Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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- Fiscal Policy
Nigeria country outlook 2021 03 Jan 2021
2020 was a very difficult year. What passed for a black swan event – the outbreak of the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) in Wuhan province of China – in December 2019, morphed into a pandemic three months later. COVID-19, as we have come to know the novel coronavirus disease, caused unprecedented economic disruptions and a historic public health disaster around the world last year.
Nigeria was hard hit by the pandemic. On the economic front, COVID-19 cost the government up to 60 per cent of its total revenue, through oil price slump and loss of tax revenue. The country had to implement lockdown and social-distancing measures that paralysed business activities for months. As a cumulative effect, the economy slipped into a deep recession in Q3 2020, as output growth dipped to -3.62 per cent.
The COVID-19 pandemic caused largescale livelihood challenges for many Nigerians. Additional five million citizens slipped below the poverty line last year as a direct impact of the pandemic, according to a projection by the World Bank. The disease spared the country the staggering death tolls in the advanced Western countries. Nevertheless, its psychological toll in the country was untold, only ameliorated by denialism.
COVID-19 was not the only reason to seek an escape to the new year. Last October, the protest by Nigerian youth for an end to police brutality in the country came to a disastrous ending. In Lekki, Lagos, some members of the protest movement, tagged #EndSARS, were shot with live bullets as the military was invited to disperse the peaceful protesters. The chill from that experience is, however, unlikely to end with 2020.
A really nasty 2020 seemed to spare the country a major agony. Over 300 students abducted from Government Science Secondary School, Kankara, Kastina State, in December by Boko Haram terrorists, were safely returned within days. However, the incredulity of abducting such a high number of people in one fell swoop was matched by the fact that the students were released without military engagement and no one faced any repercussions for the abduction saga.
2020 betrayed the Nigerian state as compromised. The trifecta of a pandemic, economic downturn and widespread breakdown of law and order left the country reeling. Nigerians couldn’t wait to bid the year farewell, in the hope that the new year would be less unkind.
But Nigeria’s country outlook for 2021, like those of other countries, and the world’s, is mixed. Many of the challenges of last year will not disappear early in the new year. It is later in the year that the world would likely turn the corner in the fight against the pandemic, as the coverage of vaccination against COVID-19 and the high numbers of those already infected cause herd immunity in the high-incidence countries in Western Europe and North America.
A second wave of COVID-19 infections was spreading in Nigeria in December. Community spread of the infection may be raging as Nigerians had abandoned the safety protocols of wearing face masks and maintaining social distancing. With the number of daily infections rising after months that they had been suppressed, at the same time that many European countries and the United States are experiencing new waves of COVID-19 infections, it is likely that cases are also being brought into the country through international travels. The pandemic remains a threat everywhere as long as it is not contained somewhere.
Sustainable economic recovery would lag the containment of the viral disease. Some economists have started to countenance a second-dip recession in the US. The new waves of the infections could delay global economic rebound till H2 2021. Restrictions to international flights from the United Kingdom, where a new strain of coronavirus that reportedly was spreading faster, pose the threat of halting the recovery in global aviation.
This is bad news for Nigeria. Any major disruption to global aviation, which was still operating well below its pre-pandemic traffic level, coupled with economic shutdown, will depress oil prices. It is a nightmare scenario for the government that has all but exhausted its fiscal space to accommodate any loss of its projected revenues in 2021.
In addition to the external shock, the local economy is also likely to be directly impacted by the COVID-19 infection surge in the country. In December, the Federal Government and the Lagos State Government announced new restrictions on businesses and religious and social gatherings; large members of their inefficient bureaucracies would also start working from home. The hope is that these restrictions would hold for a limited period in the new year. But the various restrictions and shocks are likely to worsen the country’s GDP number for Q4 2020 and constrain economic growth in Q1 2021, a period that could otherwise see an end to the current recession.
