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CBN strategizes for COVID-19 second wave, fixing economy

Recent data from the National Bureau of Statistics (NBS) have shown that Nigeria’s real Gross Domestic Product (GDP) contracted for the second consecutive quarter by…

Recent data from the National Bureau of Statistics (NBS) have shown that Nigeria’s real Gross Domestic Product (GDP) contracted for the second consecutive quarter by 3.62 per cent in the third quarter of the year, compared to a growth of -6.10 per cent, which showed that the country had entered its second economic recession in five years.

This second recession is no thanks to COVID-19 pandemic which saw the federal government adopting several measures which included a lockdown of Lagos, Ogun as well as the Federal Capital Territory, leading to the disruption of the movement of goods and services as well as production.

The International Food Policy Research Institute (IFPRI) in a recent paper which analyzed the economic impacts of the COVID-19 pandemic, estimate that during the lockdown periods, Nigeria’s GDP suffered a 34.1 per cent loss due to COVID-19, amounting to USD 16 billion, with two-thirds of the losses coming from the services sector.

The report also noted that the agriculture sector, which serves as the primary means of livelihood for most Nigerians, suffered a 13.1 per cent loss in output (USD 1.2 billion).

According to the report, primary agricultural activities were excluded from the direct restrictions on economic activities imposed in the lockdown zones, the broader agri-food system was affected indirectly because of its linkages with the rest of the economy.

“We estimate that households lost on average 33 per cent of their incomes during the period, with the heaviest losses occurring for rural non-farm and for urban households. The economic impacts of COVID-19 include a 14-percentage point temporary increase in the poverty headcount rate for Nigeria, implying that 27 million additional people fell below the poverty line during lockdown.” It added.

Owing to these realities, all eyes are now on the Central Bank of Nigeria (CBN) to roll out ammunition needed to combat the economic downturn in order to return the economy to the path of growth.

Recall that the CBN had after the economy entered into a recession in 2016, intervened in the agriculture sector through its Anchor Borrowers’ Scheme and other development finance initiatives, as well as a raft of other measures to propel economic recovery.

CBN Governor, Mr. Godwin Emefiele, recently assured Nigerians that just like policymakers did in 2016 when the economy slipped into recession, the fiscal and monetary policy managers would join forces to address the present economic challenge.

He expressed optimism that with measures to put in place to stimulate economic activities, the country would likely achieve a two per cent growth in 2021.

Professor of Capital Market, Uche Uwaleke agreed that the NBS Q3 real GDP number is a confirmation of the fact that economic contraction occasioned by COVID’19, Q2 2020 represents the worst experience for Nigeria.

He said when compared to a contraction of 6.10% in Q2 of this year: “it is actually an improvement reflective of the ease in lockdowns and movement restrictions, the reduction in the cases of COVID’19 and the gradual return of investors’ confidence in the economy.”

Uwaleke said: “this improved confidence has also manifested in PMI readings and stock market performance. This explains why, although still in the negative territory, sectors like Manufacturing, Trade, Transportation and Education recorded improvements over the Q2 numbers.”

According to him, the performance of the Agriculture sector in real terms which came in at 1.39% was disappointing.

“This corroborates the high food inflation rate now above 17% caused in large part by insecurity in many parts of the country.

“Yes, the economy has officially entered a recession but I see a quick V-shaped recovery as the effect of COVID’19 recedes and the impact of the interventions by the government and CBN begin to manifest including the implementation of the Economic Sustainability Plan.

“The early passage of the 2021 appropriation Bill will also go a long way in supporting economic recovery.”

However, downside risks remain, as restoration of full economic activities, particularly in service-related sectors, remains uncertain until a COVID-19 vaccine is produced and made available to millions of people across the world.

In a bid to stem the second wave of the coronavirus epidemic, countries including Germany, France, Spain and several European countries have imposed fresh regulations.

Governor Nasir el-Rufai, has expressed concern over the rising cases of COVID-19 infections in the state and threatened to impose a second lockdown in the entire State if the rate of infections continues to rise.

Similarly, Lagos State government, penultimate week, warned residents that the continuous flagrant disregard of COVID-19 protocols and safety guidelines by citizens could lead to a second wave of new infections in Lagos and subsequent lock-down.


How to insulate the economy from shocks

Economic analysts have posited that economic drivers must find ways to insulate our economy from the impact of these shocks through diversification efforts, while also working to ensure that we adhere to safety protocols in order to prevent a surge in COVID-19 related cases, as this could further cripple economic activities.

Speaking with Daily Trust, The Chairman of the Foundation for Economic Research and Training in Lagos, Professor Akpan Hogan Ekpo said: “We cannot afford another phase of lockdown, it will completely kill the economy. It will be disastrous for the household, family and businesses.

“Our economy is not a productive economy; a lot of people depend on the informal sector. They practically live from what they earn daily. What we urgently need is social restrictions.

