No country can live above its means forever 🙄
Nigeria’s international trade problem, How Ethiopia is fundraising for its economy and Exxon Mobil gives up on Ghanian oil well
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Talking about breaks, we’ll be taking a 2-week break in July. We’ll like to take off some time to rest and recoup.
Nigeria’s international trade problem
In the past 15 years, the years 2016 and 2020 are two that stand out. In both years, Nigeria’s imports exceeded its exports (trade deficit). In 2016, It was by ₦290 billion ($1.1 billion), and in 2020 was by a staggering ₦7.4 trillion ($20.6 billion).
The reason: Exports have plunged. Nigeria exported $35 billion worth of goods in 2020, compared to an average of $109 billion between 2010 and 2014. The pandemic didn’t help Nigeria’s oil-dependent economy, and its non-oil exports aren’t doing so well.Â
Why it matters: In the first quarter of 2021, the trade deficit is already 3.9 trillion ($10.3 billion). If it continues at this rate then 2021 would have a wider gap than 2020. Â
A widening trade deficit means that more dollars are flowing out of Nigeria than are coming in. Long-term, this means the currency will keep losing value, except Nigeria attracts dollars via other means.Â
What’s the government doing about this? Hoping that oil prices and Foreign direct investments would increase, and when it doesn’t, borrow but that’s not sustainable.
Why should you care? It’s easy to hope that the Naira to dollar exchange rate, which has crashed by 59% since 2014, would improve. A better option might as well be to convert your naira to an alternative currency that won’t drop in value like the Naira.
Dig Deeper: Nigeria's export crisis: How we are spending more than we earn [Paywall]
How Ethiopia is fundraising for its economyÂ
Earlier in the week, Ethiopia launched a tendering process for the proposed sell-off of a 40% stake in state-owned carrier Ethio Telecom to private investors. This move is coming off the back of its sale of a new telecommunication license to a consortium including Safaricom and the UK’s Vodafone Group Plc for $850m.
This move is generally seen as part of the government’s broader plan to open up the economy, but the question is does the government really want to open up its economy?
Backstory: In 2000, Ethiopia, the second-most populous country in Africa, was the third poorest country in the world. Then from 2000 to 2018, Ethiopia changed its fate. It was the third-fastest growing country of 10 million or more people in the world, according to the World bank. It’s still the fastest growing economy in east Africa.
But its economic growth slowed down in 2019/20 due to COVID-19. Exports have dwindled, and external debt has grown 26% since 2016, to $27 billion.
So Ethiopia, one of the most state-controlled on the continent, would love to remain state-controlled but it’s in need of funds.
The bigger picture: The government aims to raise at least $7.5 billion from selling assets from the sugar industry, the phone system, railroads, and other infrastructure. Â
Notably, in all its efforts to generate cash, one company that’s not for sale is Ethiopian Airlines, Africa’s biggest carrier and one of the only three airlines in the world that were profitable last year. The government says it’s unnecessary but time will tell.
Dig Deeper: Ethiopia's Privatization Push Aims to Raise $7.5 Billion
For Exxon Mobil, it’s just not worth it
On May 31st, Exxon Mobil announced that it was giving up its 80% stake in the Deepwater Cape Three Points block in Ghana - an oil field. This simply means it’s packing up its bags and leaving Ghana.
What does this mean
Oil companies like Exxon Mobil typically buy stakes in oil fields to explore the possibility of finding oil. These stakes are expensive and exclusive of the exploration license that the oil companies also have to purchase.Â
It’s a lot of upfront cost, so it better be worth it
Mobil’s actions are similar to someone who is fed up with a relationship and wants to move on in peace.
Likely reasons
Poor management: Some blame it on the high upfront cost, royalty and other tax rates. It’s been said that the move is another sign of the government's poor management of Ghana’s oil and gas sector.
Economic: Exxon Mobil and other oil companies like BP, Shell, Chevron are very big oil firms whose exploration activities hover around 500 million barrels or more. Some industry experts say that Ghana currently has around 50 million barrels of crude oil in the Cape Three Points block, which is far below Exxon Mobil’s projection. Future prospects are dim as no new oil wells are being discovered.
In this case, it doesn’t make economic sense for Exxon Mobil to explore this oil reserve, it will cost more than it could gain.
Clean energy: Another possible reason for Exxon Mobil’s possible exit from Ghana is the ongoing shift by big oil companies from fossil energy to renewable energy or what is termed the Energy Transition.
Across the world, oil giants, backed by their parent countries, are ditching fossil energy for renewable energy due to climate change. BP, Shell, Chevron, Total, Eni and Exxon have pumped billions into clean energy projects, but despite this, there is more pressure from their governments to spend even more.
Big Picture: Business decisions many times are a result of many factors.Â
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– Sharon Salzberg