Nigeria Economy | |
Nigeria Economy | |
1443 VIEWS | |
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Sunday, January 03, 2021 05:40
AM / by Proshare Research/ Header Image Credit: The stream
Households
are the bedrock of every economy, or at least they should be. Nevertheless,
households in Nigeria are having a terrible time keeping heads above rising
socio- economic waters. In 2020 Nigerian families were cut in several different
places starting with higher taxes, a malevolent global health pandemic and
serial job losses on the back of multiple company shutdowns.
The
year started with local value added tax rate rising from 5% in 2019 to 7.5% in
February 2020. The increase was greeted with mixed feelings, while some analyst
felt that it would improve the government's fiscal balance, others felt that
the increase would further impoverish consumers who were battling with rising
cost of living reflected in a rise in headline and food inflation.
When A Bug Goes Rogue
The
COVID-19 pandemic worsened household living standards. The lockdown imposed by
the government led to larger job losses, an increase in insecurity, and rampant
social unrest. Furthermore, efforts by the government in collaboration with the
Private Sector Coalition Against COVID-19 (CACOVID) to reduce the adverse
impact of the pandemic on households and businesses had limited effect due to
weak fiscal structure and revenue base (COVID-19 hit oil prices negatively).
Some
of the fiscal responses by the federal government included: approval of a N75bn MSME Survival
Fund, the scheme was aimed at supporting vulnerable micro and small enterprises
in meeting their payroll obligations, and safeguarding jobs amongst MSMEs. Establishment
of a N500bn COVID-19 crisis intervention fund which was to upgrade healthcare
facilities at both national and state-levels, VAT exemption for an expanded
list of basic food items plus medical and pharmaceutical products. Suspension
of a proposed increase in electricity tariffs by distribution companies,
three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni
loans and the extension of the moratorium on loans issued by the Bank of
Industry, Bank of Agriculture, and the Nigerian Export-Import Bank, etc (see Illustration 1 below).
Illustration 1: Nigeria's Fiscal Responses to
COVID-19 Pandemic
The data coming out of the federal government's own statistics agency became increasingly depressing during the last year. Figures released by the National Bureau of Statistics (NBS), showed that unemployment rate rose from 23.1% in Q3 2018 to 27.1% in Q2 2020 (see Chart 1 below).
Chart 1: Nigeria's Unemployment Rate (%)
Source: NBS, Proshare
Research
The
rise in the domestic unemployment rate reflected the poor growth of the real
sector of the economy as MSMEs were sledgehammered by supply chain disruptions
and disappearing demand with workers losing jobs and disposable incomes.
Drugs, Crimes and Unemployment
The
rise in unemployment which has weighed more heavily on young Nigerians between
the ages of 18 and 35 years has led to deepening social tensions and increased
incidences of drug abuse, teenage pregnancies, crimes, and mental health
disorders. With a virus pandemic set on top of already adverse socioeconomic
condition, Nigeria in 2020 was poised gingerly on a box of gunpowder primed to
explode.
The
spillover of socioeconomic tensions in 2020 could make 2021 a difficult year
for Nigerians, especially if oil prices decline below US$45 per barrel and the
coronavirus pandemic leads to new rounds of economic lockdowns. So far, the
country appears to be on the path to a growth recovery after suffering a gross
domestic product (GDP) decline of -6.10%
in Q2 2020 and -3.62% in
Q3 2020. The declines occurred after a first quarter (Q1) growth rate of +1.87% (see chart 2 below).
Chart 2: Nigeria's GDP Growth Rate (%)
Source: NBS, Proshare Research
Q1
2021 could see a negative real GDP growth rate of between -1.82% and -1.50% depending on
the spread of the Coronavirus and the need for a comprehensive economic
lockdown like experiences in Europe and some states in the United States of America
(USA).
Declining
economic output in Q1 2021 would naturally lead to further household distress
and would require the federal government to increase the national debt numbers
(recently put at roughly US$85bn) and increase fiscal spending and the budget
deficit. Unfortunately, high fiscal leakages would make added fiscal spending
ineffective and would lead to a widening social disparity between the haves and
have nots. The widening gulf between the rich and poor would deepen social
tension and may lead to disruptions of economic and social life in 2021 that
the government would find difficult to contain.
Of Sad Faces and Rising Prices
The
misery index of the average Nigerian household went up in 2020. The index is
calculated by adding the seasonally adjusted annual rate of unemployment and
the annual rate of inflation. Nigeria's unemployment rate as of Q2 2020 stood
at 27.1% and it was forecast to rise further in the year. Equally, headline
inflation sustained an upward trend with the most recent headline inflation rate
standing at 14.89% as of November 2020.
