Events of the Year 2020: A tale of ravaging impact of twin shocks of low oil prices, Coronavirus pandemic for Nigerian economy

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The Nigerian economy revolves around the Lagos ports

The failure of Nigerian authorities to diversify the economy is responsible for the heavy toll which COVID-19 pandemic is exacting on the Nigerian economy, which was already experiencing low oil prices, falling per capita income and double-digit inflation.

 

By Goddy Ikeh

 

THE Nigerian economy in 2020 was the victim of the ravaging impact of the twin shocks of the downturn in the international oil prices and coronavirus pandemic. Although the downturn in oil prices was exacerbated by the impact of the pandemic, which was first noticed in Nigeria in February 2020, a couple of months after it was discovered in China in 2019.

But for some economists, the failure of the federal government to implement the long expected diversification of the Nigerian economy exposed the economy to the vagaries of the international oil prices and the devastating impacts of the pandemic.

Speaking on the challenges of the Nigerian economy early in 2020, the minister of finance, budget and national planning, Zainab Ahmed, disclosed that the Nigerian economy was already exhibiting “some symptoms of cold before the outbreak of the cold linked to the coronavirus”.

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

Zainab Ahmed

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 was deteriorating as a result of the lockdown and other restrictive measures.

Although, 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 this year 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”.

“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”.

Despite the early warnings from the IMF, the effects of the pandemic on the Nigerian economy had been traumatic and it slipped into recession in the fourth quarter of this year. Although, the Nigerian authorities 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.

Some of the measures taken by the government to minimize the impact of the pandemic on the economy, included slashing the 2020 budget, reviewing 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 Central bank reeled out some interventions in support of the economy, amounting to trillions of naira.

The federal government also sought 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.

However, in spite of these measures adopted by the federal government, food prices continued to soar. According to the National Bureau of Statistics, NBS, the prices of most food items increased in November this year, while the incomes for many households are still in precarious situations.

In its Selected Food Prices Watch for November 2020, the NBS stated that selected food price watch data in the review month reflected that the average price of one dozen of agric eggs, medium size, increased year-on-year by 6.64 percent. It said the commodity also increased month-on-month by 1.42 percent to N494.72 in November from N487.81 in October.

The bureau stated that the average price of a piece of agric egg, medium size, (price of one) increased year-on-year by 8.68 percent and month-on-month by 2.36 percent to N44.75 in November from N43.72 in October. For rice, it said the average price of 1kg of rice (imported high quality sold loose) increased year-on-year by 23.46 percent and month-on-month by 3.71 percent to N549.98 in November from N530.32 in October.

Some other measures taken in 2020 by the CBN in its management of the economy included revoking the operating licences of 42 microfinance banks in the country. The Nigeria Deposit Insurance Corporation explained that the order took effect on 12th November, 2020. The federal government also announced tariff reduction on imported vehicles and the reopening of the land borders after over 15 months of closure. The increase in Value Added Tax from 5 percent to 7 percent, upward review of the price of petrol and electricity tariffs were some of the policy measures taken by the government that attracted criticisms from the organized private sector and the general public.

And to boost foreign exchange reserves and encourage repatriation of funds from abroad, the CBN ordered the deposit money banks, DMBs, to close all naira accounts of international money transfer operators, IMTOs. According to the CBN, this is to ensure that diaspora remittances are received by beneficiaries in foreign currency only (cash and/or transfers to domiciliary accounts of recipients).

Another major incident in 2020 was the huge negative impact of the #EndSARS protests on the Nigerian economy. According to the Lagos Chamber of Commerce and Industry, LCCI, Nigeria lost over N700 billion to the protests across the states and Abuja.

In its analysis of the Nigerian economy in December 2020, Cordros Research, which is unit of Cordros Capital, said that the ravaging impact of the pandemic and downturn in oil prices might have dissipated, following the re-opening of economies. “Still, the clog in the wheels of economic activities will linger in 2021.  Although we expect the economy to recover from the deep contraction in 2020, we believe policymakers will be faced with the more difficult task of lifting output growth above population growth. Consequently, the recovery will remain mostly insufficient in boosting per capita income, stimulating employment opportunities, and addressing the growing disparity in income levels.

“We are cautiously optimistic that the land borders, which were re-opened on 15th December, will ease pressures in food basket given weak domestic capacity. Nonetheless, we expect the gradual increase in electricity tariffs and higher distribution costs linked to higher PMS prices (especially if oil prices gain momentum) to offset the gains,” the report said.

