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Nigeria's GDP Drops by -6.10% in Q2 2020, Confirming Analysts Nightmares

Nigeria Economy	1994 VIEWS
Nigeria Economy
1994 VIEWS

Monday, August 24, 2020 01:30 PM /by TheAnalyst / Header Image Credit: NBS

COVID-19 brought about more than a health pandemic it raised a contagion of negative economic forecasts for 2020 globally, Nigeria not exempted. Local economists had predicted that despite the seemingly promising Q1 2020 GDP growth rate of +1.87%, Q2 2020 would show up with less flattering numbers. The recent Q2 2020 GDP growth rate of -6.10% released by the National Bureau of Statistics (NBS) confirmed analyst's fears.

Unlike the 2016-2017 economic recession that was bolstered by tumbling international oil prices, the decline in GDP in Q2 2020 was a combination of production and supply chain disruptions caused by a ravaging coronavirus pandemic and the tit-for-tat conflict between Russia and Saudi Arabia in the global oil market in Q1 2020 with both countries determined to retain market share even at the cost of lower prices. The battle between both oil giants has ended but global economic scars remain.

The Ides of A Lockdown

The domestic economic contraction in Q2 2020 has been attributed to the physical lockdown of two major states in Nigeria and the federal capital territory: Lagos state, Ogun state, and the FCT, Abuja which suffered blanket shutdowns in Q2 2020 with other containment measures adopted in different parts of the country. As analysts had earlier predicted the lockdown of states led to the shuttering of factories and other commercial activities which in turn dealt severe body-blows to the nation's GDP (see Chart 1 below).

Chart 1: Nigeria's Quarterly GDP Growth Rate (%)

Source: NBS, Proshare Research

The virus exposed and compounded Nigeria's weak economic underbelly characterized by over-reliance on oil export revenues, weak infrastructure, and large import dependence. The transportation and storage sectors recorded the largest contraction of -49.23% while other notable sectors that recorded contraction were accommodation & food services -40.19%, education -24.17% construction sector -31.77%, real estate -21.99%, trade -16.59%. The two sectors with the highest recorded growth in Q2 2020 were financial & insurance +18.49%, and Information & communication sector +15.09%. Other sectors that recorded positive growth in Q2 2020 include agriculture +1.58%, human health, and social services +1.89% and public administration +2.02% (see Chart 2).

Chart 2: Largest Contraction and Growth Sectors (%)

Source: NBS, Proshare Research

Restrictions induced by COVID-19 adversely affected inter and intra-state surface transport movement and the broader transportation sector. There was little or no economic activity in the sector during the lockdown as airline companies, road transporters and shippers recorded a decline in activities and revenues. Also, the manufacturing sector was badly mangled as manufacturers had to rely on declining input inventories and ad hoc substitutes, where available, as imported inputs were off-limits over the second quarter. Activities in the construction and the real estate sector were also thumped by the restrictions.

The telecommunication sector, however, had a different experience as revenues rose with more citizens either working from home or staying at home without jobs. The enforcement of the lockdown made businesses and individuals gravitate towards remote working as business meetings were conducted through the internet, therefore, raising the revenues of telcos.

Headwinds in The Savannah

Analysts hold out the view that the economy would record a second consecutive contraction in GDP growth rate by Q3 2020, but the next contraction would milder than the Q2 2020 number due to the easing of the economic lockdown and the resumption of business activities in the quarter. Nigeria's rising inflation rate (12.82% in Q2 2020), escalating unemployment rate (27.1% in Q2 2020), and dwindling foreign reserves have dampened hope of a full economic recovery by Q2 2021 as earlier estimated. Nigerian citizens will have to tighten their fiscal belts between Q2 2020 and Q2 2021 as a tougher economic outlook lies ahead. Policymakers may need to grapple with the best policy combinations needed to tackle a burgeoning economic crisis (see Table 1).

Table 1: Nigeria's Economic Scorecard

Economic Parameters	Previous	Current
Inflation (%)	12.56	12.82
Unemployment (%)	23.1	27.1
GDP Growth rate (%)	1.87	-6.10
Foreign Reserves ($'bn)	35.87	35.59

Source: NBS, CBN, Proshare Research

Due to the integration of the Nigerian and global economy, Nigeria's full economic recovery is hinged on the development of a vaccine for the COVID-19, stability in global oil prices, and a rise in global manufacturing production and commerce. Persistence in the spread of the global virus would further disrupt international supply chains as some countries may need to re-impose a lockdown that would adversely affect Nigeria's import-dependent manufacturing sector. Slow recovery of global economic growth would worsen Nigeria's balance of trade position.

Although there have been recent moves by the government to diversify its export earnings such as the grant of licenses to mine bitumen and gold, there are no quick fixes to Nigeria's economic problems. Policy-makers may need to painstakingly address fundamental issues such as the ballooning domestic budget deficit, worsening local infrastructure gaps, rampant corruption, and low and globally-noncompetitive productivity.

If there is anything worse than nightmares analysts, policymakers and indeed citizens will need to find the appropriate therapy as the economy wobbles gingerly through Q3 2020.