Nigeria has been hit by twin shocks, the coronavirus (COVID-19) and a sharp fall in oil prices without a buffer – saving for the rainy day – and limited fiscal space. The immediate challenge is to address the health needs and those of the most vulnerable people and firms. The crisis should serve as a wake-up call for restructuring the economy and putting it on a new path of more rapid growth and poverty alleviation. Once the pandemic is contained, reforms should be pursued together with an exit strategy to reduce dependence on oil, strengthen the budget and service delivery, combat rent-seeking activities and improve the business environment.
The COVID-19 pandemic has impacted the world’s economies with unprecedented speed and severity. The health crisis and the protective measures put in place will cause the global economy to contract by three three per cent in 2020, the worst since the Great Depression. Sub-Saharan Africa, which relies on exports of primary commodities and is heavily dependent on foreign financing flows, is projected by the IMF to experience a decline in GDP of 1.6 per cent, the lowest level on record. Furthermore, the disruption in local agri-food supply chains and higher transaction costs are likely to result in substantial decline in agricultural production and food imports. The reduction in food availability combined with the fall in household income could create a severe food security crisis on the continent, particularly for the poor and vulnerable groups.
Nigeria’s economy was not at its healthiest before the pandemic, with years of slow or no growth, double-digit inflation and high poverty rates. Already, there was limited fiscal space and a heavy dependence on oil for budgetary revenue and foreign exchange (forex) earnings. The 2020 budget assumed a benchmark oil price of $57 per barrel and a deficit of N2.18tn, (3.9 per cent of GDP) about 21 per cent of total spending, and oil revenue constituting over 50 per cent of revenue; the reference price of oil was subsequently reduced to $30 per barrel, still above the current international price. Despite the competing needs for limited revenue, interest payments have reached a staggering 60 per cent of government revenue. Worse still, the government had not been saving sufficiently when oil prices were favourable. In 2018, Nigeria’s sovereign wealth fund was $2.44bn; which is considerably smaller than the sovereign wealth fund of other oil producers on the continent such as Angola ($5bn) and Botswana ($6.9bn).
Furthermore, the country’s excess crude account which amounted to $325m in 2019 has been depleted to $71.8m in 2020, leaving little fiscal room for the government to weather the economic crisis amid shortfalls in revenue.
Additionally, the monetary authority has found it difficult to achieve price stability and exchange rate parity between the official and market rates. In January, the inflation rate increased to 12.1 per cent, the highest in nearly two years, and significantly above the CBN’s inflation target range of 6-9 per cent. With the increase in food prices being the primary driver of the rising inflation, the pandemic is likely to further drive food inflation upwards as access to inputs and services is reduced, labour movement is curtailed and inter and intra-state travels are minimised.
Furthermore, the exchange rate has been overvalued as reflected in the wide wedge between the official rate and the rate determined by market forces. In maintaining the overvalued exchange rate, the CBN has had to draw on foreign reserves, leaving the country more susceptible to economic shocks such as the one induced by the pandemic.
Impact on the Nigerian economy
Nigeria’s economy is thus expected to be hit harder than most African and other developing economies and its GDP would fall by 3.4 per cent in 2020, according to recent IMF projections, and inflation would edge up to above 13 per cent. Aside from the demand and supply shocks affecting economies across the world, as reflected in the sharp decline in the production of goods and services, the crisis will impact key aspects of the Nigerian economy. External financing flows, including Foreign Direct Investment (FDI), foreign portfolio investment and remittances will be severely reduced as investors turn to safer assets and those in the diaspora face tougher economic conditions. This can already be seen as the recent CBN OMO auction on March 19, ended with no sale as foreign investors demanded higher interests.
The impact on both domestic and external financing flows restricts the government’s fiscal ability to combat the pandemic and its effect. While other countries are borrowing heavily in order to build a more robust economic response package, Nigeria is in a more difficult situation. As noted above, a sizeable portion of revenue is already being spent on debt service and no buffer has been built.