The report noted that despite the Forex management strategies put in place by the CBN to reduce Forex demand for importation, we expect the current account to be pressured by a faster increase in imports compared to exports. The pressure will be amplified by a wider deficit in the services account, based on our expectations on improvement in the scale of international airline operations and medical-related tourism. Taking into consideration the fragility of macroeconomic conditions coupled with the lingering liquidity constraints in the I & E window, we expect FPI inflows to remain tepid. This view, alongside our expectation of a marginal increase in export earnings, implies accretion to the FX reserves will be limited, thus, hindering the ability of the CBN to defend the local currency.

“On monetary policy, we believe the MPC will be at a crossroads. They will be faced with the difficult choice of keeping interest rates low to support economic recovery while easing government financing pressures or tightening to attract FPIs to mitigate currency pressures and restore stability in the external sector. We expect the MPR to remain unchanged in Q1-21 but envisage tightening from Q2 onward, due to our expectations on inflation and the need to stem currency pressures.

“On fiscal policy, we expect budget performance to be characterised by the recurring themes of under performance in revenue targets, sub-optimal CAPEX spending relative to recurrent expenditure, and weak revenue from State-Owned Enterprises, SOEs. Ultimately, we believe the government will be faced with the difficult task of balancing borrowings to support economic recovery and avoiding a further buildup of debt that will further weaken debt sustainability metrics,” the report added.

For the Lagos Chamber of Commerce and Industry, LCCI, Nigeria’s debt is expected to hit N34 trillion by the end of 2020, contrary to the federal government’s expectation of N32 trillion debt burden.

The Chamber’s “Economic and Business Review for Year 2020 and Outlook for Year 2021”, released by its Director General, Muda Yusuf, on Tuesday, December 15, stated that the foreign components of Nigeria’s debt portfolio would increase in 2021 if the spread of COVID-19 persists.

According to Yusuf, the federal government should implement structural reforms in order to stop the perpetuation of the current recession and foster economic resilience in 2021.

The report noted that the recovery from current recession would depend on the performance of oil prices in the international market and local crude oil production level in 2021.

It explained that the growth outlook for Year 2021 is expected to take full course most likely in the second quarter of 2021, due to the base effect of the second quarter 2020, when output contracted steeply by 6.1 percent.

“We expect the pace of recovery to remain subdued within the region of one percent in year 2021 in the absence of shocks. In our view, Nigeria’s recovery prospects depend largely on oil price and production level as GDP performance in recent quarters has significantly mirrored trends in both variables.

“It is instructive to note that Q2-2017 growth recovery was facilitated by rebound in international oil prices rather than government’s intervention efforts. We see a similar type of recovery in year 2021. However, shocks including resurgence in COVID-19 pandemic and significant oil price volatility are the major downside risks,” the reports said.

The chamber also forecasted that the outlook for business environment in Year 2021 would not be very bright as there are no quick fixes for the structural issues and the desired regulatory and institutional reforms.

The LCCI warned that constraints to the ease of doing business like foreign exchange shortage, escalating production costs, high regulatory costs, infrastructure inadequacies and delayed cargo clearance would persist into year 2021 if there is no bold policy pronouncements in terms of structural adjustments of the economy.

“These constraints will be more profound on businesses in the real economy. While most MSMEs will struggle to survive in year 2021 amid unfavourable economic conditions, we expect most large corporates to demonstrate resilience in the coming year,” it said.

On inflation rate in 2021, the LCCI noted that the headline inflation will   remain high as combinations of food supply shocks, foreign exchange policies, higher energy costs, foreign exchange scarcity and heightened insecurity in major food-producing states would continue to mount pressure on domestic consumer prices.

“We believe a broad-based harmonisation of fiscal and monetary policies towards addressing the identified structural constraints will significantly help to moderate inflationary pressure in the medium term,” Yusuf said.

On the take-off of the African Continental Free Trade Area (AfCFTA) from January 2021, the chamber believes that the porousness of the country’s land borders would make Nigeria a destination for imported food products and exposed it to the risk of resurgence of smuggling of agricultural products in absence of adequate border monitoring measures.

It projected that the fortunes of the manufacturing sector would be dimmed in 2021despite the succor the reopening of the land borders and the enlarged market due to the AfCFTA should provide.

However, the report of the IMF after a virtual mission from October 30 to November 17, 2020 in the context of the 2020 Article IV Consultation with Nigeria, noted that Nigeria’s Real GDP was contracting, inflation was increasing and external vulnerabilities remained large.

It observed that major policy adjustments embracing broad market reforms are needed, while exchange rate and monetary policy reforms, increased revenue mobilization and structural reforms will help to unlock Nigeria’s growth potential.

“The COVID-19 global pandemic is exacting a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks. Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment. Supply shortages have pushed up headline inflation to a 30-month high,” the report issued on December 11, 2020 said.

 

– Dec. 31, 2020 @ 14:48 GMT /

 

 

 

 

 

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