₦airaland Forum

Waoo; this is absolutely from a person within one of our high towers. May be my honourable Alma mata.....ABU. Thanks guru in that field.

Have we considered the effects of the increasing strength of the US dollar? That should also play a part cause we determine the exchange rate relative to that it.

@OP Nice write-up

reserves of various countries.

china has over 3 trillion dollars

http://data.worldbank.org/indicator/FI.RES.TOTL.CD

podosci:
with the falling oil prices, last i heard it is now down to 78$ per barrel, why has kuwait, Saudi Arabia and other major OPEC MEMBER S done anything to raise the price by cutting bck oil production on all countries?

.

The Gulf Co-operation countries: Saudi, Qatar, Kuwait, UAE.. have decided not to cut output.

Especially for Saudi, the vast oil reserves enable them to pump oil into the market to make up for price fall.

Even Russia (Non-OPEC) in light of hard-biting Western sanction cannot afford to cut output.

Countries like UAE and Qatar are become less reliant on oil money, thanks to visionary leaders.

Time for 9ja to diversify big time. Agro, light and heavy industry and aggressively export.

Instead of funding pilgrimage (religious pursuit should be a privately funded thing), they should subsidise companies focused on exportation.

Even subsidy and tax relief for a period of 10 years only will encourage exportation.

AreaFada2:
.

The Gulf Co-operation countries: Saudi, Qatar, Kuwait, UAE.. have decided not to cut output.

Especially for Saudi, the vast oil reserves enable them to pump oil into the market to make up for price fall.

Even Russia (Non-OPEC) in light of hard-biting Western sanction cannot afford to cut output.

Countries like UAE and Qatar are become less reliant on oil money, thanks to visionary leaders.

Time for 9ja to diversify big time. Agro, light and heavy industry and aggressively export.

Instead of funding pilgrimage (religious pursuit should be a privately funded thing), they should subsidise companies focused on exportation.

Even subsidy and tax relief for a period of 10 years only will encourage exportation.

usa used to be a major consumer of nigerian oil. now they are producers

grellworld:
usa used to be a major consumer of nigerian oil. now they are producers

.

True, improved extraction technology has made difficult/expensive to reach US oil deposits now easier/profitable to get out.

Plus they now produce more shale gas.

nijanigga:
Oil will be sold for $50/barrel next year. Attempt to cripple Putin and Russia.

Where did you get that. So other countries should cripple theirs because America is not happy with Russia. As a matter of fact, if you are current, you would know Russia has recently sealed 2 deals worth over $400B with China to supply them O&G.

Hmmmm.. Very Educative and Insightful ..

abeltolu:
The Nigerian media has been awash of the news of Naira devaluation due to fall in Oil prices, and the consequences it has on our economy. I surfed the internet and found this great masterpiece explaining in layman's method the Naira devaluation, its effects on individuals, e.t.c. Enjoy.

So How Did This All Start?

First thing first, oil price fell. Why? Everyone’s increased their production of oil and no one plans on cutting back. In the US, shale oil’s getting cheaper, so there’s more oil out there…and we all know what happens when you have a lot more of a product — price falls. When price falls, consumers are happy and producers are unhappy. Consequently, nations that are consumers of oil have a lovely time, and oil producer countries …a not so lovely time.

So? What Does This Have to Do With the Naira?

Before we go on, a little info on currency and exchange markets. It’s important to note that our currency doesn’t exist in a vacuum. Essentially, a unit of our currency is exchanged for a unit of another currency. Hence the term, Foreign Exchange or Forex or FX, for short. When we buy products from outside Nigeria, we have to exchange our Naira for Dollars. Your Naira is useless outside of Nigeria. It’s why you convert your Naira to Dollars before you travel. You want to test it? Travel to Dubai with only Naira.

Back to the question you raised. Nigeria is fortunate(?) to be an oil producing nation…when oil prices are high. Presently, oil prices are not high and that’s bad for us. Nigeria’s economy is dependent on oil revenue: about 75% of Government revenue comes from our crude oil sales. So when oil prices fall, oil revenue falls too, and that’s bad for the economy.

In the currency market, exchange rates are often centered on the health of a country’s economy. When the economy of a country is strong, its currency is also strong in the foreign exchange market. When the economy appears to be weak, its currency loses value in the currency exchange rate. Nigeria’s dependent on oil, so when oil prices are weak, so our currency loses value in the foreign exchange market. This loss of value of Naira is called a ‘depreciation’ in currency value.

