Covid-19 exposes need for new direction in Nigerian economy

Just as Nigeria was returning to stable growth after the last recession, the Covid-19 pandemic reversed most of its gains. It has also exposed the dangers of the country’s reliance on oil. Can Nigeria now reboot on a different basis? Report by Dianna Games.

Nigeria’s oil dependence has come back to haunt it once again, as the government battles to manage a severe contraction of revenues and foreign currency in the wake of plummeting oil prices brought on by the Covid-19 global crisis.

According to multilateral organisations, the country now faces its second recession in just a few years as it battles with challenges on many fronts precipitated by the pandemic.

Nigerian economist and CEO of Financial Derivatives, Bismarck Rewane, says Covid-19 has flagged the underlying weakness of the Nigerian economy and its lack of resilience to economic shocks.

Prior to the Covid-19 outbreak, the economy was forecast to grow by 2.1% in 2020, rising to 3.3% in 2021. The IMF now expects growth to contract by 5.4% in 2020, with a rebound of 2.6% in 2021, while the World Bank predicts a contraction of 3.2% in 2020.

Nigeria’s Covid-19 restrictions have been a varied picture, with the commercial hubs of Lagos, Abuja and Ogun State the first to be locked down, with different lockdowns of varying severity in other parts of the country. Inter-state travel was banned for a few weeks and domestic flights were curtailed for several months.

Many Nigerians believe the contractions will be less serious than predictions say, given that its experience of lockdown has not been as strict or as prolonged as those in many other countries.

This will be shown in the third- quarter statistics. But second-quarter GDP figures, which covered the early lockdown phase, showed an overall contraction of 6.1%, a sharp retreat from growth of 1.87% in the preceding quarter, according to the National Bureau of Statistics. This ended the three-year trend of low but positive real growth rates recorded since the 2016/17 recession.

All sectors hit hard

The oil sector recorded a 6.63% (year-on-year) contraction, while the non-oil sector also declined, by –6.05% in real terms over this period.

With oil prices hitting 20-year lows in the initial phase of the  pandemic, and forecast revenues dropping by 80%, the government has had to take a long hard look at its budget and spending priorities.

It is not only oil prices that have sent it on a rollercoaster ride. Remittances, another key revenue stream, are also likely to have been hard-hit by the lengthy lockdowns in the key source markets of the US and UK. According to PwC, remittance inflows to Nigeria amounted to $23.63bn in 2018 – 6.1% of Nigeria’s GDP, or 83% of the 2018 budget.

Foreign portfolio investment has also been affected, with the IMF predicting that this will decline from the $9bn recorded in 2019 to a deficit of $2.4bn by the end of 2020. Interest rates on government securities have plummeted and global airline revenues have been lost to the pandemic.

One of the key impacts of the revenue crisis is the scarcity of foreign exchange, with the government and central bank trying to plug every possible foreign exchange loophole in 2020. This is not easy in a country that is dependent on imports, not just for consumer goods and foodstuffs, but also as inputs into industry. 

Many companies have had to suspend or close businesses and investors are battling to get money out. The situation is likely to worsen as the economy emerges from the crisis and business ramps up again.

As they did in the previous recession, the authorities are restricting access to foreign currency through official channels for a range of imports. In 2015, the Central Bank of Nigeria listed 41 imports that it was not permitted to access foreign exchange for through official channels, arguing that Nigeria was able to produce these goods locally.

In 2020, the focus is on food. President Muhammadu Buhari has focused on food security since he came to office in 2015, banning the import of staple foods, such as rice, to foster local production.

Food imports have cost the country dearly. In 2015, Nigeria spent nearly $2.9bn on importing food, which rose to $4.1bn by 2017. This is according to the National Bureau of Statistics, although figures vary, with the central bank saying the 2015 import bill was closer to $8bn. Either way, it is unaffordable for Nigeria, particularly in a climate of oil price volatility.

However, the bans did not allow time to build the capacity of local farmers and smugglers stepped in to fill the gap between supply and demand. Buhari controversially closed the country’s road borders in August last year to end smuggling, but it has had the effect of driving up inflation, which reached 13.22% in August – the highest recorded in more than two years.

Recently, Buhari directed the central bank to block requests for foreign currency for all food products. Rewane said the Nigerian government’s “policy of economic patriotism and protectionism” was worrying for investors, who are concerned about what might be next. “Investment wants certainty and clarity and people who are willing to respect the sanctity of contracts.”

The situation has been exacerbated by the devaluation of the local currency, the naira, which has lost 24% of its value this year as the central bank moved to unify the various exchange rates – a legacy of the last recession. 

The CBN has made a commitment that it will move to a more flexible exchange-rate regime, but investors ask whether the bank is willing to go the distance, particularly given the level of political interference in its workings under the Buhari government.

Growing poverty is another challenge. While before the pandemic, the number of poor Nigerians was expected to increase by about two million, largely due to population growth, the number is forecast to now increase by seven million, with the poverty rate projected to rise from 40.1% in 2019 to 42.5% in 2020.

Chance to build more sustainable growth

Economists believe that despite the hardships, the pandemic presents Nigeria with a chance to take the tough decisions that are necessary to build more sustainable growth and go beyond specific Covid-19 interventions.

Says Rewane, “Any sustainable economic progress will require a new direction, driven by a cocktail of comprehensive and timely policy actions.”

He says it is now essential for Nigeria to “bite the bullet” and make the difficult choices to get the economy on the road to a sustainable recovery.  The government is already taking bold steps to end the costly fuel subsidy, which will save Nigeria about $2bn annually, and implementing cost-reflective tariffs in the dysfunctional power sector. These moves have long been supported by the IMF, which recently agreed to a $3.4bn rescue package for Nigeria, but held back because of fierce resistance to them by the citizenry.

It has also put in place the Economic Sustainability Plan to address the economic impacts of the pandemic on the economy, which includes a mix of policy and project interventions. Given that many other plans have not been rolled out in the past, there are concerns about implementation, which is critical to its effectiveness. 

This is also an opportunity for the private and public sectors to work together in rebuilding the economy but this requires the government and its agencies to address the many challenges of doing business in Nigeria, and bringing down costs through greater efficiency.

As Marco Hernandez, World Bank Lead Economist for Nigeria, says, “The unprecedented crisis requires an equally unprecedented policy response from the entire Nigerian public sector, in collaboration with the private sector, to save lives, protect livelihoods, and lay the foundations for a strong economic recovery.”

Read more from our Nigeria at 60 special report