Martins Hile, Editor, Financial Nigeria magazine
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Subjects of Interest
- Social Development
Nigeria’s vulnerability to coronavirus recession 06 Mar 2020
The Nigerian economy continues to be a sitting duck for external shocks. Nearly five years in the saddle, President Muhammadu Buhari's rhetoric of economic diversification and reducing the dependence on oil revenue has fallen flat against reality. Economic growth projections and fiscal revenue targets have also been consistently missed.
As the administration settles into low growth after the 2016–2017 recession, the economy now faces a formidable external headwind in 2020. The outbreak of the coronavirus disease 2019 (COVID19), which health experts said had almost reached the level of a global pandemic at the end of February, is a major black swan that is threatening to slash global economic growth in 2020.
As of Friday, February 28, the respiratory disease – first detected in December 2019 in Wuhan, China – had killed 2,933 people, mostly in China. Having spread to all continents except the Antarctica, fears about the disease as well as the control measures have precipitated market panic and curtailed business activities. In the last week of February, over $6 trillion was wiped off the global stock markets, the worst week in the financial markets since the 2008 financial crisis.
Whereas the first case of coronavirus in Nigeria was confirmed late last month, causing mixed reactions of assurance of its control by government and a mild panic among citizens, potentially devastating economic impacts of the virus are shaping up. Oil futures dropped below $50 as global concern started to mount, with the U.S. recording its first death from the disease. The Nigerian-grade Brent crude remained well below the Nigerian government's budget benchmark price of $57 per barrel at the end of the month.
The headroom to manoeuvre sustained depression of oil prices does not exist for the government. The Excess Crude Account, which is the country’s effective fiscal buffer, has all but wiped out. While downgrading Nigeria's sovereign rating from “stable” to “negative” in December, Moody's Investors Service had stated that the government's fiscal strength and external position was likely to weaken further given the extremely narrow revenue base and sluggish growth. The impact of the COVID-19 outbreak was not even factored in at the time of Moody's rating review.
Nigeria’s external vulnerability is as a result of a combination of poor policy performance and a slew of wrong policies. The so-called economic blueprint of the administration, the Economic Recovery and Growth Plan (ERGP), which was launched in March 2017, nearly two years after Buhari came into office, targeted average real GDP growth rate of 4.6 per cent in the first four years (2017-2020) of the revolving plan. Against the backdrop of the recession that still subsisted at the time of ERGP’s launch, the projection for growth in 2020 was 7 per cent.
But not only is the revised forecast for growth in 2020 by the International Monetary Fund (IMF) 2 per cent, reflecting the impact of lower oil prices arising from the coronavirus outbreak, growth rate over the last three years averaged 1.7 per cent. If we consider the fact that annual GDP growth rate, which reached a three-year high of 2.27 per cent in 2019, was bolstered by improvement in international oil prices, it becomes more evident how ineffectual economic planning has been.
Nigeria’s macroeconomic challenges are partly sustained by what the IMF has described as "conflicting monetary policy signals" or, according to the World Bank, "distortionary activities by the central bank." The Central Bank of Nigeria (CBN)'s multiple foreign exchange rates, and forex ban, have deterred foreign investment and weighed significantly on manufacturing, which grew at less than 1 per cent in 2019. The apex bank also supports the government's ill-advised land border closure, which has had a negative impact on the trade sector that slid into double-dip recession in Q2 2019.
Growth is not only too low to create jobs and lift the population out of poverty, businesses that are not shutting down are shedding jobs to stay afloat. Part of the implication is that government will struggle to meet its non-oil revenue targets. Faced with significant fiscal challenges, especially due to the underperformance of revenue sources amid growing personnel costs, the government has been financing much of its deficit with CBN overdrafts. In other words, the CBN has been printing money to finance government’s spending.
Combined with the not-so-favourable market perception of the domestic policy environment in Nigeria, the almost-exhausted fiscal position of the Nigerian government would leave the country vulnerable in the event of a coronavirus-induced global recession. A global recession in 2020 appears to be fait accompli. Using an index that predicts recessions and booms, some researchers at State Street Associates and MIT's Sloan School of Management in the US have predicted a recession, saying there is a 70 per cent chance of it occurring in H1, 2020.
Despite the assurance from Nigeria’s global acclaim for its successful containment of the Ebola Virus Disease (EVD) outbreak in 2014, the coronavirus has arrived the country at a time of dwindling fortunes for the health sector. Thousands of citizens, including children, have been dying from preventable or treatable infectious diseases such as malaria, pneumonia and diarrhoea. Allocation for capital expenditure in the health sector under the Buhari administration peaked at N71.11 billion in 2018. It has since dropped to N46 billion in the current budget.
In the time being, however, the government should be commended for its efforts in preparing for the coronavirus disease outbreak. Very likely, its spread would be contained, demonstrating once again the feat that we are capable of as a country, if we put resources where they are needed and attend to priority needs.
Most viruses disappear. Even where some have become endemic, measures have been found to control their transmission. The COVID-19 outbreak and the ensuing market turmoil will end at some point. But the serious governance issues in Nigeria would remain unless they are addressed immediately. Inconsistent polices that weigh on growth need to be discontinued. More importantly, we need cogent policies to unlock Nigeria’s growth potential.