Here’s a simple example. If we began with a dollar exchange for a Naira, both are in a sense equal. However, once I have to give out 2 of my Naira for just 1 of your dollar then the value of Naira has fallen. In the past months, the exchange rate was $1 dollar to roughly N150. Thanks to depreciation and eventually devaluation (we’ll get to that later), it’s now $1 to N168.

Alright. I Get the Currency Part, But What Does Our External Reserves Have to Do with our Naira Value?

To explain this, we’ll have to look into what the External Reserves is and why it exists. Think of your External Reserves as a Savings account where you put some portion of your salary every month. That money gets saved for something later: paying your children’s university fees, buying a house, or importantly, in case things get bad in the future (perhaps you lose your job).

Likewise, countries keep these reserves, but mainly to safeguard the value of their domestic currency, boost their credit worthiness, protect against external shocks and provide a cushion for a rainy day when national revenue plummets. When Nigeria earns revenue from oil, it gets paid in dollars, so we simply stash a portion of the money in our reserves.

Moreover, the reserves of oil producing countries like Nigeria tend to benefit economically from higher oil prices. The higher the price of oil, the more money oil producing countries like Nigeria get to earn and save.

So if We Have an External Reserve, Why’re We Worried?

Well, having a bank account doesn’t mean you have money. We have a reserve, but our money no plenty. Nigeria has been dancing shoki with its reserves. When oil price was high, we apparently weren’t saving that much into our reserves. In fact, our reserves have been on a downward trend for years. We’ve been using our External Reserves to keep the value of Naira stable for months. When our currency appears to be falling, we take out some dollars from our external reserves and purchase Naira. Increased demand for Naira leads to increased value of Naira, and that’s how we stabilize our currency.

However, we sacrifice a portion of our External Reserves to pull this off. For instance, “while the central bank stepped in Nov. 7 to send the Naira to its biggest one-day gain in three years, intervening in the market has reduced foreign reserves to a four-month low of $37.8 billion.” In the last few months, even Russia with their large reserves had to devalue their currency by 23%.

So is This why Everyone Was Making Noise About CBN Devaluing the Naira?

Yes. Now there’s only so much spending from the reserves that the CBN can do, especially given that we’ve really sucked at growing our reserves when oil price was in the $100 range. It’s like when your office was paying you N100k, you were clubbing every weekend rather than saving some money. Then the minute your office decided to increase your income tax, that’s when your jobless relative comes to live with you too. So now, your salary is not only less, it’s burning faster cause there’s an extra mouth to feed.

The drop in oil price does not only send our currency downwards, it also makes it difficult for the CBN to defend our currency. It’s a double whammy. Essentially, if the CBN keeps trying to defend the rate at N150, it’ll burn through the reserves pretty fast and then we’ll be screwed. So relaxing this currency threshold to N168 means they can relax a bit. They don’t have to keep using as much of the reserves to prop up the Naira. If you’re still curious on how it all works, Feyi goes into the intricacies of devaluation in his fantastic post here.

Okayyy! I Think I Understand Now, But How Does This Affect Me?

Like many other economic events, devalution creates winners and losers. Let’s start with the losers. If you generate revenue in Naira and incur costs in dollars, this is a bad time for you. Any activity that has you converting Naira for Dollars will hurt you way more than a few months ago.

Let’s have a moment of silence for our Igbo brother who will be ‘importing containers’ this christmas. Life just got harder for them. Given that importers have to pay for their imported goods in dollars…and dollars just got more expensive, the cost of their goods have increased overnight.

Same thing happens to those Behind parents who’ve got their kids in Nigerian schools that only accept their fees in dollars or Nigerians that have children schooling abroad. If you like flying, shopping or doing anything abroad, your cost of doing so has risen. On the contrary, if you earn in dollars and pay in Naira, life is looking pretty good at the moment.

Exporters also benefit. The fall in value of Naira means more exports because our exports have gotten cheaper. But ermm…what exactly are we exporting?

Phew. So It Doesn’t Affect Me Like That

Don’t be so sure. Nigeria’s an import-dependent nation, which means that most of what you purchase is produced abroad. I heard we import our toothpick too. If the prices of imports have risen, trust your Nigerian brothers and sisters to increase their prices too…leading to what’s popularly known as inflation.

I Was Hearing All These Oversabies Saying CRR, MPR. What Does This Mean?

CRR stands for Cash Reserve Ratio. It’s the proportion of what a bank can lend, to what it has in its coffers. So if the bank has N1000 and its ratio is 50%, can only use 50% of that money (N500) for business. Given that awon banks do not mess around with profit making, they will make sure that N500 brings back maximum profit. Banks are like the servant in Jesus’ parable that got 10 talents from his master, not the lazy one that got 1 talent. So to make max profit off the N500, they will raise interest rate if you want to borrow their money.