A further risk to Nigeria’s economic outlook in 2021 is the likely rebalancing that could worsen oversupply of the oil market. The Organisation of Petroleum Exporting Countries (OPEC) and other producers led be Russia – so-called OPEC+ – reached agreement in early December to increase output by 500,000 this January and make further adjustments in the coming months. The groups also showed strain in their cooperative agreements in existence since 2016 to cut supply to support oil prices. A premature expansion of supply would likely put a downward pressure on oil prices.
The Nigerian government has set $40 per barrel as the benchmark oil price in the 2021 budget. To achieve its real GDP growth projection of 3 per cent for 2021, at minimum, the government must be able to fund its N13.59 trillion budget for the year. The ambitious federal appropriation was intended to catalyse a quick rebound of the economy. But inadequate funding is likely to undermine the growth projection. Moreover, partial fund releases for public projects tend to create opportunities for more inefficient spending and misappropriation of funds.
Notwithstanding the criticality of funding the budget, the options for financing the deficit are severely limited. After obtaining the $3.4 billion IMF loan last April, followed by $1.5 billion World Bank loan in December, other avenues for external borrowing are limited to African Development Bank and other multilateral and bilateral creditors having smaller single obligor limits. The condition in the international credit market has remained little supportive of issuing a Eurobond. Yields on emerging market instruments are pricey, which creates a different reality compared to near-zero interest rates for securities provided by the major central banks.
The Nigerian banking sector is expected to remain resilient in 2021. As the government pivots to domestic financing for the budget deficit of N5.2 trillion, the banks are expected to rake in income from yields on the government’s treasury bonds. This fiscal strategy has been known to crowd out the real sector and the SMEs in the credit market. The government has taken a bigger risk with its deficit financing in 2021, as the budget deficit at 3.64 per cent of GDP, crossed the 3 per cent threshold set in the Fiscal Responsibility Act.
As the government grapples with a tough fiscal year, businesses and households are likely to continue to struggle in an inflationary environment. Inflation rose to 14.89 per cent in November. It is expected to continue its upward trajectory of the last consecutive 16 months or at best remain elevated in double digits in the short term.
With inflation seen as “the worst tax on the poor,” the erosion of real wages would continue to dent the welfare of Nigerians. Although it promised to reduce poverty, the government has it all to do to tame its rising tide. This becomes even tougher as the naira continues to depreciate in value as a result of the multiple exchange rates of the CBN, which serves to discourage capital importation into the country.
Overall, both corporate and household income growth will likely be slower than the rate required to accelerate general improvements in the standard of living of Nigerians in 2021. But the business layoffs of last year are expected to gradually start to reverse, despite the current COVID-19 restrictions. The economic prospects are better in 2021, even if short of far-reaching positive changes to the general economic realities of Nigerians.
In concluding, three factors are set to return certainty to the global environment, with varying impacts on local economies. The first is COVID-19 vaccination, which is already underway. So far, vaccine hesitancy has been kept at bay. Second is the ending of the Brexit saga, with the UK now out of the European Union. Both entities would now have to focus on making the most out of their post-Brexit trade agreement. The third would be the inauguration of the US administration of President Joe Biden on January 20. The common effect of all three is the return of certainty. Whereas uncertainty dampens the appetite for investment risk, certainty buoys investor confidence.
To address the need for certainty in Nigeria, the country would have to enact political reform to restructure the country. Improving the security situation is also both an imperative and an urgent need. The civil society groups should not go to sleep. They should instead remain woke, pressurising the National Assembly and President Muhammadu Buhari to exercise the political will to address the two key challenges that are fuelling the third: economic implosion.
Finally, the CBN needs to unify the exchange rate this year. Its regime of multiple exchange rates has no chance of future success after its woeful failure in the last five years. The debate has to change from introducing a floating exchange rate to unifying the multiple exchange rates of the CBN. Restoring investor confidence in the economy can no longer be delayed.
2021 is the year to start to rebuild. Laying the foundation for a good future for the country is the best way to make the most of 2021.
Wishing you a happy and prosperous new year!
The article has been updated with the value of the 2021 budget changed to N13.59 trillion as signed by President Muhammadu Buhari on December 31, 2020, after the original version of the article was written for Financial Nigeria magazine.