How will crude oil price slump impact Nigeria

Market Background

Nigeria is the largest consumer of palm oil in Africa with a population of 196 million people (World Bank, 2018). The nation consumed approximately 3 million MT of fats and oils in 2019, with palm oil accounting for 77.6% of the market share or 2.33 million MT (Oil World, 2019). In the same period, production stood at 1.1 million MT resulting in a supply shortfall of 1.23 million MT in the country which are met through imports. Benin and Togo are the largest exporter of palm oil to Nigeria in 2018, commanding 32.5% and 20% respectively, followed by Malaysia at 20% and Indonesia at 11%.

Palm Oil Import Restriction

Under a presidential directive, Central Bank of Nigeria (CBN) has barred palm oil importers from accessing foreign exchange services. Imports of crude and processed palm oil are both subjected to a 35% import duty (highest in the West African Region). These policies were enforced with the aim to reduce dependency towards palm oil imports and increase local production as well as to conserve Nigeria’s dwindling foreign currency reserve. It was reported that Nigeria spent approximately $500 million on the importation of palm oil. Government of Nigeria further enforced these policies by banning cross border trade between its neighbours namely Benin and Togo, which are re-export destinations for palm oil into Nigeria due to duty discount from ECOWAS Agreement (10% import duty for palm oil).

Impact of crude oil price slump to Nigeria’s Economy

Considering the recent COVID-19 spread, Saudi Arabia, through OPEC, proposed a cut in crude oil production in the effort to maintain prices. However, Russia declined to cut production as they claimed it would aid in USA’s shale industry. To pressure Russia, Saudi Arabia flood the market with discounted crude oil price, starting an oil price war with Russia. This move will certainly impact other smaller oil producing countries such as Venezuela, Mexico, and Nigeria. 

According to Nigerian National Bureau of Statistics, Nigeria’s main contributor to the economy is the exports of crude petroleum. A member of OPEC, Nigeria is heavily dependent on petrodollars to sustain their foreign currency reserve. Brent crude oil prices has been dropping since the start of the price war, dropping 50% from the period of 6th March 2020 to 18th March 2020.

Conclusion

It is foreseeable that due to the price slump, Nigeria’s foreign currency reserve will be affected and the spill over effect could lead to stricter import policies. However, Nigeria is still reliant on oils and fats imports to satisfy its 3 million MT consumption. Local production alone will not satisfy its consumption in the near future. Imports of Malaysian palm oil in the region has increased by 18.4% in 2019. With the recent cross-border trade ban between Nigeria, Benin, and Togo, it would certainly create an import vacuum from the two biggest exporters. An introduction of a stricter import policy will have an adverse effect on the supply of oils and fats in the region which could lead to a large shortage.

Prepared by: Fazari Radzi

*Disclaimer: This document has been prepared based on information from sources believed to be reliable but we do not make any representations as to its accuracy. This document is for information only and opinion expressed may be subject to change without notice and we will not accept any responsibility and shall not be held responsible for any loss or damage arising from or in respect of any use or misuse or reliance on the contents. We reserve our right to delete or edit any information on this site at any time at our absolute discretion without giving any prior notice.

You can share this posts:

Related Articles