MPR stands for Monetary Policy Rate. The Central Bank uses the MPR to control base interest rate. The higher the rate, the less money in circulation. How? If interest rate is higher, will you borrow money from the bank knowing that you’ll pay much more later on? Nope. Instead, you’ll take your money from your pocket and give it to the bank, so they’ll make you more money.

Remember that thanks to devaluation, awon boys will be increasing prices left and right. General price increase in a given period leads to inflation. To tackle this, CBN increases CRR and MPR to reduce demand for money. This way, they prevent inflationary rise.

Okayy. I think I Understand That Part, So What’s This Austerity Thing Aunt Ngozi was Talking About?

That one is another long story. So, we’ve all been in situations when we’re broke. Ok, maybe just some of us. We adjust our lifestyle around the middle of the month when our salary hasn’t been paid. You go from eating jollof rice to drinking garri. When friends tell you to come out and party, you form ‘I’m very busy’.

Nigeria’s proposed austerity measures are similar…except on a grander scale. To cushion the effect of the falling crude oil prices, we have to cut back on spending and quite literally tighten our belts. The Government is cutting back on wastage (less government traveling and all that sort). The Government’s also raising taxes on luxury goods such as private jets, yachts and champagne. Somewhere in this luxury tax is the amusing observation that the revenue from taxes on the rich will still go back to the rich.

For the proletariat, the sweet subsidy you enjoy when you fuel your car will also get cut. Prepare to pay more for fuel. This is a good thing. Subsidy has to go anyways.

Wow. That was Long. So, Any Lesson to Learn from All This?

Yes. First lesson: Nigeria is the most reactive and least proactive nation you could’ve been born into. This isn’t the first time oil prices have fallen. Government should’ve gotten used to fluctuating oil price and prepared accordingly. And, since oil is the figurative oil in Nigeria’s economic engine, judicious and prudent management of oil revenue should’ve been practiced. However, we largely mismanaged our wealth during the time of booms and we’re now trying to behave ourselves in the time of slump. Let’s see how that goes.

The second lesson to be learnt is that we should’ve diversified our economic sources of revenue a long time ago to prevent price shock of primary products from affecting us drastically. Also, State Governments should’ve been pressured to increase their internally generated revenue much sooner. We can’t keep reacting to every economic shock that hits us.

Anyways, this is getting too long and no one probably got to the end, so no need for a witty or wise ending. But, if you reached this point, congrats! After spending all that time reading this, make sure you show off your new macroeconomic knowledge to your friends. And please, stop abusing econ-nerds. We have feelings too. Selah.

Source: http://naijanomics.me/2014/11/26/the-bricklayers-explanation-to-oil-price-fall-naira-devaluation-everything-else/

simplified.

EMEzzy:
it's intentional!!

Ok! Dont forget to write that way when writing your project or English exam ok!

Kimmo:
Excellent, thank you.
I didn't have the nerve to discuss this topic since yesterday. I knew it wasn't a good development, but exactly how, was beyond me.

If i hear. U no go read this thing and pass...busy body.

@Op, very commendable one there. If it was an exam, i would've given you A+. Makes a lotta sense.

Chai chai yahoo boys godey smile now.

GeneralShepherd:
Nicely written.

I am even more worried that I am studying an Msc in Subsea engineering and oil prices are falling. If the oil prices fall below the cost of production in the offshore industry then I have effectively wasted my money studying Subsea engineering. So sad

Palm oil mills are everywhere and your kind of services are needed there. Oil is oil. Shekinah!

tanimola22:
sureguy02

You two have asked good questions, was debating this with an oil analyst in London couple of days ago.

Let me begin by prompting

1) Isn't it a possibility that the fuel being sold is the one in stock that was already purchased at previous price levels, thus making current movement in crude oil prices to have no impact on prices of refined products in Nigeria?

2) How long do players in Nigeria store refined products before they order new stock?

3) Perhaps the subsidy is on existing/already purchased fuel and things might change if crude prices remain low?

Let's look at this

Before crude drop
Actual cost of fuel per litre - 137 Naira, say
Nigerians paid 97 Naira
So subsidy is 40 Naira

After crude drop
Actual cost of fuel per litre - 100 Naira, say
Nigerians still pay 97 Naira
Subsidy should be 3 Naira

Thus, in this scenario, we should be saving 40 Naira - 3 Naira if Nigerians still pay 97 Naira per litre.

So, whichever way we look at it, if actual cost is 100 (not sure) and Nigerians still pay 97, then subsidy has to drop, unless Nigerians are made to pay considerably less than 97 Naira/litre - an event I believe is very highly unlikely.

