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Outlook 2021: The Year 2020 in Retrospect - A Bleak Year for Households

Reviews & Outlooks	1113 VIEWS
Reviews & Outlooks
1113 VIEWS

Friday, February 12, 2021 /05:20 AM / By Proshare Research/ Header Image Credit: EcoGraphics

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 households' 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.

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. 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%.

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 32).

Illustration 32: Selected Food Prices for 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.

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 33).

Illustration 33: 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 34).

Illustration 34: 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 35).

Illustration 35: 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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