Tuesday, February 02,
2021 / 12:31PM / by NESG Group / Header Image Credit: NESG Group
Nigeria is at a critical point in its 60-year history. In the year 2020, Nigeria experienced one of the worst recessions in several decades - its second recession in a space of 5 years. While the rate of unemployment reached a peak of 27.1 percent as at June 2020, the World Bank estimated that in 2020, about 8.6 million Nigerians would fall into poverty. Real per capita incomes, according to the Bank, are expected to fall to levels like those seen in the 1980s. When compared with countries like Indonesia, China, Singapore and Malaysia that have exponentially expanded their real income for decades, the fact remains that Nigeria, in recent times, was never far from the realities of the 1980s.
Nigeria is at a crossroad. Nigeria has been at a crossroad even before the outbreak of COVID-19. It has been at a crossroad even before the recession in 2016. A crossroad where the country has to decide on implementing tough choices to reform itself or continue on the business-as-usual pathway. A crossroad that will ensure breaking the country from the curse of crude oil and developing its non-oil sector or continuing the cycle of reliance on crude oil for foreign exchange earnings and government revenue. One that will determine the optimum path for states to thrive and become independent or allow the continued reliance on the centre for survival. A crossroad that will determine what type of legacy it wants to leave for the future generation. Nigeria cannot afford the business-as-usual approach which will only lead to further job losses, pull millions of citizens into poverty and worsen an already fragile economy.
Nigeria's economy had been on a rough path even before COVID-19. Although the trajectory of economic growth had been improving since 2017, economic growth was still fragile and driven by just a few sectors, as was the case leading up to the recession in 2016. For instance, between 2017 and 2019, only 3 out of the 19 major sectors- agriculture, mining & quarrying and ICT - contributed 91 percent to Nigeria's economic growth while about 15 sectors either contributed insignificantly or negatively to economic growth.
The economic recovery was further marred by slower accretion of the country's external reserves in the early parts of 2019, which further took a downward turn from the month of August 2019, as monetary and fiscal authorities could not take advantage of the gains of the relatively stable crude oil prices in 2019. Continued intervention by the Central Bank of Nigeria (CBN) in the forex market, high demand for imports, as well as, external debt servicing obligations led to the decline of the reserves in 2019.
Wrong policy choices cast a strain on an ailing economy even before the outbreak of COVID-19. The implementation of land border closure resulted in a decline in earnings from non oil exports. This policy decision reversed the few gains made in the last couple of years and further exacerbated the challenges facing the economy. In addition to a sharp and consecutive increase in prices - inflation rate rose from 11 percent in August 2019 to 14.9 percent in November 2020 - the economy has recorded consecutive trade deficits since the fourth quarter of 2019. Many non-oil exporters that serviced neighbouring countries suffered losses. This, we believe, was a huge cost to the economy.
The closure was a heavy policy decision that required the input of the private sector especially given its implications on businesses, both formal and informal players. In addition to a challenging trade environment, public debts trended upwards with an addition of a net of N3 trillion to the debt stock in 2019. Actual debt servicing costs remained high at 60 percent of total revenue.
The outbreak of Coronavirus (COVID-19) only accentuated the problems and further tested the strength of the economy. The COVID-19 pandemic and its associated impact tested the strength of the economy and exposed the long-standing vulnerabilities therein. The first major impact channel was through the crude oil industry, Nigeria's major vulnerability spot. Consistent decline in oil prices triggered by lower demand due to the implementation of lockdowns across countries led to several revisions of the benchmark crude oil price in the 2020 budget, which was later pegged at US$28 per barrel from US$57 per barrel when the budget was passed in December 2019. Shortfall in oil revenue that followed was supported by a sharp increase in public debts which rose to N32.2 trillion as at September 2020 from N27.4 trillion in December 2019. In summary, the pandemic revealed that Nigeria had an economy that could not withstand shocks especially taking into consideration the low levels of external reserves and fiscal savings.
The pandemic also tested the ability of government to adequately cater for the needs of citizens and businesses in times of crisis. With the implementation of lockdowns and restrictions across major states, the government needed to step up in providing palliatives for affected citizens who were estranged from work and from making a living. Prior to the pandemic, the number of poor people in Nigeria stood at 83 million, according to the National Bureau of Statistics. Bearing in mind that the lockdown not only affected the poor but also the near poor population as well as middle income earners, providing adequate support was a herculean task for the government at both federal and state levels. Several factors such as inadequate data on affected citizens, ineffective delivery systems and mechanisms as well as issues relating to accountability and transparency limited the states' reach of affected citizens.
