Nigeria is in trouble and the economy is tilting towards a recession; if it is not in one already. The last time Nigeria suffered a recession in 2016, global crude oil prices dropped, resulting in forex reserves also dropping, due to the country’s over-reliance on oil revenue. But the nation failed to devalue the Naira which led to the shortage of forex earnings to fund imports. This, in turn, made investors struggle to get forex for their imports.
Due to the inability of past and present leaders to provide the enabling environment for a strong industrial sector, investment opportunities have been few. The shortage of forex to source for raw materials and machinery to sustain production led to the exit of foreign portfolio investors and foreign direct investors left the market. This, in turn, caused a fall in the production of goods and services which is a major component of the GDP.
In nutshell, what caused the last recession in Nigeria was not entirely the fall in oil prices. Rather, the lack of sound economic policies to diversify away from the volatility of crude oil prices, whilst boosting the nation’s non-oil exports, was also a major cause.
Below are signs that Nigeria’s economy is heading towards another recession.
Drop in Diaspora Remittances
According to the International Monetary Fund (IMF), remittances represent household income from foreign economies, arising mainly from the temporary or permanent movement of people to those economies. Remittances include cash and noncash items that flow through formal channels such as electronic wire, or through informal channels, such as goods carried across borders.
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Remittances are important because they help meet basic needs, fund cash and non-cash investments, finance education, foster new businesses, service debts, and essentially drive economic growth.
The top 10 remittance-sending countries to Nigeria are: the United States of America, the United Kingdom, Cameroon, Italy, Ghana, Spain, Germany, Benin, Ireland, and Canada. Presently all these countries have been badly hit by the Coronavirus pandemic, with millions of jobs lost which may affect the ability of Nigerians in diaspora to send money home. It should be noted that diasapora remittances accounted for 6.1% of Nigeria’s GDP in 2018.
Drop in Oil Prices
Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed warned that Nigeria may go into recession if the coronavirus pandemic continues for the next couple of months. According to the minister, the Federal and State governments will struggle in terms of revenue, as long as crude oil price remains low.
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An analyst report by Rennaissance Capital (Rencap), states that the fall in oil prices below $30 will negatively affect Nigeria’s export earnings. The collapse in oil prices may be devastating for Nigeria, as oil accounts for 90% of the country’s revenue and 60% of the Federal Government’s revenue. This is exacerbated by the global demand shock caused by COVID-19, which largely explains why Nigeria is sitting on 30 or more unsold April-loading cargoes of crude oil.
Supply chains disruptions
According to Reuters, China’s exports contracted sharply in the first two months of the year, and imports declined, as the health crisis triggered by the Coronavirus outbreak caused massive disruptions to business operations, global supply chains and economic activities.
Nigerian businesses that rely on imports from China and other countries are likely to suffer, while businesses that export goods would also be affected, which may ultimately lead to loss of revenue and job losses.
Service Sector has been affected by the virus
The service sector in Nigeria also contributes to the Nigerian economy, but presently the sector is in meltdown. The Central Bank of Nigeria had announced a credit relief of $135m to businesses affected by the coronavirus. The CBN governor said households, small and medium-sized enterprises, airline service providers, hotels, health care merchants will benefit from the funds.
The services sector in Nigeria includes but is not limited to construction, transport accommodation, food services businesses.
Stock Market Performance is low
Investors’ pessimism has taken over and people are selling off due to uncertainty of where the world is going. The daily deluge of bad news, coupled with an economy that is in a free fall, will keep stocks low.