COVID-19: IMPACT ON NIGERIA'S ECONOMY
By Temple Ezebuike
The world’s activities have been disrupted by the Covid-19 outbreak and this has affected conferences, legal gatherings, sporting events, political rallies and economic transactions. Economically, the global supply chain substantially relies on production from China and the disruption in China thus affects almost all economies and markets. As a result, American, European and African markets have been on a bearish.
While the world actively pursues a vaccine to combat the pandemic, the pandemic has been of dilapidating effect on the Nigerian economy.
CRUDE OIL AND THE BUDGET PROBLEM
Nigeria’s revenue constitutes 80% of Oil receipts.The 2020 budget was benchmarked on the crude oil price of $57 per barrel. The on-going disruption caused by the Covid-19 pandemic has plunged crude oil prices to below $29 per barrel. The Oil market plunge is further exacerbated by the oil production rift between Saudi Arabia and Russia, two countries who have for some years led efforts to balance World Oil Prices through the OPEC and arrangements between OPEC members and non-OPEC oil producers. The production rift stemmed from Russia’s non-alignment with OPEC’s (Saudi Arabia-led) proposal to cut down on oil production (reduce supply) to cushion the plunging of oil prices below international benchmark of about $66 per barrel. This production rift may lead to Russia’s reneging on the OPEC+ arrangement, which has the effect of removing the cap on production, allowing OPEC and non-OPEC oil producing states increase production to volumes as can be commercially viable.
By market forces, where there is surplus oil production, crude oil price per barrel crashes. Presently, the price per barrel fluctuates between $20 and $29. Noting that Nigeria’s 2020 budget was pegged on the presumption of oil selling at $57 per barrel, this plunge in oil prices below Budget benchmark drags the 2020 budget into a large deficit.
The Nigerian Bureau of Statistics reported that the Economy advanced by 2.55% in the last quarter of 2019. If the Covid-19 pandemic is not contained in the upcoming few months (April and May), and oil price continues to plunge, the Nigerian economy may contract into a negative. Given overwhelming dependency on oil receipts, negative economic growth of more than two months may plunge the economy into a recession.
Notionally, in times as these, budget deficit is covered by savings in the Excess Crude Oil Account. However, the limited fund in the Account has necessitated calls by the government to slash the 2020 budget, which when implemented, will run negatively on the Country’s projected economic growth.
POSSIBLE SOLUTIONS TO CURB AN ECONOMIC DOWNTURN
Cut-Down on cost of Governance – For many years, Federal recurrent expenditures have accounted for 70 to 80 percent of the annual budgets, leaving the remainder for capital projects, notwithstanding the country’s growing debt profile. Slashing this cost by at least, 40%, will free up revenue to cushion the effect of the Oil price plunge on the 2020 budget and broader Nigerian economy.
Removal of Fuel Subsidy – Nigeria spent $1.8 billion on fuel subsidy in 2018, four times more than it spent on Health, Education and Science and Technology. The Nigerian 2020 budget sits at $35 billion. Fuel subsidy is primarily paid to absorb high prices of PMS (Premium Motor Spirit- petrol) if sold at market value; to keep the price pegged at, at least N145 per liter. Thus, fuel subsidy is the money paid to stakeholders in the downstream oil sector to keep the price of PMS as it is currently, which essentially is the difference between Government-controlled prices and market prices. The reason given by successive governments to justify non-removal of fuel subsidy has been the poor purchasing power of majority of Nigeria’s population. Presently, the plunge in oil prices may likely mean that the market cost of supplying a liter of fuel will be less than the retail price, such that a removal of subsidy will not lead to an increase in the retail price. Additionally, the Dangote Refinery, projected to come onstream in early 2021 (with 650,000 barrels per day refining capacity), will substantially reduce the system of exporting and importing refined crude products, bringing down retail prices to considerable rates. The plunge in oil prices and Dangote Refinery’s potential elimination of associated need for foreign refining capacity, provide short and long-term buffers against the income stress that will be caused by a withdrawal of subsidy. If fuel subsidy is withdrawn, more funds will be released to cover the budgetary short fall occasioned by the global oil price plunge.
Opening of Land Borders (Strictly for Trade) – Premised on the plan to curb rice smuggling and to support profitability of local production, the Nigerian land borders have been closed since October 2019, preventing imports from neighboring countries (such as Niger Republic, Benin Republic, Chad and Cameroon). While the borders remain closed, ironically, the neighboring countries are arguably substantial recipients of Nigeria’s non-oil exports. The border closure particularly lays to ridicule the African Continental Free Trade Agreement (AfCFTA) the Country recently signed (even though un-ratified by the National Assembly). The border closure continues to increase inflation in Nigeria. Last month’s (February’s) food inflation was 14.9%, up by 0.05% from 14.85% recorded in January 2020. This has also affected cross-borders businesses, with many turning losses and closing shops, lengthening unemployment rate. With the fall in oil prices and impending budget cut, the resultant outpour is inflation; which will cause a rapid loss of purchasing strength of Nigerians, and accelerate the economy towards another recession.
It is recommended that the borders be re-opened strictly for trade (essentially- processed agricultural produce, with attendant incorporation of social distancing guidelines given the pandemic) whilst the Nigeria’s Customs tightens its enforcements mechanism to curb smuggling, and whilst the Federal government creates enabling infrastructure for local producers. A border re-opening will revive legitimate cross-border businesses, which will by its shed reduce the unemployment spike. Food inflation will flutter down as more agricultural goods flood the Nigerian market. This reduces the strain on expendable income of Nigerians who already spend almost 60% of income on food. A competitive agriculture market and higher expendable income of Nigerians are mild fodders to withstanding any impending economic downturn.
Floating of the Naira – The Nigerian Exchange rate is currently a Fixed Exchange Rate. The CBN extends $USDs (from its foreign reserve) to commercial banks to fund imports at subsidized exchange rates. This means that for importations, the Naira is not traded based on its real market value. Thus, as has been reported, the CBN spent about $16.56 billion in 2019 to maintain the current Inter-bank exchange rate of the Naira.
Although CBN’s governor has reiterated the government’s resolve against floating the Naira, the money spent appears to be non-prudent expenditure, as it only seeks to maintain an artificial (non-real market) value of Naira, which chunks away the economic legitimacy of Nigeria’s GDP. If the government allows the Naira to Exchange at market value, that is an estimated north of $10billion in government’s coffers (noting that the Country’s 2020 budget is $35 billion).
The Naira ordinarily gains against the Dollars when receipts from exports (largely crude oil) are high, and falls against the Dollars when receipts from exports are low. The subsidization of exchange rates for imports (defending of Naira) by CBN has been to maintain an artificially low exchange rate for Naira against the Dollars, but that was possible due to high foreign receipts from crude oil sales. Presently, due to the fall in oil price per barrel, there seems to not be enough foreign reserve to defend the Naira. Although floating (or devaluation) of the Naira may be useless if there is no revenue diversification (to increase foreign receipts through exports) since Nigeria is an Oil-dominant, import-reliant economy, however, such released fund (from discontinuing the Naira defence) can optimally be utilized to cover any impending budgetary short-fall, resulting from fall in oil prices.
As the World continues its search and development of a vaccine to combat Covid-19, it is projected that if the pandemic continues to spread beyond April and May, the suggested solutions may be proactive tools to absorbing the effects of an economic downturn in Nigeria, while the government looks towards pursuing capital projects and creating policies to stimulate trade and investment for long-term sustainability.
Temple Ezebuike is a Lagos-based lawyer, with focus on Energy, Finance and Real Estate. You can reach him at templeezebuike@gmail.com
