Coronavirus (COVID-19)
Best and worst case scenarios for the Nigerian economy
#COVID-19
The
worst-case scenario is if the world does not find a vaccine in the next fifteen
months.
By Emmanuel Abara Benson
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 unfavorable 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 Organization 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 lock down
measures in a bid to contain the virus. This would be bad for the economy, he
stated.
