When you are faced with health-related adversity such as COVID-19, you think of survival first before the economy. This at least is what any right-thinking government should do. But it appears after the calm then comes another storm.
Nigeria’s Minister of Finance, Zainab Mohammed has said that the government wants to raise N500 billion ($1.39 billion) Coronavirus fund to help support the country’s health care infrastructure. “This crisis intervention fund is to be utilised to upgrade healthcare facilities,” she said in a statement.
Unfortunately, this may not be enough to rescue the economy when the threat of the virus is eventually contained. It will take significantly more to calm the second storm.
Nigeria’s economic and political capital, Lagos and Abuja respectively have been in a lock down since last Monday night after the President Muhammadu Buhari led-government declared a 14-day stay at home order.
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Before then, most businesses had grounded operations to essential duties rolling out whatever business continuity plans they had in the cooler for years. The government now more than ever needs to implement its own business continuity plans and it could be very costly.
A recent report from the London Business School indicates countries hard hit by the shutdown caused by the COVID-19 virus may need as much as 15% of their Gross Domestic Product if they are to exit en impending recession as soon as possible and get their economy back in motion. According to the report “assume only a temporary drop in economic activities: 50% for a month and 25% in the two following months. Then, GDP drop of almost 10% of annual output” will be recorded by most countries.
The report also suggests that the longer the COVID-19 induced lock down, the more money governments will need to put aside if the economy is to heal faster. “Make the countries lock down longer and add the supply/demand downward spiral, then the actual costs (without policy interventions) could exceed 15% of GDP.”
At Nigeria’s GDP of N144trillion, the lock down could cost the country a whopping N21 trillion or $50 billion. Thus, to plug this hole it will surely need more than the $1.39 billion mooted by the Finance Minister. Acknowledged, the CBN along with the bankers committee had promised an intervention fund of about N120 billion while the government is considering a stimulus package.
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Virus hit advanced economies in the West (like the UK and US) have similarly announced stimulus package, which they hoped will stem the negative effect of the virus on their economy.
For instance, the US passed a stimulus package of about $2 trillion nearly 20% of its GDP. The United Kingdom also announced an unprecedented stimulus package that is about 15% of its GDP. The situation is that critical.
A recent report from Mckinsey on the effect of the Coronavirus on the Nigerian economy explains it rather starkly.
“Across all scenarios, Nigeria’s economy looks to be pushed towards a contraction. The oil effect is the biggest driver of GDP impact (40-70% of total, disruption impact across scenarios) and also funds 65% of budgeted revenue and 90% of foreign reserves accrual.
“Uncontained, GDP growth could fall to -8.8% (USD ~40Bn) with oil effect and disruption to way of working – particularly consumer spend in F&B, clothing and transport account for >90% of the total impact.”
Where will government get the money from?
The Nigerian Government has major revenue challenges, which are further compounded by the crash in crude oil prices.
To raise cash, it will have to resort to a combination of Eurobonds, local bonds and asset sales. It planned to fund its outsized N10 trillion 2020 budget via loans but the urgency cannot be over emphasized.
Public debt hawks will complain bitterly and rightfully so. Nigeria’s external debts is about N27 trillion as at end of December 2019. Prepare for it to get higher.