It is clear that COVID-19 is a global pandemic that affected many countries including developed economies. Even countries with high income and developed experienced a deep recession, deeper than that of Nigeria. However, for many developed economies that fell into a recession, the implementation of lockdowns and restrictions rather than commodity prices, played a much more important role. But for Nigeria, the performance of crude oil price and output cuts were also significant factors that led to the recession. In essence, the recovery of the Nigerian economy will not only be linked with the easing of lockdowns, but also with the performance of the global oil industry.
The fact remains that Nigeria is yet to wean its economy from the performance of crude oil price. Even with 2020 being one of the worst years for the global oil industry with oil price declining to as low as US$9 per barrel in April, crude oil still accounted for 81 percent of Nigeria's export earnings in the third quarter of 2020. When other oil products are included, this share increased to 93 percent implying that non-oil exports accounted for just 7 percent of total export earnings in the period. The above statistics further confirm that government efforts to diversify the economy are not yet yielding positive results - a very familiar tale that Nigeria must change, if it must favourably compete with other countries in the light of the African Continental Free Trade Area (AfCFTA) agreement.
Beyond crude oil, human development is at one of its worst stage in the history of Nigeria and this was made severe by the pandemic. Despite the ambition of the current administration to lift 100 million people out of poverty in the next 10 years, the World Bank, in its Nigeria Development Update, noted that before COVID-19, about 2 million Nigerians were expected to fall into poverty in 2020. The institution further stated that with COVID-19, the recession is likely to push an additional 6.6 million Nigerians into poverty in 2020, bringing the total newly poor to 8.6 million. This, therefore, implies an increase in the total number of poor in Nigeria to about 90 million in 2020. Unemployment rate also reached a peak of 27.1 percent as at June 2020 due to the impact of the pandemic.
As Nigeria moves into the future, it is faced with the pressing need to provide solutions to an expanding array of economic and social challenges that continue to hamper development. At every level of governance, political leaders must rise to the leadership challenge that the COVID-19 crisis presents. Policymakers must be proactive and sincere in dealing with the problems of policy inconsistency, poor implementation of national plans and making bad choices. What is clear is that the state of the Nigerian economy at any point in time is a consequence of the choices/decisions of policymakers: choices of either taking the wrong policy action or ignoring appropriate signals to implement the right policy decisions. This is a reality that policymakers must accept going forward. Policymakers must be deliberate in solving basic economic problems and continuously engage with relevant stakeholders before making crucial decisions.
There are however several reasons to be optimistic: Nigeria has implemented some tough reforms in 2020, such as, removal of fuel and electricity subsidies and a massive programme on harmonisation of citizen's data. These must be consolidated with swift implementation of security reforms and sanitising the business environment, both of which are crucial in attracting investments into critical sectors of the economy. In addition, state governments must be given the legislative and policy support to explore the opportunities and resources in their respective states. The urgency of these reforms must be prioritised going into the next decade.
Already, the devastating impacts of the twin phenomenon of poverty and unemployment are being felt across several parts of the country as manifested in the level of insecurity - kidnappings, theft, and other social vices. The violence that followed the EndSARS protests in late October of 2020 is also a testament of heightened aggravation of a group of young and agile citizens towards the ruling class, the middle and high income citizens. This implies that the conversation for achieving inclusive economic recovery has never been even more important. This is at the heart of the survival of the nation.
Meanwhile, in the last three editions of our Macroeconomic Outlook Report, we, the Nigerian Economic Summit Group (NESG), emphasized the importance of inclusive economic growth and how it can be attained in Nigeria. Specifically, in one of the editions, we developed a framework for inclusive growth in Nigeria and proposed reforms to alter the structure of the economy, drive sustainable and high economic growth, create more job opportunities and achieve significant poverty reduction. The current edition, (Macroeconomic Outlook for 2021), builds on the previous works and highlights four key priorities that must be considered and wholeheartedly pursued by the Nigerian government to get the economy on the path of inclusive economic growth and development with the immediate goal of creating jobs and lifting millions of Nigerians out of poverty.
Part I of this report reviews the Nigerian economy in 2020 and provides an outlook for 2021. Part II discusses the Four Priorities for the Nigerian Economy in 2021 and Beyond.