.72 trillion as oil price took a hit in the first half of the year.
As crude oil price crashed in the first half of the year due to a supply glut, a deadly coronavirus and ensuing global city lockdowns, the Nigerian Government revised its benchmark target from $57 per barrel to $28 per barrel in June as the realities of the oil price meltdown devastated the Federal Government finances.
However, since hitting rock bottom at around $14 per barrel in April, crude oil price has rallied strongly in the oil trading market, rising as much as 229 percent in the last 8 months. The strong rally has been a huge relief for oil dependent nations like Nigeria who have entered economic recessions and posted ballooning fiscal deficits since the oil price meltdown began.
Despite the strong rally in crude oil prices, oil price is still trading below its beginning year price. At the start of 2020, bonny light crude oil price traded around $67.42 per barrel, representing a year to date return of around -28 percent.
The heavy decline in crude oil revenue which accounts for more than 90 percent of Nigeria’s foreign exchange earnings has led to around 3 technical currency devaluations in Nigeria so far this year. Naira which traded against the dollar in the official market at N305 to $1 was first marked down to N360 to $1, then $380 to $1, and now trades around $390 to $1 in the official FX trading market.
Analysts estimate that Nigeria reported average monthly deficits of around N531 billion in the first 7 months of the year, as government spending failed to take a significant cut despite the declining government revenue during the year. A strong rally in crude oil price over the last 4 months will suggest that the monthly fiscal deficit may have fallen below N500 billion monthly providing a huge relief for the Federal Government who had spent nearly 85 percent of its H1 revenue servicing the national debt.
2020 may not have been a brilliant year for the country for obvious reasons but at least the final months of it appears to be a gift from Santa to the economically struggling African giant. The federal government will be more than relieved to see crude oil price edging closer to the initial $57 benchmark target set at the beginning of the year helping ease concerns on the government’s precarious financial condition.