There is fire on the mountain. It seems too far away, and the fire looks more like a smouldering fire than a volcano. However, the molten lava is simmering in the belly of the volcano, waiting to be unleashed. No matter what we do, although living in a faraway land, the lava shoots out like a rocket-propelled missile, and the ensuing heat will eventually reach and affect us. Should we be overwhelmed by the fear of the unknown? Or should we not work out the unknown from the known and put our house in order, as every good family head will do? Some facts are not just obvious but apparent. It would be best if you connected the dots to get the full import of the picture. We are in such a situation now. Fact number one: the world is headed for a prolonged war in the Ukraine/Russia crisis, and now the Israel/Hamas conflict has ensued. After nearly 18 months of Russia-Ukraine gruesome warfare and its adverse impact on living standards, no one can wish for another row of any dimension.
Fact number 2: the global economy will be affected if this conflict continues in its current trajectory and may get complicated if the sphere of war expands to Iran.
Fact number 3: the Nigerian economy would be negatively impacted significantly if we do not take steps to hedge our economic projections and plans. The latter is the focus of our discourse for today.
The ramifications of these conflicts are too huge to contemplate. The sensitive nature of the Israel-Palestine brouhaha touches the emotional nerves of the world, polarising the world into two dominant frames: supporters of Israel versus supporters of Palestine. The baggage behind this support is generational and more heuristic than logical. It is tainted with elements of religious dichotomy.
The economic interlinkages of the global community are manifesting clearly as the Russia-Ukraine war ravages the economies of nations and is now further complicated by the hostilities between Hamas and Israel. The global economy would sink deeper in three significant ways. Israel- Hamas conflict will most likely engender a spike in energy costs. It would add to inflationary pressure already escalated by COVID-19 and the Russia-Ukraine war. And it may lead to a global recession. Bloomberg economists predict global growth may drop to 1.7% and, in the worst-case scenario, may lead to another recession.
Nigeria is already grappling with multiple economic challenges, and other developing economies are seriously and multidimensionally impacted. The discourse around mitigating the adverse negative economic impact of the two war fronts in Nigeria must be on the table. This new scenario presents another addition to issues that must be considered in navigating the complex global linkages to strengthen our economy and reduce the burden on citizens. If the crisis between Israel and Hamas expands to a regional one involving Iran, Lebanon, and Syria, crude oil prices will spike, and if not, the price rise will be marginal.
For Nigeria, a crude oil-producing nation, this is paradoxical in two ways. First, the attendant shortfall in supply resulting from disruption in production in the Middle East may boost oil supply revenue. But we may not harness those benefits because of the Niger Delta oil production conundrum. We have yet to be able to meet our OPEC quota. Hence, only a little may be gained through an increase in supply, at least in the short run. Second, the prospect of an oil price increase seems reasonable especially if Iran is drawn into the conflict. The government of Nigeria would earn additional income from the sale of crude, and that can help shore up our currency, which is crashing like a house built on sand. However, when you juxtapose this with the fact that we import all our petroleum products and export less than our OPEC quota, whatever benefit there is vanishes to the air.
The Guardian economists argue that the brewing energy crisis may force the Nigerian government to spend N644.8 billion subsidising Premium Motor Spirit (PMS) monthly. They argued that with “PMS trading at $1,023.00 per metric tonne at the international market as naira exchange above N1,020/$, crude oil price at about $100 per barrel would push the difference between the current pump price and the actual price to about N400. This difference amounts to about N644.8 billion monthly given the current consumption of about 52 million litres daily.”
The conflict in the Middle East could lead to additional inflation in Nigeria. Shipping costs would increase because of insurance. It might cause massive disruption in global trade logistics, and when you add this to the mix of higher gas prices, inflation is the natural result. Inflation will worsen for Nigeria, which imports substantial consumer items, and most families cannot afford basic needs. Inflation will worsen poverty and the crime rate.
While we battle inflation, the naira might weaken because of impending slow growth projected at 1.7%. The government would be forced to intervene on two fronts, first to try to stabilise the currency by injecting non-existent foreign exchange and secondly, by reintroducing subsidies on a smaller scale to cushion the effect of a hike in the cost of petroleum products or allow for an increase in petrol price. The only saving grace might be if the Dangote refinery comes on stream and at least two of our refineries become functional.
There is also the possibility of the Federal Government and state governments borrowing more as they struggle to implement the budget. State governments have already borrowed about N46.17bn from banks to pay salaries between January and June 2023. The FG borrowed a $800 million loan from the World Bank to cushion the adverse effects of the supposed removal of subsidy. It further followed an alleged loan of $1.95 billion from the World Bank in the first four months of this government.
Clearly, our government and economic managers must think ahead, plan, and be more disciplined, as there are turbulent paths ahead. Policymakers must weigh the immediate economic needs against long-term sustainability and be prepared to make tough decisions. Nigeria needs to prepare itself for a potential surge in the domestic price of petroleum products with the attendant increase in the cost of transportation, cost of doing business, and hardship, especially for those at the economic periphery. Citizens may be impoverished more, and the number of multidimensional poor Nigerians will exacerbate. We cannot afford to play the ostrich while the deities in Russia, Ukraine, Israel, and Hamas play the Game of Thrones. We are at the receiving end, so we must think outside the box to navigate these unusual times.
As a nation, we must work back our economic numbers and plan on worst-case scenarios so we are better ready rather than live in optimism and ignore global economic realities that would ultimately unfold and engulf all, hitting the least planned nations. The dual inferno has been ignited in a faraway mountain, but what we do now in our distant land will define our future. We hope that the war in the Middle East will de-escalate as soon as possible. But we must do more than hope. Nigeria’s challenge in all these remains that of forward global strategic thinking which had never been part of our government culture. We are a reactive nation and not a proactive nation with a sense of mission. We must plan and act to protect ourselves from the potentially harsh consequences of our economy. In the medium to long term, Nigeria may need to diversify its economy, reduce its dependence on oil exports, and promote domestic production and non-oil sectors to mitigate the potential negative impacts. Additionally, fostering diplomatic relations and strengthening regional cooperation can help minimise the adverse effects of these conflicts on Nigeria’s economy.