Government can however argue that the subsidy is on products already purchased. This prompted my first three questions.

Let's brainstorm and provide counter ideas!

When the going is good, the masses bear the burden of this country. When the going is rough we still bear the heavier burden. Even when we pay our taxes, we contribute money from our individual pocket to do our street roads, buy fuel as if we run mini industries etc.

I will suggest that when the buy "new stock", let FG continue with 50% subsidy while we pay the balance (pump price will be #77/ litre)

They have budgeted for the subsidy. If the save 100%, the masses will lose both ways. They said the saved over $150 billion from sugar importation yet they are seeking $1 billion to fight BH.

Lianaluv:
We Nigerians will still survive no matter what. We r tough.

My dear sister and friend, how are you? A brother appreciates your being here on nairaland.

Very good and educative. Thanks

mumumugu:
I am a bricklayer but i still dont understand

I doubt what the man did to history. He could have gone to the end of the planet to get an authentic explanation for the cause of the problem.
Instead of instigating him. The repercussions of such actions in my own opinion could be very disastrous!

Thankx. Really educating

God bless u @op for this great break down... I I have learn alots frm this. God bless Nigeria!!

RedBenson:
Ok! Dont forget to write that way when writing your project or English exam ok!

i dey crase

saxywale:
Where did you get that. So other countries should cripple theirs because America is not happy with Russia. As a matter of fact, if you are current, you would know Russia has recently sealed 2 deals worth over $400B with China to supply them O&G.

That was when oil was > $100/barrel. That deal is not worth $400B anymore, this year alone Russia has lost over $100B in oil receipts alone. Plus $40B in western sanctions. Do you think Saudis don't want to cut output to raise oil price? Single reason, America is pressuring them not to.

YNeme3E:
What I learned from dis post..
1) I just wasted my mb opening dis page
2) If u finished reading dis writeup, "patience" is ur middle name..
3) Dis shouldn't have made fp..
4) How will dis make me win tonights match in SM?


#op no mind me ooh,, very nice write up..#

Such a pity u dont know how inciteful and educating this piece is...you Nigerians shaa...they dont like reading at all.

The economy is getting bad,wise entrepreneurs are smiling.
The Govt has failed Nigerians.

denkyw:
nd u expect me. to. read. all. that?

Then aw d'u explain it if asked? Is that too much for knowledge? Unless,u knew it before naw.

YNeme3E:
What I learned from dis post..
1) I just wasted my mb opening dis page
2) If u finished reading dis writeup, "patience" is ur middle name..
3) Dis shouldn't have made fp..
4) How will dis make me win tonights match in SM?


#op no mind me ooh,, very nice write up..#

If you can't read this small write up, how can you prove you worked for your degree if you have one? Don't exhibit your shortcomings like this in future!

abeltolu:
So if We Have an External Reserve, Why’re We Worried?

Well, having a bank account doesn’t mean you have money. We have a reserve, but our money no plenty. Nigeria has been dancing shoki with its reserves. When oil price was high, we apparently weren’t saving that much into our reserves. In fact, our reserves have been on a downward trend for years. We’ve been using our External Reserves to keep the value of Naira stable for months. When our currency appears to be falling, we take out some dollars from our external reserves and purchase Naira. Increased demand for Naira leads to increased value of Naira, and that’s how we stabilize our currency.

However, we sacrifice a portion of our External Reserves to pull this off. For instance, “while the central bank stepped in Nov. 7 to send the Naira to its biggest one-day gain in three years, intervening in the market has reduced foreign reserves to a four-month low of $37.8 billion.” In the last few months, even Russia with their large reserves had to devalue their currency by 23%.

The conclusion from the emboldened is correct but the process is not.

It should have been:

When our currency appears to be falling, due to excess demand for Dollars, we take out some Dollars from our external reserves and use it to finance our imports to reduce the local demand for dollars. Decreased demand for Dollars leads to increased value of Naira, and that’s how we stabilize our currency.

You are a brother, I'm an Economist too. Thanks for explaining things to the laymen. I'm beginning to get tired of explaining.

UPDATE
It might also interest folks to know that Russia and China have signed an agreement to undermine the dollar, have agreed to be paying each other with their currencies. These are all efforts to weaken America, Dollar and Obama.

tanimola22:
My brother, you're right and I like your Dangote example, but the OP is not completely wrong either..It all depends on the Naira value of subsidy government decides to implement and the actual new cost per litre of fuel. Don't know this figure though...

Okay, let's put down some numbers to buttress claims made.

Suppose actual per litre fuel cost falls to 120 from 137 but government drastically reduces subsidy to 10 from 40, say. What happens? Nigerians will pay 120 - 10 = 110 per litre, or a 13.40% increase from 97 Naira .

