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International Business Nigeria's oil-dependent economy plagued by plunging crude prices

While oil’s price plunge has benefited motorists and helped reduced food prices, the losses to government revenue poses a significant threat to social stability, according to an RBC report.

Afolabi Sotunde/REUTERS

In one of Abuja's glitziest new malls, the crowds are thin. With the Nigerian currency steadily losing value, shoppers are staying away from the increasingly costly imported gadgets at the electronics shops here.

"Our sales are dropping month by month, and we're supposed to meet targets," says Lawrence, manager of a Samsung retail outlet, who wouldn't give his surname.

"On some days, the whole mall is empty," he frets. "You just see people trickling in late in the afternoon. Before, it was packed every day."

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Nigeria, like other oil-dependent countries, is sliding into a spiral of economic damage from the plunge in world oil prices. Its currency is weakening, government revenue has dropped dramatically, civil-service salaries are delayed, many construction projects have been suspended and layoffs have begun.

Abuja, the Nigerian capital, is normally a bubble of affluence, propped up by the seemingly inexhaustible spending of the national government and the political elite. But now even Abuja is feeling the pinch.

At the Samsung shop, the prices of imported smartphones were hiked twice in November and December because of the weakening Nigerian currency, the naira. "It's too much for our customers," Lawrence said. "They were expecting prices to go down and instead they went up. People were complaining."

But the higher prices are not the only reason for the declining sales. With global oil prices falling by more than 50 per cent since June, the government has lost half of its revenue, leading to delayed salaries and halted projects. One local contractor in Abuja has laid off hundreds of workers because of suspended projects since the oil price drop.This means that many consumers have less money in their pockets. At the Samsung outlet, Lawrence estimates that his sales fell by 20 per cent in December and January, month over month.

Despite some diversification in the past decade, Nigeria remains highly vulnerable to the world oil price. It is dependent on oil and gas for 95 per cent of its export earnings, 35 per cent of its GDP and three-quarters of government revenue.

Over the past six months, the naira has lost 17 per cent of its value against the U.S. dollar, one of the steepest declines of any African currency. To support the naira, Nigeria's central bank has hiked interest rates to a record 13 per cent, while burning rapidly through its foreign-exchange reserves. The central bank's reserves have steadily dropped each month, falling this month to $34-billion (U.S.), down about 20 per cent from a year ago.

Nigeria's economy has been booming – expanding by an average of 7-per-cent annually for the past decade – but now it is projected to grow by barely 5 per cent this year. Earlier growth projections were cut by a full percentage point. In a budget unveiled in December, the government announced plans for an 8-per-cent spending cut. But even the December budget is now badly outdated, as world oil prices remain significantly below the budget's benchmark of $65 a barrel.

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The Nigerian stock market, meanwhile, has dropped sharply as oil prices tumble. And even the government's "rainy day" fund of oil savings, known as the Excess Crude Account, has dropped from $21-billion in 2008 to about $3-billion today.

In the face of this, the government seems to be in denial. "Our economy is not in tatters," insisted Mike Omeri, a senior government spokesman, in a recent interview. "We're not queuing for food like Venezuela. Salaries are being paid – I've received my salary for January. Despite all of it, Nigeria is still standing."

With elections approaching on Feb. 14 and Feb. 28, the government may be protecting the naira and its own budget for political reasons. But the pressure is intensifying, and may lead to a substantial drop in the naira's value after the elections. On Friday, the naira fell to a record closing low of 193.90 against the U.S. dollar, despite intervention from the central bank.

"There has to be a large devaluation," says Atiku Abubakar, a former Nigerian vice-president who is now a prominent businessman and a member of the main opposition coalition.

"They can't support the naira forever," Mr. Abubakar said in an interview. "I think a devaluation is in the pipeline. The economy is in trouble. We're heading for a recession."