Trade is another area that is being severely curtailed. While global trade in general is affected due to logistic obstacles, Nigeria’s situation appears bleaker. Aside from the fact that the demand for oil fell sharply, its main trading partners for non-oil commodities such as India, China and Turkey have been among the most affected by the pandemic.
Moreover, with the recent adjustment of the official naira-dollar rate from N305 to N360 (and further adjustments expected due to the pressure on forex earnings) and the rationing of forex to importers, imports will become more expensive; disrupting local production for which imported inputs are required.
Economic policy responses
Similar to other countries, the Nigerian government and the CBN have responded to the pandemic and its economic effects through fiscal and monetary measures. The fiscal stimulus package provided by the Federal Government is being targeted mainly at the health sector and workers. N984m has been released to Nigeria’s Center for Disease Control (NCDC) for its operations, as well as another N6.5bn for purchasing medical supplies, opening isolation centres and training medical personnel. Additionally, N500bn has been provided for establishing healthcare facilities and incentivising employers to retain staff during the economic downturn as the Emergency Economic Stimulus Bill 2020 provides 50 per cent tax refund to businesses that do not retrench staff between March 31 and December 31, 2020.
On monetary policy, the CBN has reduced interest rates on all its interventions from nine to five per cent and extended debt repayment by one year. The CBN has also gone further to inject liquidity into the economy as it provided a N50bn credit facility to small- and medium-sized businesses, N2tn to the manufacturing sector, N1.5tn to the real sector and N100bn to the health sector.
The government is also receiving support from multilateral financial institutions totaling almost two per cent of GDP. The IMF is providing Nigeria with $3.4bn under its Rapid Financing Instrument, and the World Bank and the African Development Bank (AfDB) are expected to disburse another $3.5bn. It is hoped that this international support would be utilised speedily and efficiently for the benefit of the health sector and the neediest segments of the population.
Additional actions needed
Macroeconomic policies should continue to be used to protect vulnerable groups, mitigate economic losses and support the recovery. While the interventions listed above will go some way in containing the adverse impact of the two shocks, they may not be sufficient in helping individuals and businesses survive given the uncertainty of the duration of the crisis. With the shutdown, many businesses are generating little or no revenue to enable them to pay employees and meet their tax obligations which will qualify them for tax refund at the end of the year.
Moreover, the credit facilities being provided may not be accessed by businesses operating in the large informal economy.
In order to further limit the negative human and economic impact of the pandemic, more robust economic responses are therefore recommended:
– The suspension of income and business tax payment for a period or allowing payment in installments will provide liquidity for individuals and businesses.
– The speedy provision of grants to businesses to finance employee wages, particularly for industries directly impacted by the crisis such as aviation, tourism and hospitality in order to ensure that workers are not laid off or furloughed and businesses remain solvent.
– The speedy provision of loans and grants to small businesses in the informal economy.
– Ensuring that the food chain is not interrupted, and all regions have access to food and basic necessities.
As part of the exit strategy once the Covid-19 pandemic is contained, Nigeria should seize the opportunity to wean itself of its heavy dependence on oil. While providing credit facilities will enhance the local industrial capacity and import substitution, legacy issues such as poor infrastructure and an inefficient bureaucracy together with prevalent corruption must be addressed for local industries to develop and to be competitive.
– Fiscal policy needs to be recalibrated: non-oil revenue mobilisation should be enhanced considerably, greater emphasis should be placed on capital spending, health and education and social safety net; the deficit should be contained to ensure debt sustainability. The quality of spending and service delivery need to be improved significantly.
– The exchange rates should be unified and be more market determined in order to reduce distortions and rent seeking and help diversify the economy.
– The power sector is in urgent need of reform. Past reform efforts have failed.
– The crisis should be used as an opportunity to strengthen the digital economy. Businesses should adapt to providing remote service delivery and public institutions such as universities should permanently incorporate virtual infrastructure and techniques such as online courses.
– While countries are encouraged to produce commodities for which they have comparative advantage in, it is imperative that Nigerian producers reduce their reliance on global supply chains for inputs. Global shocks such as the pandemic should incentivise producers to look inwards, utilise local resources and manpower in manufacturing goods and agriculture.
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