A series of unfortunate developments have been working together to shape the Nigerian economy, albeit in a bad way. And things could get worse, unless certain actions are quickly taken to mitigate these unfavourable incidents.
This is the summary of a presentation by Cheta Nwanze, the Lead Partner at SBM Intelligence, who was part of a set of vibrant panelists that spoke during Nairametrics’ second-quarter 2020 economic outlook. The event, which took place virtually on Saturday, was centered on the topic: “The New Normal – Economic Outlook: Your Money or your Life.”
According to Nwanze, the COVID-19 pandemic triggered a public health crisis in Nigeria, a situation that was quickly followed by economic instability. The drastic drop in oil price, Nigeria’s major source of foreign exchange, only complicated the situation.
While other countries like the US responded to the crisis by doling out trillions of dollars as palliatives, Nigeria offered very little relief. The country was also further plagued by a worsening inflation rate and civil unrest/security challenges. The International Monetary Fund (IMF) had since predicted a global recession, expected to exceed 3%.
Nigeria was not prepared to handle COVID-19 and its fallouts
Speaking further during his presentation, Nwanze compared Nigeria’s response to the pandemic with countries such as South Africa and India. According to him, Nigeria’s initial COVID-19 curve was particularly similar to India’s.
But this changed over time because Nigeria had only been able to test a very limited number of its citizens, a situation that led to fewer cases being discovered. That was unlike India which ramped up its testing efforts. Notwithstanding, the negative economic effects of the pandemic had continued to be very pronounced in Africa’s most populous country.
“However, the economic effect is still there, whether the cases are low or not. And it shows the state’s preparedness; this chart is very important…the preparedness of the Nigerian state. Basically, this chart was derived by taking certain factors into consideration – doctor to population ratio, human development index, infant mortality, per capita budget, percentage of budget spent on health; that’s a very important thing which many people don’t look at in this country.
“After looking at all these, you find that the best prepared Nigerian state is supposed to be Cross River which is not even up to 60% ready for anything. Basically, Nigeria on a state level is not ready to handle the effect of this pandemic.”
Civil unrest and violence have been major problems
In addition to the fatalities caused by the COVID-19 pandemic and an earlier Lassa fever outbreak in the year, Nigeria has also been grappling with the fatalities caused by unrest in the country’s North-Eastern region.
According to Nwanze, hundreds of violent deaths were reported across North-Eastern Nigeria. In the same vein, kidnapping remained a major security challenge in the country, he noted. Unfortunately, a bad security situation never facilitates the economy of any country.
Focus on Nigeria’s inflation problem
Moving on, Nwanze noted that Nigeria’s inflation had gone up to an all-time high. In reaction to that, interest rates had gone down, just as capital importation was down. In the same vein, the exchange rate and the country’s external reserves down were also down. One of the implications of all that was the fact that Nigeria’s federal allocations were increasingly becoming smaller. He explained the impact of that in the quote below:
“Looking at the chart, what immediately jumps out is that on the average, FAAC allocations are getting smaller. There’s a session that we had a higher share in March of 2020. But what people need to bear in mind is that these figures you are looking at are naira figures.
“And there was a devaluation in between February and March. So, because of that devaluation, the March figures appear to be higher. But if you convert everything to USD at the prevailing rates of such sharing, you will find that the money is actually consistently getting smaller.
“This again has implications in terms of social unrest, security, and the larger economy. States don’t have as much money. It means that some states will just go straight up and owe staff. Some states will downsize, and the bottom line is that the unemployment market is going to get much larger.”
Global recession to hit hard
He also spoke a bit more extensively about the global recession that was forecast by the IMF. He noted that the 2020 recession is expected to have a far greater negative impact than the 2008 global economic crunch as well as the 2016 recession. Similarly, the World Trade Organisation had predicted that global trade would decline by 32%. Again, that will be worse than what was experienced during the 2008 global financial crisis.
Back home in Nigeria, the recession is expected to impact on people’s spending habits. He noted that research had shown that Nigerians typically spend more than 50% of their incomes on food. The nature of the situation is such that the lesser one’s income, the more likely they are to spend more on food than anything else. The implication, therefore, is that people would normally not have enough money for other important things such as investments. And that is not good for the economy.
Sectors that will be most affected
As the global recession looms, sectors of the Nigerian economy that are expected to be hit the hardest are: the banking industry, construction, travel and leisure, entertainment, automotive, luxury goods, oil and gas, trade, and transportation. He noted that those sectors were all major employers of labour in Nigeria.
Speaking further, Nwanze stressed that Nigeria needed to come up with serious actions that would help mitigate the effects of the pandemic. He also examined the best-case scenario and the worst-case scenario.
Best and worst-case scenarios
The best-case scenario which, according to him had the lowest probability, would be if the world finds a vaccine within the next three to six months. This would allow Nigerians to fully resume back to work. A possible vaccine discovery would also help oil prices to rebound, a situation that would be favourable to the GDP and economy at large.
The worst-case scenario, on the other hand, would be if the world does not find a vaccine in the next 15 months. If that happened, infection rates would most likely spike and the government might have to adopt more drastic lockdown measures in a bid to contain the virus. This would be bad for the economy, he stated.