“Government should enforce the wearing of masks; prohibit gatherings to not more than 20. We have to stop these weddings and parties where people behave as if there is no COVID-19.”

Emefiele in a recent lecture has posited that the recent rise in inflation was not due to monetary factors, but rather the prevalence of structural rigidities and supply shocks, and that traditional tools of monetary policy may not be helpful in addressing current inflationary pressures.

Rather, he said a more useful policy would be the supply-side measures implemented by the Bank.

Regarding this, Emefiele said emphasis would be placed on strengthening the development finance initiatives of the CBN in order to stimulate greater production and reduce unemployment.

“We intend to increase our support for measures that will improve cultivation of local produce in Nigeria, with particular emphasis on improving our yield levels, as food inflation continues to remain the key driver of inflationary trends.

“The banking sector therefore has a significant role to play as a facilitator of growth in the agriculture sector, through its intermediation function.

“Some of the opportunities in the agriculture sector that banks should explore include ways to address some of the existing gaps in the agriculture value chains, such as storage centres, transport logistics, and technology platforms, which can enable rural farmers to sell their produce directly to the markets.

“These measures would help to improve productivity of farmers, reduce post-harvest losses, increase access to finance for farmers and improve sourcing of local raw materials for processing by manufacturing and industrial firms.

“It will also aid improved production of local goods, enable the creation of jobs, while supporting the growth of other sectors of our economy such as manufacturing, and transportation,” Emefiele said.


Raising COVID-19 Targeted Facility

In order to reflate the economy, the Monetary Policy Committee (MPC) recently urged the CBN to raise its COVID-19-targeted facility to households and firms from N150 billion to N300 billion in order to accommodate more Nigerians.

The initiative is to cushion the impact of the pandemic that pushed the economy into recession, spur consumer spending and accelerate recovery from recession.

Furthermore, the CBN head said increasing the targeted credit facility will, by boosting consumer spending, stimulate output and ensure that all the six geopolitical zones benefitted from the palliative.

He said: “We have been advised or nudged on by the MPC that given that this had been very impactful positively, that the CBN should do more.

“We have been told that we have to increase it not just from the N140 billion to N150 billion that it is now, but increase it to about N250 billion to N300 billion to accommodate more people that have not accessed this facility.

“But we do insist that this must be done in a way that it goes round because we found out that some zones are more represented in the country than others.

“But understand that a zone like North-central, where we have predominantly Abuja, or South-west, where you have predominantly Lagos, would certainly have a larger share.

“The important thing is that we want to use this as an opportunity to see what can be done to boost consumer spending for our people and also see to it that output is stimulated positively for the good of our people.”


Implementing Economic Sustainability Plan

The central bank has also advised the federal government to quicken the implementation of its Economic Sustainability Plan (ESP) in order to boost economic recovery.

A speedy implementation of the policy, the CBN said, will help in addressing the structural impediments to growth and job creation as well as improving the poor state of the country’s infrastructure.

The Deputy Governor, Financial System Stability Directorate, CBN, Mrs. Aishah Ahmad has noted that for optimum benefits to the economy, monetary policy instruments can only compliment policies in other sectors of the economy to deliver broad-based economic prosperity.

She stated those aspects of the plan, which seek to improve non-oil government revenue and reduce non-essential spending are vital and reinforce the importance of prioritizing government expenditure to support social infrastructure, including but not limited to health, education and security, to help drive economic growth prospects.

“The bank must support these fiscal efforts by sustaining its intervention policies particularly in the agricultural sector, which will be critical to strengthening output and curtail food inflation and COVID-19 monetary stimulus measures and other initiatives designed to channel credit to critical sectors such as agriculture, manufacturing and small businesses,” she added.

She said there was a need to continue to push for the implementation of the minimum Loan to Deposit Ratio Policy (LDR); vigilance over the banking sector to preserve its strength, resilience and capacity to support the economy; and support for Small and Medium Enterprise (SMEs) to mitigate their exposure to adverse impacts of the pandemic.

Similarly, the Deputy Governor, Corporate Services Directorate, CBN, Mr. Edward Lametek Adamu, said COVID-19 had altered the way people live and conduct economic activity/business, adding that some of its consequences might remain for a while.

“There will be lasting consequences for employment, production cost and how economic agents engage resources, even under the best circumstances of early vaccine plus a cure,” Adamu added.

The Deputy Governor, Operations Directorate, CBN, Mr. Folashodun Shonubi, said: “Overall, the state of the economy requires that we must keep as many as possible economic agents active and promote the expansion of economic activities to create more employment and guarantee income.

“On the back of an inflationary pressure that is induced, largely, by temporary disruption to supply chain, one-off shocks and structural rigidity, I am certain that as we keep the engine of economic activities grinding, the cost reducing the effect of increased productivity and economies of scale will eventually drive prices down.”