Analysis Commentary

In Nigeria, the COVID-19 coronavirus means more years of economic turmoil

The Nigerian economy is shrouded in the same level of complexity as the global economy; a multi-faceted environment in which every policy measure has various arguments with positive and negative effects. We have fought inflation, crawled out of a recession and commenced a battle against a plateauing demand. Unemployment is the war that no administration has been able to win, moving marginally from 19.7% in 2010 to 23.7% in 2019.

It is important to consider other factors such as population growth and the employable portion of the population. 

Before COVID-19, we had:

Depleting External Reserves

The second quarter of 2019 was the last quarter we witnessed some growth in external reserves peaking at $45.07Bn. Subsequently, we had recorded declining reserves occasioned by increased forex demand in the capital and money markets, and declining balances in the excess crude account. The higher the pressure on the foreign exchange rate, the higher the need for intervention in the markets, reducing the reserves. This could make investors lose faith and anticipate a devaluation, increasing their demand and the pressure on the foreign exchange rate.  

Stock Exchange Woes

The stock exchange is a yardstick for the financial health of any country because it shows the efficiency of it’s capital markets. A boisterous stock exchange comprises very well valued securities with intrinsic values equal or close to their market values and prompt reaction of stock prices to corporate information such as earning announcement and dividend payments. 

However, Nigeria is a weak form efficient market, with stock prices moving independently of events happening within the market. Following MTN and Airtel’s listings on the Nigerian Stock Exchange, the average daily volume in 2019 increased by N72mm from N3.19 to N3.91Bn. In the 2nd quarter, N5.6Bn was traded daily as an immediate effect of MTN’s listing. But in the 3rd and 4th quarters, as a result of the general elections, earnings announced fell below investors’ expectations. Overall the market closed the year at a 14.4% drop. The second year of decline in a row.

Economic Growth

The 2016 recession dealt a strong blow to Nigeria’s economy. We’re still suffering the repercussions of that recession.. In the 1st quarter of 2019, we witnessed the fastest 1st quarter GDP growth of 2.01% since 2015. Overall, the average growth in 2019 was 2.28%, marginally higher than the growth of 1.9% in 2018. In simpler terms, our GDP crossed the N400Bn mark since 2016, It closed in 2019 at N409.6bn. However, we are still a mile from the 2014 high of N568.5bn. The major contributors to our economic growth are oil revenues, mining and agriculture. 

Foreign Exchange pressures

Nigeria is an import dependent country. Relying on other countries to manufacture most products needed for the country’s consumption, choosing instead to supplement her ravenous appetite for importation with her oil export revenues rather than import substitution in order to manage the balance of payment deficits. Capital inflows into the country for January and February 2020 was N42.7Bn, against an outflow of N98.8bn. This is one of the various pressures on the external reserves, and reducing investor confidence increased pressure of the foreign exchange rates. Oil prices play a significant role in the foreign exchange rate as Nigeria is a petrocurrency, but this will be addressed in detail in significant sections.

Inflation and liquidity

Inflation is a problem for every economy in different forms, from hyperinflation to disinflation, deflation and stagflation. All governments seek to reduce inflation to close to zero as possible while avoiding negative inflation metrics. Simply put, inflation is the change in purchasing power of the consumers attributed to holding a specific currency over a period of time. It is comparing the volume of goods that can be bought with a specific amount of money in one period with the volume that can be purchased with the same amount of money in another period. Inflation has been one of Nigeria’s concerns, fluctuating between the tens and twenties, closing in December with headline inflation of 11.98%, as a result of combined efforts of monetary and fiscal policies, such as the border closure, T-bills restrictions, LDR ratio and minimum wage bill. 

Fiscal and monetary policies

Fiscal tools are used by the federal government to control the flow of money in the economy, while monetary tools are used by the central bank to control money circulation through the financial system. In 2019, we witnessed a shift towards contractionary policies after the introduction of the minimum wage bills. The LDR restriction was introduced and treasury bills restrictions for domestic investors were introduced. This effectively reduces investment outlets for arbitrage, risk free investors looking to benchmark their earnings above inflation, even failing to jumpstart a losing stock exchange. With the restrictions, the interest rates crashed and this effectively reduced the debt servicing expenditure of the government. In early 2020, with the finance bill, we witnessed the VAT adjustment and changes in stamp duty. CRR was also adjusted for banks, including merchant banks whose CRR were increased from 2% to 27.5%. LDR was enforced, mopping excess liquidity in the system and kickstarting local content commercial lending, forcing an increase in the risk appetite of performance driven investors. The border closure also had short term relief on the foreign exchange pressures.

IMF and Rating Agencies Economic Downgrade

Prior to  the outbreak of COVID-19, there have been observations about Nigeria’s GDP gradually flattening. Leading indicators suggested that we may be entering a mild recession as demand was reducing and inflation was increasing steadily, closing February 2020 at 12.3%. As a result, there have been various sovereign rating downgrades by economic aggregators such as the Standard & Poors and Moody. The IMF reduced the Nigerian economic growth forecast to 2% while other aggregators revised the outlook from stable to negative. These factors affect investor perceptions.

In dealing with the above issues, the federal government laid down plans to systematically stimulate growth in the economy through construction and export promotions amongst other policies. 

 Enters COVID-19

In the absence of early border closure, we witnessed new cases of COVID-19 until we had to freeze the economy. The critics of the current administration have had a field day making mockery of the government’s response in terms of the healthcare infrastructure and testing capacity. We have witnessed advanced economies failing, crawling and trying to decide between the dilemma of saving lives and creating an economic nightmare. Nobody knew what to do. The global economy has been brought to its knees, and Nigeria is following.