The
country's inflation rate rose persistently throughout the year, climbing from
12.13% in January to 14.89% in November 2020, suggesting that the average
households' disposable income took a dive. This implied a fall in the welfare
of Nigerian households as prices of essential goods and services continued to
rise in the year. For example, the prices of medical services, hospital
services, passenger transport by road, hairdressing salons, paramedical
services, and pharmaceutical products recorded significant increases during the
year. Furthermore, essential food items
such as bread and cereals, potatoes, yam & other tubers, meat, fish,
fruits, vegetables, oils & fats became out of reach for some middle- and
low-income earners as food inflation rose significantly from 14.67% in January
2020 to 18.3% in November 2020 (see Illustration 2 below).
Illustration 2: Selected Food Prices November 2020
The Growing Food Gap
Household
consumption was worsened by the COVID-19 pandemic, as well as other government
policies in 2020. According to the most recent data released by NBS, household
consumption expenditure declined Y-o-Y by -0.08% in Q2 2020. Household consumption
declined from N10.134trn in Q2 2019 to N10.126trn in Q2 2020. While in Q1 2020,
household consumption expenditure declined Y-o-Y by -4.03%, as it declined from N9.53trn in Q1 2019 to N9.147
in Q1 2020 (see Chart 3).
Chart 3: Household Consumption Expenditure Y-o-Y (%)
Source: NBS, Proshare
Research
Towards the end of the year, the government announced that there would be a removal of fuel subsidy and the deregulation of PMS to reflect current realities. Within the same timeframe, the Nigerian Electricity Regulatory Commission (NERC) announced a new tariff regime dubbed service reflective tariff. Many analysts noted that both policies though critical for the development and growth of the economy were ill-timed and would further impoverish Nigerian citizens, as the stimulus employed by the government to drive a rebound was insufficient (see Illustration 2 below).
Illustration 2: Grinding Consumer's Pain: Factors
that Affected Households in 2020
Nigerian
Households: Riding a Carousel
Many factors that shaped household
spending in 2020 are likely to influence their welfare and spending in 2021.
While some of these factors would affect all categories of households, there
would be varying degrees of impact on different household income categories. It
is projected that in 2021, the inflation rate would be an important factor that
will shape the household's welfare and spending pattern. An increase in the
inflation rate would have a severe negative impact on low-income earners i.e.,
a decline in their purchasing power and an increase in the cost of living. On the other hand, high-income earners would
not feel so much of the brunt.
Furthermore, the implementation 0f the
service reflective tariffs and the increase in the PMS would affect all Nigeria
income class, but the greater impact would be felt by low-income earners who
are already struggling to survive. The VAT increase in 2020 would still shape
consumption spending in 2020. It had the most severe impact on the low-income
earners while it is assumed that high-income earners have enough buffers to
insulate their living standard from any rise in VAT charges. Other factors that
would likely shape household welfare and spending in 2021 include, but are not
limited to, devaluation of the exchange rate, the slow roll-out of the COVID-19
vaccine, low remittances, and the possibility of another lockdown (see Illustration 3 below).
Illustration 3: Nigerian Households: Riding a
Carousel
Making
Households Merry
The major focus for the government in
2021 would, or at least should, be improving the welfare of citizens. The World
Bank has projected that about 150m would fall into extreme poverty by 2021,
therefore, intensifying the call for the government to focus on measures in
bridging the inequality gap, reducing the poverty rate, and increasing the
welfare of its citizens. The government should intensify efforts in eliminating
all forms of multiple taxations that can stifle out business start-ups, and
provide necessary infrastructures e.g., regular power supply, security, etc.,
that would induce an efficient bu. Furthermore, it is the onus of the
government to cuts its huge recurrent expenditure which could be utilized for
other priorities with a greater multiplier effect on the economy e.g., more
reliefs, grants, and conditional cash transfers (see Illustration 4).
Illustration 4: Making Households Merry
Conclusion-Facing Down Poverty
The
new year 2021 would require new tactical approaches to poverty reduction to
head off social disruption in the year. The series of micro interventions by
the CBN and fiscal authorities would have minimal impact in the present year as
economic multipliers linked to the microcredit schemes are low. To accelerate
growth and reduce both unemployment and inflation institutional and
infrastructural constraints inhibiting business expansion must be faced down
firmly.
The
role of non-state actors in revenue leakages must be sizably reduced if not,
eliminated, and the leakages in public spending cut. If the year 2021 is to be
an improvement over 2020 old ways of doing things need to be revised and
replaced with new vision, broader compassion, and data-driven execution. Nobody
can plan what is not measured.
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News
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