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ANALYSIS: Trump’s U-turn from nuclear deal – Iran’s pains, Nigeria’s gains
“This decision was an act of psychological warfare against Iran,” those were the words of Hassan Rouhani, Iranian President to the decision of President Donald Trump to exit the nuclear programme deal with Tehran. Many more reactions have since followed the US President’s action.
Trump’s decision on Tuesday, May 8, 2018 to walk away from the deal with Iran, has both positive and negative implications for countries of the world.
One area that immediately felt the impact of the US exit from Iran nuclear deal is the crude oil market which jumped as much as 2.8 percent to three and a half -year high of $77.20.
Analysts said the soaring prices were the result of an expected fall in Iranian oil exports.
“Iran’s exports of oil to Asia and Europe will almost certainly decline later this year and into 2019 as some nations seek alternatives in order to avoid trouble with Washington and as sanctions start to bite,” said Sukrit Vijayakar, director of energy consultancy Trifecta.
Iran re-emerged as a major oil exporter in 2016 after international sanctions against it were lifted in return for curbs on its nuclear program, with its April exports standing above 2.6 million barrels per day.
Trump said he would initiate new sanctions on the regime, crippling the touchstone agreement negotiated by his predecessor. Trump said any country that helps Iran obtain nuclear weapons would also be “strongly sanctioned.
In July 2015, Barak Obama, Trump’s predecessor agreed a nuclear deal with Tehran after two years of negotiations − a comprehensive, long-term deal with Iran that will prevent it from obtaining a nuclear weapon.
“Today, because America negotiated from a position of strength and principle, we have stopped the spread of nuclear weapons in this region. Because of this deal, the international community will be able to verify that the Islamic Republic of Iran will not develop a nuclear weapon,” Obama said in his address while agreeing to the deal.
But according to CNN, President Trump announced Tuesday he is quitting the Iran nuclear deal, pitting him against the United States’ closest allies and leaving the future of Tehran’s nuclear ambitions in question.
“It is clear to me that we cannot prevent an Iranian nuclear bomb under the decaying and rotten structure of the current agreement,” Trump said from the White House Diplomatic Room. “The Iran deal is defective at its core. If we do nothing we know exactly what will happen.”
BOOST GOVERNMENT REVENUE
Though, Trump’s withdrawal from the nuclear deal with Iran has plunged the future of the oil market into uncertainty, Nigeria, stands a chance of recording boost in its revenue and increase in Excess Crude Account (ECA).
An increase in the price of crude oil at the international market means more revenue for all oil exporting countries.
Nigeria, a member of the Organisation of Petroleum Producing Countries (OPEC) with daily production of 1.8million per barrel has a window of opportunity to boost its revenue base, particularly the Excess Crude Account (ECA). Excess recorded on sales of crude oil is kept in ECA for the three tiers of government to benefit from.
As of January 2018, Kemi Adeosun, Minister of Finance, said Nigeria’s ECA stood at $2.13billion. But with the approval by President Muhammadu Buhari to take $1billlion from the account, out of which $496million has already been withdrawn, the balance in the account is less than $2.13billion. About 75 to 80 per cent of government’s revenue comes from the oil industry. Therefore, the higher the price, the more revenue accrues to the government.
Based on the 2017 budget bench mark of $44 per barrel, and daily output of 1.8million barrel, Nigeria is expected, with the new crude oil price of $77per barrel to rake in $62.04million per day. In the face of other factors, if the price is steady, Nigeria will make as much as $1.86billion in a month.
The economy’s exit from recession after a 0.55 percent growth in the second quarter of 2017 was propelled by a significant swing in oil fortunes, brought on by higher prices and improved production.
EXECUTE CAPITAL PROJECTS AND DIVERSIFY ECONOMY
This means that the Federal Government, if prudent with excess crude money, will have enough to execute many of its capital projects.
At a time of slowing growth, government is still grappling with the implementation of 2017 budget even in the second quarter of 2018 while the 2018 budget is waiting to be passed by the National Assembly.
Experts say higher government revenue would go a long way in narrowing the budget deficit, which was estimated to hit 3.4 percent of GDP by year-end, according to the International Monetary Fund (IMF), from 2.8 percent in 2016.
“I believe that the present administration is focused in its use of public funds; that implies that the more revenues it has at its disposal, the less pressure it will have seeking to borrow. This simply means it will have money to invest in projects.
“I believe the rise in oil prices is good for the economy, but with a caveat. Let us seek to depend less on oil and gas because the price of oil especially is not stable; it may crash again. We do not want that to happen so we must manage what we get from the current price regime and hope for the best,” said Sunday Babalola, Technical Advisor, Green Energy International Limited.
There are also fears that the increase in the oil price could distract the government from diversifying the economy, though the Federal Government is already focusing on agriculture and other areas of economy.
This rise in oil price, many opined would also support public plans to invest in badly needed infrastructure from rail to power.
“It should rather help to diversify the economy because in the past, the money was just being shared into people’s pockets and people were not thinking outside the box. That was why the economy was not diversified,”Babalola said
“Now that we have suffered, I think the money that will come in will be enough to build infrastructure and provide dividends of democracy as well as diversify the economy.”
When there is growth in the real sector through infrastructure development, the exchange rate will appreciate naturally rather than present artificial management
REDUCE BORROWING BY GOVERNMENT
Improved oil revenue through higher prices could slow the pace of government borrowing. Many argued that it would reduce the rate at which government goes on borrowing spree since there is enough money in the Excess Crude Account.
Economic analysts say it is a good omen as the country needs money now to reduce borrowing to finance annual budgets and make investments in economic growth and employment enhancing ventures that will take the nation fully out of recession. They maintained that the present low level of growth does not guarantee escape from sliding back into recession.
More importantly, the money should be used to finance capital projects like power and road/rail infrastructure rather than financing the foreign exchange market as the Central Bank Nigeria is currently doing.
ACCRETION OF EXTERNAL RESERVE AND GREASE FOREIGN EXCHANGE
When prices of crude oil fell in 2015, it translated to less petrodollars into the country which experts described as illiquid foreign exchange market in Nigeria, given that oil accounts for almost 90 percent of total dollar inflows into the country.
Therefore, an increase in oil prices naturally should translate to a more liquid foreign exchange market and external reserve accretion.