The Nigerian economy is melting away from the combined pressure of the COVID-19 pandemic and the fall in crude oil prices. It is barely one month since the heat started and we have seen one round of naira devaluation, a spike in consumer good prices and a dent in government revenues. Ironically, things could get better.
In a rather twist of fate, the global spread of the virus and a fear for another surge later in the year could limit travel plans for dollar hungry Nigerians easing pressure on the already troubled naira.
Reports from several health research organizations predict there could be another wave of Coronavirus contagion even as reported cases subside in some of the hardest-hit countries. This suggests travel restrictions could remain for the foreseeable future.
What the data says
Data from the Central Bank of Nigeria (CBN) statistical bulletin reveals Nigerians spent a whopping $12 billion on personal and business travel allowances in 2019, higher than the $7.6 billion spent in 2018. Nigerians also spent another $6 billion on education-related expenditure during the year. Nigeria’s dollar demand is mostly from the services sector accounting for a total of $33.7 billion in 2019, compared to $26 billion in 2018. This demand could fizzle away if prediction from health experts come through, even as the world gears up for another contagious economic crisis.
This could thus present a surprise boost for Nigeria, as the lack of demand could help cushion the impact of the crash in oil prices, which has severely dented the government’s revenue earnings. With the exchange rate already devalued, economists expect a significant rise in inflation rate further denting the purchasing power of consumers.
A recent bit of irony has already been experienced after the government twice reduced the price of petrol as global crude oil prices crashed and demand for oil plummeted due to COVID-19.
Why it’s possible
A recent report by Mckinsey on the impact of COVID-19 on the Nigerian economy also reveals consumer demand will be weakened by “reduced household and business consumption due to restricted movement, travel ban, and the knock-on effects of reduced government expenditure.”
The report also opines that the “Reduction in number of people travelling because of health concerns” will resort in weaker consumer expenditure.
Job losses are also likely to rise in the coming weeks and months as employers stare at another round of weak economic growth that could once again lead to another recession or worse still, stagflation.
Stagflation is when a country is witnessing weak economic growth yet inflation is rising. Nigeria faced this situation in 2016 when it fell into a recession. Mckinsey also weighed in on job losses. “Actual (and expected) health costs and job losses could lead to deep cuts in discretionary spending and trade downs in non-discretionary spending.”
Another critical factor that could go the way of the naira is the huge supply chain disruptions expected to subsist over the next few months and post-Coronavirus pandemic. Importers have complained bitterly of a major disruption to their supply chains as they cannot import critical goods and inputs required for local manufacturing and assemblage. This bit of a problem could also impact on the demand for the dollar helping the central bank to hold on to its reserves.
The elephant in the rooms still remains; with foreign investors yet to sell-off their entire holdings of debt and equity securities, there could still be downward pressure on the exchange rate. Nigeria’s central bank governor will surely welcome this pressure if it is the only one, he has to deal with in this trying times.