Fully agree this is an extreme example, but it's not impossible.

T22

Your example here is indeed extreme!

A better analysis should be comparing the percentage drop of crude oil to an approximate percentage drop in the naira price of oil products say, PMS.

Going by this analysis, crude oil price fell approximately 35% or more. But more importantly is that the percentage drop in price of PMS and other associated products will be higher than 35% taking into consideration other costs such as transportation, storage, etc.

In addition, the market for crude oil is different from the conventional market you and I are used to as orders are usually placed months before delivery and sometimes, very unusual, a ship can sell oil it is carrying on the high sea at a discount.

Why the Government is confident of managing this development is mostly because of the Subsidy component. As you and I know, this component takes close to 15% of our entire budget. That's money paid on behalf of the entire country for CONSUMING FUEL! At a time it was more than a Trillion naira. But with dwindling price of crude oil, that money will begin to disappear as going by a close analysis of a corresponding drop in PMS and kerosene, we're most definitely going to be buying PMS at local filling stations at a price that could be slightly higher than the market price. In this case, it is a gain for the government so they can recoup already lost revenue.

In the next budget (2015) government may most likely review the subsidy component, with a partial removal. This will free up more funds for government to spend. I believe the call for diversification of the economy should be sustained. Government needs to open up opportunities in other sectors of the economy. That should be the direction of this government (I strongly see that they are already on it).

So many misconception and wrong facts by both the OP and other comments.

Lastly, the price of diesel will not just drop now because no importer will sell diesel at a price lower than the purchase price. In fact, diesel importers will be making frantic effort to dispose all products in their storage facilities so as avoid a case where products imported at a lower crude oil price are being introduced into the market. Expect gradual drop in diesel price.

this is a beautiful breakdown...excellently reviewed.. thank you som much..please sorry for derailing, does anyone know where i can download amos tutuola's palmwine drinkard? will appreciate much

nice write up op, the devaluation thing was really eluding me b4 now.

thanks!

JONATHAN'S GOVERNMENT SOLD OIL FOR CLOSE TO 5 YEARS AT ABOVE 100 DOLLARS PER BARREL. NIGERIA'S OIL BENCHMARK FOR THESE YEARS WAS BETWEEN 60 TO 77 .DOLLAR PER BARREL MEANING THAT FOR THIS PERIOD NIGERIA EARNED EXCESS CRUDE OF ABOUT 20 DOLLARS PER BARREL SOLD. AND SOLD ABOUT 2.2 MILLION BARRELS PER DAY. DOLLAR THEN SOLD FOR ABOUT 116 TO ONE. SAME GOVERNMENT INHERITED ABOUT 59 BILLION DOLLARS OF FOREIGN RESERVE FROM LATE PRESIDENTADUA ADUA. YET WITH ALL THESE BOOM IN OIL PROCEEDS AT ALL TIME HIGH FOR 5 YEARS, JONATHAN'S ADMINISTRATION HAS NOT ONLY DEPLETED FOREIGN RESERVE TO ABOUT 35 BILLION DOLLARS EVEN IN ERA OF PROSPERITY BUT HAS ANNOUNCED TO NIGERIANS THAT THE ECONOMY IS ON A VERGE OF COLLAPSE. DOLLAR NOW GOES FOR ABOUT 170 to180 NAIRA TO A DOLLAR. IF A MAN COULD NOT MANAGE SUCCESS, HOW DO WE TRUST HIM TO MANAGE NIGERIA THROUGH THIS TRYING TIMES. LET ME TELL YOU THE TRUTH JONATHAN IS HIDING, IF HE DOES NOT REMOVE SUBSIDY AND INCREASE FUEL PRICE SOON, ECONOMY WILL COLLAPSE AND WE WILL BE ON OUR WAY TO GREECE. HE HOWEVER FINDS IT DIFFICULT TO DO SO BECAUSE ELECTION IS NEAR. I BET YOU IMMEDIATELY JONATHAN WINS NEXT ELECTION, HE "MUST" (QUOTE ME ANYWHERE) INCREASE PUMP PRICE OF PETROL SO WITHSTAND THE SHOCK. WE ALL KNEW BEFORE NOW THAT JONATHAN POSSESSES NO CREDIBLE CREDENTIALS TO GOVERN NIGERIA BUT SADLY FAILED TO WARN NIGERIANS WE HE TOLD US IN 2011 THAT HE HAD NO SHOES. TO REDEEM NIGERIA FROM IMMINENT COLLAPSE, NEVER THINK OF JONATHAN AS AN OPTION NEXT ELECTION.