Making Hay While the Missiles Rain
In the last two weeks, the Middle East becomes restive (again), but Nigeria might just be smiling to the bank because of it. Also, Africa's favoured trading partner has gotten more favoured. Enjoy!
Early last week, the price of Nigeria’s crude oil grades - Bonny Light, Brass River, and Qua Iboe - rose to $77 per barrel (it is now at $78 per barrel). This is a stunning reversal from late April, when it had dropped to as low as $58 per barrel in response to the tariffs slammed by the Trump administration in the United States. The ongoing conflict between Israel and Iran drives this rise, and it is likely to keep rising if the conflict escalates, either between just the two countries or with the United States joining.
The price increase is good news for Nigeria: the previous fall in the price had led to concerns of budget underfunding, as the 2025 budget was planned with a benchmark price of $75 per barrel. If the current price is sustained, it will mean that Nigeria will be closer to meeting its revenue targets. However, that is also dependent on an increase in oil production from the current ~ 1.5 million barrels per day to the 2 million barrels per day it set out in its 2025 budget.
The flipside of this price increase, however, is that it will also drive up the price of refined petrol. Since the fuel subsidy has now been removed, the price is now dependent on the cost of crude oil as well, which will be passed down to consumers. This will likely lead to an increase in transportation costs and roll back the recent gains in reducing inflation, which came down for two consecutive months.
Another downside is that the price of crude oil can come crashing down as quickly as it went up, and the lack of price stability makes it a very tricky commodity to plan by. This is a situation which we are all too familiar with; however, save for the Excess Crude Account, which was set up by President Obasanjo, we have not planned adequately for bust periods during the times of boom.
This will not be the first time that Nigeria will profit from a conflict in the Middle East via its status as an oil producer. However, we have an unsavoury history of not making the most of those opportunities. In 1973, the Arab-Israeli War (or Yom Kippur War) fully ushered Nigeria into the league of major oil producers, with large oil revenues from a fourfold increase in the price of crude. This was also when the Federal Government started subsidising the cost of petrol to help Nigerians deal with global price shocks, but it became entrenched, distortionary, and filled with corruption, and would not be removed until 50 years later.
In 1991, the first Gulf War also saw Nigeria earn a whopping $12 billion in oil revenues, as the price of crude once again shot up to about $40 per barrel from $15-18 per barrel due to a supply crunch. However, a 1994 report by a panel constituted by the former Head of State, General Sani Abacha, and headed by respected economist, Dr. Pius Okigbo, found out that the windfall was diverted from the Federation Account, and much of it was spent outside formal budgetary processes and never fully accounted for. Abacha’s predecessor, General Ibrahim Babangida, and the then Central Bank Governor, Abdulkadir Ahmed, were implicated in the report.
In the meantime, we hold our breath and watch how the conflict unfolds, while hoping for a quick return to peace.
Fun fact: At least 20% of global oil consumption passes through the Strait of Hormuz, a maritime chokepoint near Iran and which could be closed down by it. If that happens, it will further increase the price of crude oil.
Looking to the East
On June 12th, China announced that it will begin plans to implement a zero-tariff scheme for 53 African countries. This is an extension of a deal it made last year to eliminate tariffs for 33 African countries it classified as ‘least developed’. With this recent development, 20 more countries have been added to the list.
This is monumental for Africa because it gives it access to the world’s second-largest market, which has the largest middle class in the world and a fast-growing consumer market. For the past 15 years, China has been Africa’s largest trading partner, importing $170 billion worth of African goods in 2023. China is Nigeria’s largest trading partner, exporting $10.5 billion worth of goods in 2023 and $9 billion worth of goods in the first 9 months of 2024. Slightly over half of these exports (55%) are crude oil and gas, while agricultural products such as sesame seeds (~33%) and ginger take up the rest.
Although there is no date stated yet for the implementation of the zero-tariff scheme, it comes when the United States has put tariffs of between 14% - 50% on African countries, albeit paused until next month. The scheme also mirrors the African Growth and Opportunity Act (AGOA), which provides tariff-free imports of African goods into the United States for 25 years. However, the deal expires this year, and the Trump administration is unlikely to renew it.
Like we explained in a previous edition of this newsletter, Nigeria did not maximise its opportunity with AGOA by pushing more non-oil exports to the US, and using it to drive its economic diversification. This is a mistake that should be avoided with China: already, about 45% of exports to the Middle Kingdom are agricultural produce, which gives it a headstart relative to the US, where only 8% of exports are non-oil produce. However, there is a need to move from exporting raw produce to exporting processed foods, which will increase light manufacturing. This will also require quality assurance and certification investment, supply-chain logistics, and packaging and standardisation.
Hopefully, this time, we will make the most of it.
Fun fact: Lesotho is the only African country excluded from the deal due to its recognition of Taiwan as an independent country and not Chinese territory.
And Four Other Things….
The National Assembly has extended the implementation of the capital component of the 2024 budget to December 2025.
At least 300 Nigerians have applied for asylum in Iceland in the last four years.
Nigeria is one of the 13 hunger hotspots around the world requiring urgent attention, according to the Food and Agriculture Organisation (FAO) and the World Food Programme (WFP).
The United Nations Office for Drugs and Crime (UNODC) says about 3 million Nigerians are suffering from drug use disorders.