26, 2020 / 11:25 AM / by Budget Office and Federal Ministry of
Finance, Budget and National Planning
Following the outbreak of the Coronavirus Disease (COVID-19), and its rapid spin into a global pandemic in Q1 2020; there has been corresponding economic consequence. There has been a slow-down of global economic activities as most countries are on lockdown with movement only limited to essential goods or persons performing essential services. Correspondingly, international oil prices have plunged triggered by the Saudi-Russia oil war and weakening global oil demand. Oil and Gas represents only about 10% of Nigeria's GDP. However, it accounts for about 50% of government revenues and over 90% of export earnings.
Thus in responding to the fiscal implication of the pandemic and oil price war, Mr. President, on Monday, 9th March 2020, set up a Crisis Management Committee (CMC) comprising Senior Government officials headed by the Hon. Minister of Finance Budget & National Planning to consider measures to address the fiscal pressures arising from the recent drop in oil prices. Further to the above, most of the assumptions underpinning the 2020 FGN Budget have had to be revised in the face of current realties, as Nigeria is vulnerable to the current global economic disruption caused by the COVID-19 crisis exposed to the risks of both a pronounced decline in oil prices & spikes in risk aversion in the global capital markets.
Although similar challenges were experienced in 2015/2016, Nigeria now has considerably lower fiscal buffers. This addendum to the 2020-2021 Medium Term fiscal Framework and Fiscal Strategy Paper, (MTEF/FSP), is to provide a postscript to the initial publication and update with the revised assumptions and fiscal strategy in the face of current economic realities posed by COVID-19.
Update On Macroeconomic Performance Of The Nigerian Economy
The economy has grappled for acceleration in real GDP growth since the exit from recession in Q2 2017. In spite of eleven consecutive quarters of positive growth, GDP growth rates remain below desirable targets (growing below population growth rate).
Prior to the outbreak of COVID-19 pandemic, the Nigerian economy had been characterised by wavering external sector and improving internal economic indicators. Over-dependence on oil revenue, constrained fiscal space, low foreign and domestic investments and, declining foreign reserves made the economy disproportionately vulnerable to the twin shocks of crude oil price/production collapse and a health crisis. The informal sector which accounts for over half of Nigeria's GDP will be negatively impacted.
2.1 Monetary Sector
There has been a continued uptick in headline inflation (year-on-year) for the seventh consecutive month to 12.26 per cent in March 2020 from 11.02 per cent in August 2019. The rising inflation, was largely attributed to increases in the food and core components, which rose to 14.98 and 9.73 per cent in February 2020, from 13.17 and 9.7 per cent in August 2019, respectively. Furthermore, the surge in demand for food produce in anticipation of the lockdown have further contributed to the hike in inflation rate.
The Central Bank has adopted measures to rein in inflation by managing excess liquidity in the banking system, which is also aimed at reducing pressure in the foreign exchange market, with resultant depreciation of the Naira.
2.2 External Sector
Nigeria's foreign reserves have declined to US$35.9 billion in March 2020 from US$44.7 billion in April 2019. The decrease is largely attributable to the impact of the decline in crude oil receipts. Monetary policy rates have been relatively unchanged with the goals of supporting growth and employment and checking capital outflows to support external reserves accretion.
The uncertainty and general decline in global economic activities caused by the COVID-19 pandemic have further dimmed the prospect of reversing the downward trend in foreign portfolio investments (FPIs) in the Nigerian Treasury Bills (NTBs), also adversely impacted by the Covid-19 inspired flight to safety, represent the second biggest source of dollar inflow into the country after crude oil.
2.3 Fiscal Sector
Fiscal buffers are very lean. With external debt standing at USD 26.94 billion and Excess Crude Account (ECA) barely USD71 million, Balance of Trade (BOT) at UDS18.7 billion and widening fiscal deficit on account of lower oil revenue, the fiscal space is critically constrained. Tax as a percentage of GDP (8%) has been suboptimal while debt service to revenue at over 50% is high and worsening.
Government is seizing the opportunity of the crisis to intensify economic diversification to ensure a growth in non-oil exports, reduction in import bill and improving competitiveness. Nigeria is currently implementing a modest stimulus package and providing palliatives for the most vulnerable members of the society.