COVID-19: Nigerian economy still fragile ahead of looming recession

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Zainab Ahmed
Zainab Ahmed

Despite the looming recession in the country, some economists believe that though this year’s recession may be severe due to the absence of significant foreign exchange reserves as buffer to support the economy, there is every reason to be hopeful that the economy will begin its recovery in 2021 if necessary policy measures are implement by the authorities

By Goddy Ikeh

UNFORTUNATELY, Nigerians are waiting for the official pronouncement that their economy has slipped into recession since it appears that no miracle can save the precarious situation which has been blamed on the traumatic effects of Covid-19 pandemic. But the blunt minister of finance, budget and national planning, Zainab Ahmed had revealed that the country’s economy was already exhibiting “some symptoms of cold before the outbreak of the cold linked to the coronavirus”.

Ahmed told lawmakers recently in Abuja that prior to the outbreak of the virus which led to decline in crude oil prices, “the Nigerian economy was already fragile, vulnerable and deteriorating”.

The minister explained that the global economic downturn had forced international oil prices to drop to as low as $22 per barrel and that international travels and trade had been severely disrupted, while demand for goods and services is deteriorating as a result of the lockdown and other restrictive measures.

Fortunately, there were early warnings on the potential devastating impact of the coronavirus on global and regional economies and some of the regrettable measures adopted by most African countries, including Nigeria, which further harmed their fragile economies.

For instance, the IMF boss, Kristalina Georgieva warned in April that the global coronavirus pandemic was causing an economic crisis unlike any in the past century and would require a massive response to ensure recovery. She said that “global growth will turn sharply negative in 2020,” with 170 of the International Monetary Fund’s 180 members experiencing a decline in per capita income.

“In fact, we anticipate the worst economic fallout since the Great Depression,” Georgieva said in a speech previewing the spring meetings of the IMF and World Bank, which was held virtually due to the restrictions imposed due to the COVID-19.

She noted that even in the best case the IMF expects only a “partial recovery” next year, assuming the virus fades later this year, allowing normal business to resume as the lockdowns imposed to contain its spread are lifted.

But she warned that “it could get worse,” and “there is tremendous uncertainty around the outlook” and duration the pandemic.

Countries already have taken steps worth a combined $8 trillion, but Georgieva urged governments to do more to provide “lifelines” for businesses and households to “avoid scarring of the economy that would make the recovery so much more difficult”.

On the regional level, the World Bank said that COVID-19 was taking Sub-Saharan Africa towards its first recession in 25 years.

In a statement in April, the bank explained that growth in Sub-Saharan Africa had been significantly impacted by the COVID-19 outbreak, and was predicted to fall sharply from 2.4 percent in 2019 to -2.1 to -5.1 percent in 2020.

The World Bank explained that it based its forecast on the latest Africa’s Pulse, the bank’s twice-yearly economic update for the region.

“The COVID-19 pandemic is testing the limits of societies and economies across the world, and African countries are likely to be hit particularly hard.

“We are rallying all possible resources to help countries meet people’s immediate health and survival needs, while also safeguarding livelihoods and jobs in the longer term.

“This includes calling for a standstill on official bilateral debt service payments, which would free up funds for strengthening health systems to deal with COVID 19 and save lives.

“Social safety nets to save livelihoods and help workers who lose jobs, support to small and medium enterprises, and food security,” the statement quoted Hafez Ghanem, World Bank Vice President for Africa as saying.

According to Ghanem, the Pulse authors recommend that African policymakers should focus on saving lives and protecting livelihoods by strengthening the health systems and taking quick actions to minimise disruptions in food supply chains.

The bank noted that the authors also recommended implementing social protection programmes, including cash transfers, food distribution and fee waivers, to support citizens, especially those working in the informal sector.

The analysis shows that COVID-19 will cost the region between 37 billion dollars and 79 billion dollars in output losses for 2020 due to a combination of effects.

“While most countries in the region have been affected in different degrees by the pandemic, real gross domestic product growth is projected to fall sharply, particularly in the region’s three largest economies like Nigeria, Angola, and South Africa, as a result of persistently weak growth and investment.

“In general, oil exporting-countries will also be hard-hit; while growth is also expected to weaken substantially in the two fastest growing areas, the West African Economic and Monetary Union and the East African Community, due to weak external demand, disruptions to supply chains and domestic production,” the bank said.

So far, these warnings and predictions of the IMF and the World Bank have manifested and are still unfolding, while the effects on the Nigerian economy had been traumatic and unless the unexpected happens, the economy is set to slip into recession in the third quarter of this year. Although, the Nigerian authorities took some hasty and unnecessary measures like the lockdown, they were able to provide some palliatives to the needy and vulnerable in the country and some other recommendations of both the IMF and World Bank to ameliorate the impact of the virus on the economy and the people. However, there were widespread reservations on how effective and transparent the exercise was across the country.

And to minimize the impact of the pandemic on the economy, the federal government has slashed the 2020 budget, reviewed the oil benchmark for the 2020 budget from the initial $57 to $25 per barrel of crude oil and pegging the exchange at N360 to the dollar, while CBN has reeled out some interventions in support of the economy, amounting to trillions of naira.

The Nigerian government is also seeking concessionary loans of $6.9 billion from the World Bank, the IMF and the African Development Bank, AfDB to support the implementation of the 2020 budget. According to Ahmed, the federal government applied for the loans on behalf of the states and Federal Government, while $1 billion is expected from the AfDB.