The effects of COVID-19 on the Nigerian economy may vary, from the immediate effects to longer-term effects

Oil price war

The naira is a petrocurrency. This means that our economic metrics are tied to the global oil prices; our revenue projections, our external reserves, our GDP, forward contracts and exchange rates. On the 8th of March 2020, a fallout of the OPEC meeting, saw an ultimatum issued to Russia for a cut in production of the world supply by 1.5%. Russia rejected the demand, ending the three-year partnership between OPEC and major non-OPEC providers. This prevented the renewal of the production cut agreements as Saudi Arabia, who had suffered a huge effect of the cuts, notified her buyers of  her plans to increase supply and discounts, flooding the global market with excess supply of crude. Global oil prices dipped, with the bonny light, Nigeria’s oil, dropping to a low point of $17/bbl. A price not recorded since the 2008 global recession.


China accounts for 19% of Nigeria’s import bill. This is excluding her bilateral concessionaire agreements and construction projects with Chinese companies. When Chinese factories stopped production, most of Nigeria-China construction projects were stalled. The industries immediately affected were the FMCG industries sourcing their raw materials from China, the aviation industry, the hospitality and tourism industry and the financial market. China is also the world’s largest importer of crude oil with a daily demand of 14 million barrels. Alongside India, they account for almost 40% of Nigeria’s oil export revenues and the shutdown of their factories has contributed to an increase in oil supply leading to a glut with excess global supply of almost 800 million barrels of oil

Financial markets

There is an existing overdependence on the debt market especially in the fixed income and money market. We have witnessed a drop in the activities of the stock exchange market including the rapidly declining market capitalization of major players in the Nigerian stock exchange. The bearish players were favorable as the market dropped above 20% on a year to date comparison. The Nigerian bourse had to suspend trading activities to protect the integrity of the market and investor confidence. In a bid to Jumpstart the healthcare sector and rapid response as well as forestall the death of SMEs due to inactivity, the Central Bank introduced two intervention funds totaling 150 billion Naira to support health care service providers and infrastructure developers and Small and medium Scale enterprises. 

Hoarding, Inflation and Interest rates

Already battling a negative inflation/risk free(T-bills) interest rate spread, our inflation figures continue to increase steadily. With the sudden disruption in the supply chain of conglomerates with local presence and import dependent essential sectors, we witnessed an immediate increase in prices and creation of artificial scarcities. Essentials such as pharmaceutical supplies and food supplies have been hoarded and their prices increased in anticipation of an actual scarcity. 

Cue in the Lockdown

The lockdown was introduced and has been extended by the presidency in high risk locations like Lagos in order to forestall the spread of Covid-19. This is mandatory for all sectors except essential services including power, health, food and some financial service providers. This has prevented some of the pressures on the economy arising from activities. 

However, revenue expectations by the federal government had to be revised as a result of the oil price dip, which have now been corrected by the agreements between Russia, Saudi Arabia and other oil producers to reduce the supply of oil. The demand side is still challenged as China tries to recommence operations but is still recording new cases, even though the curve has been flattened. 

The global economy is in recession as 30% of the global population, an estimated 2.5 billion people are in lockdown. Companies are forced to lay off employees to survive in the short term and firms are redefining their business processes in line with reducing contact as much as possible. Emerging and frontier markets are the most vulnerable given their high poverty ratio. Nigeria as an example has over 1000 cases and has been locked down for a month. Due to the poverty level, tensions are rising especially in certain parts of Lagos and Ogun as the population below the poverty line would rather be infected than die of hunger. Education is also a problem as they do not fathom the dangers of the spread of the virus. Their daily incomes have been affected and they have now resorted to petty violent crimes to fend for themselves daily.

What do we expect?

If the lockdown, scheduled to end on the 28th of April is not extended and activities commence on the same level as pre-lockdown, we may be able to pick up the economy and continue to fight the battles stated above. However, if the lockdown is extended beyond April and the pandemic is not controlled before Q3, the economy will enter a recession. 

The Nigerian economy is mostly consumer driven. An estimated 70% of economic activities are consumption, increasing reliance on imports and foreign exchange pressures. The CBN governor in his paper, plans to rejuvenate the economy and develop the real sector and establish infrastructure development and venture capital for import substitution initiatives. The idea is novel and it’s execution remains to be observed. 

This pandemic will go a long way in determining how countries’ economies will be affected, and is a large blow to globalisation and international trade relations. Companies will begin to redefine their workflow and companies with digital prowess will experience immediate lasting gains. The federal government is expected to focus on developing the healthcare and real sector of the economy. Businesses in addition to sustainability investment and review, will begin to prepare doomsday protocols in case of repeat scenarios. Emerging technology provider stocks will skyrocket and freelancing will experience a surge. Industries will consolidate as stronger players acquire the weaker ones. 

The Nigerian government is expected to source for the revenue shortfall by taking on extra external debt to fund the budget expenditure. This debt is expected to come from other development banks and investor clubs. 

Overall, there would be opportunity to change the face of the Nigerian economy and control a lot of factors. To achieve this, Nigeria needs to become a meritocracy, giving power as a reward to competence.

Inioluwa Osagbemi

Inioluwa Osagbemi is a writer, poet and a professional in the financial services industry. He is also a member of the Institute of Chartered Accountants of Nigeria (ICAN-ACA) and a student candidate of the CFA Institute. He enjoys reading, making and listening to music and writing poems and stories around his experience as a Nigerian. You can find him on twitter @iinioluwa_.

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