Nigerian economy: Averting the dooms ahead
By Oludare Mayowa
The outlook for the Nigerian economy remains bleak as economists both at the local level and international financial institutions have reached a consensus that the economy will slip into recession this year.
And the consensus is that the economy will shrink by around 3.5 percent by the end of the year due to the duo effect of a sharp drop in global oil prices and the impact of the lockdown on the supply chain, productivity, and businesses.
However, there are divergent of view on when the economy may likely rebound; while the International Monetary Fund (IMF) and the World Bank are projecting a recovery by the first quarter of 2021, there are some economists who believed that Nigeria may not come out of the recession until the first quarter of 2022.
Both may be right and wrong at the same time. The fact is that the recovery of the economy will be based on critical factors which include the earlier time the global oil prices will bounce back and the dynamics of government intervention in the economy to ensure minimal impact of the coronavirus on the larger society.
For instance, for Bode Agusto, Nigeria’s former director-general of Budget the long-term outlook for the demand for crude oil is weak.
Nigeria’s hope of rapid recovery of the economy is largely hinged on the quickest rebound of the global oil prices to a comfortable level. The country’s total foreign exchange earnings depend largely on revenue from oil export, which accounts for about 90 percent year in year out.
But Agusto, an economist in a report noted that “as the World continues to be more concerned about the environment, embrace EVs and Hybrids, the world demand for crude oil will begin to fall.”
“In fact, it seems as if the era when the average annual price of crude exceeded $100 per barrel has gone for some considerable period and OPEC members must learn to live with an average annual price in the region of $60 per barrel,” he said in a report tagged Nigeria after oil.
He said with the rising of the non-OPEC member production level, there will be a downward pressure on the price of crude oil. “Even if OPEC changes strategy and starts pursuing market share, at best the cartel will sell a little more oil at much lower prices.”
Another gloomy projection on the likely performance of the economy come from the CFG Advisory, which projects another round of local currency devaluation in the coming months.
This is plausible in the face of the declining earnings from oil export by the country and lack of accretion into the foreign exchange reserves.
Already, the country external reserves are down to $33.62 billion by April 22, this happened at a period of the lockdown of the economy when demand seems to have slowed down a bit as a result of shutting down in productions from the highly demanding sectors.
The foreign currency buffer has been down 4.13 percent month-to-date, while it has declined 12.74 percent year-to-date. The reserves stood at $38.53 billion at the start of the year and at $35.07 billion at the beginning of April.
The key pressure point on the forex buffer was the flight to safety by most offshore portfolio investors from the local economy as a result of the weak outlook for the country’s economy.
With a likely further devaluation or rapid depreciation of the local currency, there will definitely come a spike in the inflation rate going forward.
CFG Advisory headed by Adetilewa Adebajo projected that the impact of devaluation and the pandemic shock is likely to push up the inflation rate to between 18-20 percent by the end of the year.
With the twin effect of devaluation and rising inflation will come the increasing cost of production to local manufacturing companies that depend on importations of raw materials to survive.
The impact of the coronavirus lockdown will also reflect in possible job loss, which is already rearing its head in the aviation sector with the recent announcement by the Arik Airline.
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Like it usually said by economists, the gloom is in one hand, however on the other hands is the possibility that the government of President Mohammadu Buhari will rise up to the occasion and provide the needed leadership to drive the economy in a manner that it would not slip deeper than being projected by economists across the divide.
WHAT IS THE GOVERNMENT DOING?
So far on the part of the government, the response to the containment of the spread of COVID-19 has been a bit swift, especially in Lagos, Ogun, and Abuja, which constitute the economic base of the country.
There are increase testing for people and discovery and management of the infection through the provisions of isolation centres, laboratories, and restrictions to flatten the curve.
On the economic side, the federal government has applied for grants, loans, and debt moratorium and write-off from various organizations to enable it to cope with the fallout from the sharp drop in global oil and declining revenue due to the impact of the lockdown on the economy.
The governments are equally reaching out to the weak and vulnerable in the society in terms of the provisions of palliatives to ease the burden of the lockdown on the larger society.
Other measures by the government are the announcement of relief measures for businesses impacted by the lockdown, which include likely tax holiday and moratorium on bank credits repayment.
Also, the Central Bank of Nigeria (CBN) has come out with close to N3 trillion intervention funds to help businesses get back to their feet post COVID-19 shock.
All these measures are introduced to reduce the impact of the shock on the economy and probably arrest the slippage of the economy to recession or contains the depth of the contraction.
HOW EFFECTIVE ARE THE INTERVENTION MEASURES?
The major challenges with government intervention is the ability of the majority of the people targeted to access the funds and the huge corruption in government which has reared its head in the distributions of palliatives meant for the poor but cornered by those in authority, hereby defeating the purpose of the intervention.
Many Nigerians who have been stuck at home for weeks due to the lockdown are already agitating for the reopening of the economy to enable them to fend for themselves and ease the pressure of hunger on them.
From the available evidence, the shutdown of the economy has not truly helped in the containment of the dreaded disease, rather the spread has spiked within the period of lockdown.
For instance, as of March 21, 2020, before the lockdown, Nigeria recorded only 22 cases of coronavirus infections across the country. However, as of April 26, the number of cases has risen to 1,273 across the country, which means there has been a spike in the spread of disease during the period of lockdown.
This development put to question the effectiveness of the lockdown on the containment of the dreaded disease.
The available data supported the agitation of the reopening of the economy and the deployment of a fresh approach to the fight against the deadly disease rather than the “cut and paste” approach currently being deployed by the government.
Some people are suggesting the German model, which subscribe to the gradual reopening of the economy with provosio that people must wear facemasks while in public space. this would enable more people to go back to their job, restart the economy, and reduce the economic impact of the virus on the standard of living visa versa the economy at large.
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The former Director-General of the Securities and Exchange Commission (SEC), Arunma Oteh has also suggested that the government should weigh the impact of hunger among the populace on the effect of the containment measures adopted to flatten the spread of the virus on the larger society.
WHAT GOVERNMENT, PRIVATE SECTOR MUST DO
On the economic side, the government should deploy all foreign exchange obtained through grants from the World Bank, IMF, the African Development Bank (AfDB), and debt relief from creditors to good use.
The government must cut down on the size and cost of governance, which includes top government officials taking a salary cut across the board, besides cutting down on frivolous expenditures that added little to the growth of the economy.
The government should renegotiate all contracts and ensure that unnecessary padding in the budget is removed and the cost-saving deploys to better use to rejuvenate the economy.
The National Assembly should also be prepared to take a cut on their humongous emoluments while the House of Representatives should be made to refund the cost of the newly bought vehicle to the treasury.
This is the time to maintain lean government across the board including some states where budget discipline was an anathema. The state should cut down on travel costs, including the hiring of private jets to fly all over the country by state governors for frivolous reasons.
All ties of government should be prepared to implement structural reforms needed to revive the economy, including blocking of all leakages and ensuring prudent management of resources.
The private sector executives should also be ready to take a pay cut as well and plow it back to ensure there is no job loss and ensure the continuity of their entity in this period.
The government should ensure the security of lives and property across the country while also ensuring that the weak and the vulnerable are taking care of to stem social unrest.