The Disruptive Impact of COVID-19

Thursday, April 23, 2020 / 11:20 AM / By FDC Ltd / Header Image Credit: Ecographics

Covid-19 has brought the global economy to its knees. The lockdowns, social distancing and self-isolating rules in various countries have resulted in a virtual economic paralysis and what could likely be the worst financial crisis since the Great Depression.

Covid-19 & The Nigerian Economy

Nigeria is not spared from the economic implications of the Coronavirus pandemic. Transmission channels of Covid-19 on the economy include the oil price effect, global financial conditions, external trade effect and the foreign investment flows. This explains why agencies such as the IMF and EIU are projecting a contraction in Nigeria's GDP growth to -3.4% and -2.2% respectively. Whilst both agencies estimate a slight recovery in 2021 to 2.4% and 0.9%, this will depend largely on the adoption of key policy reforms.

Impact On Sectors

There is no doubt that Coronavirus has disrupted activities in virtually all sectors ranging from aviation, sports, hospitality, education amongst others. The only sectors benefiting during the pandemic are sectors offering essential services which include Pharmaceuticals, health care and telecommunications amongst others.

Government Response

In order to mitigate the fallout, the fiscal and monetary teams have introduced stimulus packages of varying magnitudes:

Monetary team

Contrary to market expectations and the examples of advanced central banks, Nigeria's monetary team is yet to cut its benchmark interest rate. This could be due to the complexity of lowering interest rates at a time of heightened inflationary pressures. Countries such as the US, UK, South Korea, Japan and China that have cut interest rates since the Covid-19 outbreak all boast of single digit inflation rates compared to Nigeria's double digit inflation rate of 12.2%.

Fiscal team

The initial response of the fiscal team was to revise the 2020 budget assumptions including the total estimated spending as well as the oil price ($30pb) and production benchmark (1.7mbpd). With the current free fall in Brent price and the additional OPEC output cuts of 9.7mbpd, these assumptions may need to be revised again in the near term. In addition, the Ministry of Finance has sought for financial support of $6.9bn from multilateral agencies including IMF, World Bank and the AfDB. In reality, Nigeria stands a greater chance of securing these loans with the adoption of a market determined and efficient price model for exchange rates and refined petroleum products.

Is This Enough?

The question on the minds of Nigerian business owners and consumers remains - is this enough? Analysts are of the opinion that the FGN stimulus which represents a miserly 0.34% of GDP is not sufficient to move the needle. A simple guideline policy makers can use with regards to the necessary palliatives include the following:

Appropriateness

Is this the necessary move at this time? Is this solution tailor made for Nigeria? Have all possible options been exhausted?

Auspiciousness

Will Nigerians be better off? How to ensure the palliatives get to the appropriate people?

Adequacy

Is this the right dose? Is this evenly distributed across affected states?

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