Saturday, April 18, 2015

Nigerian economy to heave sighs of relief as oil rises beyond $60 dollars

Nigeria, one of the foremost exporters of petrol, Brent crude, in particular, should be heaving a sigh of relief that the price of oil is rising slowly.

The conflict in Yemen has been attributed to this development. On thursday, tribal forces took control of a major southern oil terminal and airport.

What has been worrisome about the Nigerian reaction is the news coming from the Central Bank of Nigeria, (CBN).

First, it's pushing a hasty capitalization policy on the banks, especially on the strategically important banks in order to meet capital adequacy requirements. Many of the banks have been carrying out dividend reinvestment plans for this purpose.

Secondly, if foreign exchange reserves was the reason behind the CBN's reduction of the annual amount holders of naira denominated ATM cards are allowed to spend to buy goods from overseas,(from $150,000 to $50,000 per year), then there are possibilities that it could go back to the days before the boom when the price of Brent Crude was above $105 per barrel by instituting financially repressive regimes that not only hurts the economy, but the "common man" who will always respond to the dictates of the market.

Brent Crude risen beyond $60
Smiley face
Credit: Brent Oil Streaming Chart

Some online news reports state that the CBN is afraid of creating arbitrage opportunities that could leak away badly needed foreign exchange reserves.

The 2015 budget presented by the Finance Minister, Ngozi Okonjo-Iweala, was placed at a benchmark price of $52 per barrel. So, this Thursday's record rise to $64 per barrel of Brent Crude will surely cause some nerves to ease off a little.

Nigeria has a duty to commit themselves to eradicating a thriving black market in the country. That is what created the arbitrage in the first place. One believes that is quite a herculean task, given the fact that the banks posting megaprofits and politicians profit from the black market trade in foreign exchange.

Time is ticking away. It is unwise for the Finance Ministry and CBN to keep putting all their eggs in one basket. The economy has to diversify and get it done fast by encouraging other sectors of the country to be more innovative and productive.

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