| Nigeria Economy |    1932 VIEWS  |
| Nigeria Economy | |
| 1932 VIEWS | |
 |
Thursday, April 23, 2020 / 10:58 AM / By FDC Ltd /
Header Image Credit: Ecographics
The International Monetary Fund (IMF) estimates that the coronavirus
pandemic will cause a global recession in 2020 that could be worse than the one
triggered by the global financial crisis of 2008-2009. However, it expects a
recovery by 2021. The pandemic has sparked a global economic meltdown. The
negative effect on growth comes through both demand and supply channels. As
entire countries go into lockdown and economic activity grinds to a halt,
negative consumer and business sentiment will impact demand negatively. At the
same time, businesses have shutdown and the resultant disruption to global
supply chains is still yet to be fully quantified.
For Nigeria, It's No Longer A Case Of If But When
A second recession in four years is clearly on the cards. In 2016, it
was the incomplete and belated response to the oil price crash that was the
trigger. In 2020, the trigger is COVID-19 and preemptive measures on the part
of the monetary and fiscal authorities will more than likely not be enough to
stave off the looming threat. Four years ago, external reserves were $25.84bn
while external debt was $11.26bn (mid-size buffers: $14.58bn). Today, the
buffers are down to $9bn as external debt has more than doubled to $26.94bn
while reserves, though higher at $35.94bn, have been in steady decline for
about 10 months.
The impact of COVID-19 on the Nigerian economy has been 3-dimensional.
The first is from the medical and health care perspective. The second is
through a slowdown in trade, investment and project finance, considering that
Nigeria's largest and most important trading partners are China and India - who
are on lockdown. The third is through the plunge in oil prices and its
devastating impact on macroeconomic stability.
A Case Of Deja vu
Nigeria's vulnerability to oil market turbulence is once again brought
under the spotlight. The impact of an over 50% drop in oil prices since the
start of the year will lower export revenues considerably from an estimate of
$65.7bn to $40bn. Imports are now also projected to fall to $43bn as both
consumption and production slow. This means that the trade balance will fall to
-$3bn from $11.4bn in 2019. According to the IMF a 10% drop in the price of oil
in one year will reduce GDP growth by 1.3%. Therefore, if the current price of
oil ($28pb) persists through 2020, Nigeria's GDP will contract by 0.2%,
guaranteeing a return to a recession.
The drop in oil prices means lower government revenue, which translates
into many states having difficulty meeting salary and pension obligations.
Capital projects will be suspended and contractors owed. This is negative for
aggregate demand. When Q4'19 GDP growth numbers are broken down, it reveals
that oil sector growth of 6.36% is the major driver of growth in the period. Of
the 46 activities tracked by the NBS only 12 outperformed the national GDP
growth rate of 2.55%. The 12 activities had an average of 6.85%. The other 34
activities had a combined average growth of -01.04%. The fast growing sectors
including aviation are also highly vulnerable to the impact of the COVID-19. As
if the oil price shock is not bad enough, the rapid spread of coronavirus means
entire industries are faced with shutdowns as a way of slowing down the
outbreak. This is already resulting in job losses and Nigeria's unemployment
figures could rise to 35-40%.
Policy Fall Out
Nigeria's current expenditure plan (N10.59trn) is too small to
meaningfully support the economy. The sharp drop in oil prices has necessitated
a proposed cut of N1.5trn ($5bn) to the 2020 budget and the adoption of a lower
oil price benchmark of $30pb. It also nudged the CBN into action after which it
announced 6 policy responses:
Fiscal and monetary coordination is needed now more than ever before. An
exchange rate adjustment to N380/$ means more revenue for the government as oil
exports are priced in dollars but it also means higher import prices, including
for food. To many, the CBN could not have chosen a better time to devalue the
naira. Nonetheless, a similarly pressing issue would be when it would be a
perfect time to remove petrol subsidies completely - certainly in a period of
low oil prices. A lower pump price of Premium Motor Spirit (N123.50/liter) has
been implemented and this will boost aggregate consumption, but not
significantly. The CBN has left interest rates unchanged as it weighs
inflationary fears against the need to lower interest rates and stimulate
growth. There is no telling how long this recession will last but sustainable
and accelerated post-COVID-19 recovery will require economic restructuring that
incentivizes long-term investment. Hopefully, the movement towards equilibrium
factor pricing (exchange rate and petrol prices) will be a catalyst.
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