The solution, he said, is to diversify the Nigerian economy and reduce its dependence on oil – a goal that many politicians have touted in the past, with mixed success. In his case, Mr. Abubakar is investing heavily in agriculture and food processing, which he sees as the key to a more sustainable economy. In late January, he opened an expanded water-bottling plant, the biggest in West Africa, along with a cattle-feed production facility, both in Adamawa state, one of the three northeastern states where the Boko Haram extremist group has captured territory.

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To support the naira, Nigeria's central bank has threatened to limit the purchase of foreign currency by importers of non-essential products, such as rice, which Nigeria already produces. The central bank governor, Godwin Emefiele, has warned of a looming crisis if the bank is forced to dip more deeply into its foreign-exchange reserves.

"The more we import, the more we deplete our reserves," he told a business conference last month. "As time goes on, we will not allocate [foreign currency] to companies importing rice. We import virtually everything into this country. We import toothpicks, toothpaste, petroleum products and all manner of things."

But his rice plan could be futile in such an import-dominated economy. "I don't think it's possible," said a rice dealer named Chidiebere, who declined to give his surname. "We don't have enough farmers in the country to produce enough rice. We have land, but the government doesn't invest in it. It's only focused on oil and gas."

He sells mostly imported rice from Thailand and India, which he finds cheaper, better-preserved and easier to obtain. Salesmen often bring him samples of Nigerian rice, but then they fail to bring him a supply to sell, he says. "Customers ask me for Nigerian rice, but I don't have any."

Far from diversifying its economy, Nigeria is not even managing to keep the loyalty of its oil customers. Last year, because of the shale boom, the United States stopped importing oil from Nigeria. It had been one of Nigeria's biggest customers.

Analysts warn that the oil-price issue could provoke social unrest and lead to a reduction in Nigerian oil production. "In a country plagued by deep regional and religious divisions, oil revenue is the glue that binds the fractious elites together," RBC Capital Markets said in a recent report. "Nigeria has experienced coups in previous low price environments due in part to drying up patronage funds."

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In another report, RBC said: "Nigeria faces the greatest risks in 2015, since oil revenues are the only thing that keeps combustible groups in both the government and the military from descending into a much more chaotic, and violent, state of affairs."

Nigeria's oil production is already being threatened, with Nigeria's national petroleum company recently announcing that it will delay several deep-water oil projects.

The drop in oil prices has some benefits for Africa. It's helping to reduce food prices, a benefit for the urban poor. African motorists are enjoying the savings from lower petrol prices, and some African governments have been able to save money by reducing their fuel subsidies.

Major oil-importing countries such as South Africa are among the beneficiaries of the lower oil price. One estimate suggested that South African consumers are getting a 1.5-per-cent increase in their disposable income. The lower oil prices are also helping to dampen inflation.

But for the oil-exporting African nations, serious damage is being inflicted. Among the worst-hit countries are Angola, Equatorial Guinea, Gabon, Cameroon, Ghana and Chad. Others, such as Mozambique and Uganda, could see delays in multibillion-dollar investments in recent oil and gas discoveries if global oil prices remain low.

Angola, dependent on oil for more than three-quarters of government revenue, is suffering some of the worst effects. Its currency has lost value and its economy could decline in 2015 for the first time in 20 years. The Angolan government has already begun drastic cuts in its spending and is delaying some of its capital projects. It is trying to diversify its oil-dependent economy by spending $600-million on new mining projects.

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In response to the plunge in oil prices, Nigeria's finance minister has proposed several austerity measures, along with new taxes on luxury products such as yachts, private jets, luxury cars and sparkling wine.

Some say this is still not enough. "As a country, we have to tighten our belts," said Nuhu Ribadu, a former Nigerian anti-corruption chief who is now a state governor candidate for the ruling party in Adamawa state.

He called for drastic cuts in government spending on inflated contracts, glitzy office buildings and $50,000 luxury cars that race around the country in convoys of 10 or more vehicles.

"For $50,000 you could build a school or a medical clinic in a rural area," he said. "We need to clean up, and stop the luxuries and the things that we don't need."

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