In the age of the Coronavirus (COVID-19), the world is facing an unprecedented health crisis and no country is spared. As social distancing takes precedence in most countries around the world, COVID-19 has evolved from a health crisis into an economic disaster. Economic activities, for instance, have reduced sharply in just two months since COVID-19 was declared a global crisis: many businesses and workers in non-essential sectors (like leisure, tourism, restaurant services etc) have been forced into a mandatory redundancy’ the global economy is facing an imminent recession, global trade restrictions have dislocated global supply chains, and financial markets are on a downward spiral as investors are concerned about the uncertainty brought by the pandemic.
In Nigeria, the implication of COVID-19 will be dire. Without buffers to support businesses and households, we might be living through the worst crisis since Nigeria gained independence.
How will Nigeria be affected?
Reduced economic activities in Europe, Asia and America – our primary trading and investment partners – is already taking a toll. In the oil market, oil prices have halved to under $30 per barrel. The Nigerian government crafted the 2020 budget around an oil price projection of $57 per barrel for the year. This rapid downturn indicates that oil revenues – which make up about half of Nigeria’s total revenue – will fall sharply, at least in the first half of the year. Also, as over 90% of Nigeria’s export is from oil, the country faces a dollar liquidity problem. This impending liquidity problem is why Nigeria’s apex bank has devalued the Naira. Imports are also going to suffer, heaping more misery as Nigeria partly relies on foreign trade for raw materials and machinery used in manufacturing, medical supplies and food. Foreign investments, both by investors buying assets in the domestic financial market and those investing for the long-term in Nigeria, are likely to fall. We are already seeing investors in the former category dumping their Nigerian assets and exiting the country. Like the rest of the world, the measures we adopt to contain the spread of COVID-19 locally will affect economic performance in 2020. The bottom line is that Nigerian businesses, consumers and governments will endure economic hardship due to the spread of the virus.
Why is Nigeria unprepared?
Nigeria will be hit hard by this crisis and unlike many other countries, it lacks the fiscal buffers, knowledge and manufacturing capacity to deal with it adequately. Given the disinclination towards saving when oil prices were high, the Nigerian government now lacks the fiscal support needed for a crisis of this magnitude. During the global financial crisis in 2008/9, Nigeria was able to drawdown savings of around $20bn in the Excess Crude Account (ECA) to support government spending. In the next crisis between 2015 and 2016, there was no reprieve as the savings in that account fell to $2.5bn. To support spending, the FG borrowed so much money that 60% of its revenue had to be used to meet the interest of the payments. Today, the balance in that account is less than $100m and the room to borrow is now limited. Reforms to ensure public spending discipline and open up sectors to private investment have also been put on hold. The fiscal pressures, coupled with poor investment in people through the health and education sectors means that there is a national shortage of materials and knowledge needed to respond to this crisis. The overburdened healthcare institutions cannot cope with another health crisis while the local capacity to develop vaccines and testing kits is insufficient. On monetary policy, the central bank refused to adopt a flexible exchange rate, thus its reserves have fallen from a peak of $47.4bn in April 2018 to $35.7bn today. Also, the central bank prioritised foreign exchange inflows by selling loads of high yielding debt to foreign investors and this now puts it in a difficult position as foreign investors are exiting Nigeria.
It would seem that decades of poor policies by the government and policymakers in various areas of the economy now threaten our survival- both fiscally and health-wise.
What should Nigeria be doing?
The immediate priority is to take measures to slow the spread of COVID-19 and support the healthcare sector by financing healthcare companies, paying health workers and providing medical supplies needed for efficient control. Similarly, households and businesses are facing tough times, and the government needs to provide adequate welfare support. Financing can be supported with a combination of foreign aid, multilateral organisations and non-interest debt raising domestically.
This is also the right time to start implementing overdue reforms for the long-term. Policies to rein in government spending and build savings must be promoted, backed by law. The government needs to look at reforming the health and education sectors by investing more and allowing private capital. With Nigerians spending 70% out-of-pocket on health expenditure, the highest among peer countries in SSA, the government must work on a health insurance scheme that can accommodate Nigerians in the informal sector. Similarly, the government’s focus on infrastructure demands a lot of resources, but collaborating with the private sector will ease the pressure. Finally, if the government eases its hold on power sectors – oil and gas, transportation and power- we stand a better chance at creating a long-term structure that would potentially serve as a stable foundation for national policy and in global emergencies such as this one.
Adedayo Bakare is an investment analyst with experience in macroeconomic and equity research.