Despite the measures adopted so far to stabilize the economy avert the looming recession. The state of the economy is still looking gloomy. According to the review by Cordros, an investment firm, Nigeria’s external trade balance extended its deficit run for a second consecutive quarter in Q1-20 (NGN139.00 billion vs. a NGN831.62 billion surplus in Q1-19). Quoting figures from the  National Bureau of Statistics, NBS, Cordros noted that relative to Q4-19 (NGN579.06 billion), the reported deficit was noticeably smaller. It explained that the breakdown provided showed that exports (-10.0% y/y) underperformed imports (+14.0% y/y) over the period. On the former, the blend of lower crude oil (-12.8% y/y) and non-crude oil (-1.8% y/y) exports weighed markedly on overall exports.

For us, the decline in crude oil exports isn’t surprising, given the sharp deceleration in the oil price (-20.0% y/y) even as crude production (+4.0% y/y) rose marginally. It is noteworthy to mention that crude oil exports still account for more than 72% of total exports, portending that the country is still miles away from achieving its revenue diversification mandate. On the other hand, importation of agriculture (+10.6% y/y) and solid mineral (+20.1% y/y) goods, supported overall import in the review period.

Over the next few quarters, the foreign trade balance is expected to deteriorate further, given the benign outlook for crude oil earnings and prospects for a higher import bill. For one, the oil price is expected to average USD38.71/bbl. over 2020 (vs. USD64.16/bbl. in 2019). That together with the new OPEC+ agreement, which is expected to place a cap on Nigeria’s oil production (Cordros’ estimate: 1.79mbd including condensates), should cascade negatively into export earnings.

On imports, the need to flatten the COVID-19 case curve will continue to support the demand for medical supplies. Thus, we suspect that the shipments of medical supplies and food items will dominate the import bill – non-oil imports made up 82.2% of total imports in 2019. Thus, we see further legroom for Nigeria’s trade deficit to expand.

On investments in the capital market, Cordros says risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

On foreign exchange, it noted that for the second straight week, the CBN recorded another reserve drawdown as FX outflows outpace inflows – foreign reserves dipped by USD82.09 million WTD to USD36.50 billion. Nonetheless, the naira depreciated against the US dollar by 0.32% WTD to NGN387.75/USD at the I&E window but closed largely flat at NGN450.00/USD in the parallel market. Unlike in the spot market, the naira gained ground against the US dollar across all contracts in the forwards market. Specifically, the 1-month (+0.1% to NGN388.71/USD), 3-month (+0.4% to NGN392.70/USD), 6-month (+0.8% to NGN398.45/USD), and 1-year (+2.3% to NGN416.25/USD) contracts all appreciated against the US dollar.

“For us, the widening current account (CA) position suggests that odds are stacked against the Naira. Beyond that, as the economy gradually reopens, the resumption of FX sales to the BDC segment of the market will place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.

In his analysis of the Nigerian economy, Pita Adori, an economist, said about a year ago, the economy appeared to be picking up gradually after the recession. And to support the growth, “we saw the government investing much in infrastructure development, foreign loans were taken to invest on infrastructures such as rail, roads, airports, etc, which was good and going on well until the Covid-19 incidence which has slowed down not just the Nigerian economy but the global economy”.

According to him, every aspect of the economy has been negatively impacted by Covid-19. “With the stoppage of movement, productivity was also halted in every sector of the economy. So the productive aspect of the economy was badly affected by Covid-19.

“For now, there is no magic to save the economy from recession. We can only mitigate the impact and work towards recovery from the recession, and the way to go about that is to increase public investment and fiscal discipline on the side of the government,” he said.

He noted that the private sector can only support the government, while favourable policies are expected from the government. “But the major bulk lies on the desk of the government. Let the government keep investing in infrastructures, ensure fiscal discipline, create jobs, and encourage the private sector with ease of doing business,” he added.

Speaking in the same vein, Bismarck Rewane, an economic analyst, believes that the economy will plunge into recession in the next quarter of the year and warns that this year’s recession may be more severe since it has virtually little or no buffer in terms of foreign reserves as against the 2016 recession which had a reasonable buffer to support the economy. Rewane, who is also a member of the advisory council of the Nigerian government, noted that the inflation rate will hover between 15 and 18 percent this year with food prices maintaining the upward swing until 2021, when the economy is expected to start its gradual recovery with inflation dropping to about 13 percent.

Speaking on Channels Television Democracy programme on Friday, June 12, Rewane said that the Gross Domestic Product might dip to -3.4 percent or more, while the exchange rate for the naira will continue its downward trend, but would remain convertible.

Perhaps, in addition to measures adopted by the federal government and the CBN to ameliorate the effects of the pandemic on the economy, the authorities should adopt the all-inclusive approach to address economic challenges arising from Coronavirus (COVID-19) pandemic.

According to Ebrima Faal, Senior Country Director of the AfDB, the approach will comprise short-term and long-term responses like  reprioritization of expenditure and “in the long term measure, the country needs to diversify the economy and increase social infrastructure”.

Faal believes that growing non-oil revenues will insulate the economy from the cyclicality of oil revenues and create stability in government budget.

– Jun. 14, 2020 @ 16:39 GMT |

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