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Nigeria Under Pressure as Oil Freeze Talks Collapse

Nigeria and other African economies that depend solely on oil revenue are once again are under pressure as talks by oil producers on April 17, 2016 in Doha, Qatar, over output freeze failed.

The talks lasted 11 hours more than required, but finally, Saudi Arabia, who produces 30.8% of OPEC’s output, said Iran must be present before reaching any agreement. Iran however, could not be present given tensions with Saudi Arabia.

Subsequently, oil price fell to $38.4/barrel, resulting in a new dollar hike, which pressures African economies.

Nations such as Angola, Nigeria or CEMAC’s, whose revenues directly depend on crude export, should not have their budget earnings improve in the short term. Meanwhile, the new dollar hike weighs on African currencies, even non-oil producers’.

In this context, Nigeria plans to reinforce taxation so as to generate more tax revenues. It is an option which has proven efficient in the Lagos State and the Federal Government now wants to replicate in other states. But it is easier said than done, according to observers of the Nigerian economy.

Another solution would be to raise Value Added Tax (Nigeria is one of the lowest worldwide with 5%) as inflation is now a major issue.

Wary of the international debt market where conditions tightened, many African economies, suffering from weakening currency and pressure on budget, reached out to IMF asking for help. And though average rates of African sovereign bonds have been falling since the beginning of March 2016, they remain quite high for emerging economies.

So, countries like Mozambique, Angola (now leading oil producer in Africa), Ghana and Tunisia already asked IMF for large credit lines. Other nations such as Kenya have negotiated, still with IMF, precautionary provision. It is expected that Zambia will also ask the Bretton Woods institution for help.

Nigeria keeps signing partnerships to finance its infrastructure projects and reduce its budget gap.
Regarding the OPEC meeting, a new one is planned for June 2016.

Analysts however are not very optimistic about its outcome but looking at global production, it is possible that balance between supply and demand might be achieved around mid-2017.

Also, despite Iran re-entering the market, OPEC only contributes to 38.5% of global production. This will not be regularised in the short-term and should be a strong argument in up-coming negotiations.

-Idriss Linge

Business Journal
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