Nigeria’s perfect storm
The oil price crash and costs of COVID-19 mean Nigeria’s economy needs external help now more than ever.
Nigeria’s economy has been dealt a blow, first by a collapse in the oil price, and then by rising costs to fight the spread of COVID-19. One of these crises alone would have been enough to derail 2020 growth, but both occurring simultaneously is devastating. This couldn’t have come at a worse time, with global growth facing its most fraught period since the 2007-8 financial crisis. The impacts will be far reaching and are ultimately interconnected.
On the growth front, according to the World Bank and by its own estimates, Nigeria was set to emerge from recession in 2020. Expectations now are that the economy will face a deep contraction this year, which given global growth forecast revisions, could be protracted. This will have severe consequences for the country’s revenue collection figures and finances.
Government’s US$35 billion 2020 budget, which was to be partly financed by local and offshore debt, was premised on an oil price of US$57 per barrel and production levels of more than two million barrels a day. Oil prices currently languish between US$20 and US$30 per barrel.
Producing more to make up some of the shortfall will be a break with the Organization of the Petroleum Exporting Countries (OPEC), a risky move that would put further downward pressure on prices.
With more than half the country’s revenue coming from oil taxes and royalties, the impact on revenue and the fiscus will be immense and Nigeria has little ability to influence either price or volume. There are limited fiscal buffers and foreign exchange reserves of just US$34 billion have been run down by US$10 billion in one year by defending the naira, which was devalued in March.
This isn’t the first time in the recent past that Nigeria has faced twin crises
Even after rejigging its 2020 budget and drawing down US$150 million from its sovereign wealth fund, Nigeria has had to approach the International Monetary Fund (IMF) for US$3.4 billion, the World Bank for US$2.5 billion and the African Development Bank for US$1 billion. Without debt suspension or cancellation, the result will be a material deterioration in the debt-to-GDP ratio (and debt service costs), further currency weakness and deeper falls into sub-investment grade territory.
Access to capital markets are already prohibitively expensive, and despite countermeasures, the country continues to see the flight of foreign capital and investment, according to Institute of International Finance figures. The policy space is highly constrained, and S&P recently put the country’s B rating on negative outlook (from stable). Fitch lowered Nigeria’s credit rating from B+ to B and kept the country on negative watch. Investors are rightly concerned.
This isn’t the first time in the recent past that the country has faced twin crises. In 2014, oil prices fell from US$100 per barrel to a little above US$50 per barrel as global growth slowed and higher US shale supply exacerbated OPEC’s decision not to cut production. In the same year, an Ebola outbreak in West Africa saw infection spread to Nigeria. There are, however, stark differences between 2014 and 2020.
In both instances, the oil price essentially halved but in the first episode, Nigeria was coming off two years of near 7% year-on-year GDP growth. This was propped up by elevated investment levels and strong consumer spending.
The fiscus was also relatively flush from the proceeds of four years of oil at roughly US$90 per barrel and foreign exchange reserves were healthy. The country’s fiscal deficit was just 0.9% of GDP and the debt-to-GDP ratio was below 13%.
Foreign investor sentiment is bruised after a spate of policy missteps and regulatory overreach
In the current episode, Nigeria’s growth has averaged just 1.3% year-on-year over the past four years. Foreign direct investment and consumer spending have taken a significant hit, leaving the economy even more vulnerable to slower world growth and weak oil demand. The fiscal deficit is now projected to balloon from N2.2 trillion to N5.2 trillion and the debt-to-GDP ratio, while still low in relative terms, looks set to weaken substantially, from 32% to 55% by Trading Economics estimates.
Complicating matters is that foreign investor sentiment has been left bruised after a spate of policy missteps, regulatory overreach (telecommunications in particular) and the populist stance of President Muhammadu Buhari’s administration.
From an epidemiological standpoint, the Ebola outbreak infected 19 people in Nigeria in 2014, seven of whom died. There are currently 782 cases of COVID-19 in Nigeria and 25 fatalities, but the actual number could be higher given that COVID-19 is much more infectious than Ebola. Testing levels in Nigeria as tracked by Worldometers (39 tests per million people) are well below South Africa (2 140 per million). South Korea, the global benchmark for testing, is at 11 273 tests per million.
The Ebola outbreak of 2014 also didn’t require shutting down entire regions and parts of the economy as is now the case. Lagos, Abuja and Ogun states are all on lockdown until at least May and it seems unlikely that COVID-19 will be contained as quickly as Ebola.
The policy responses in 2014 are also vastly different to today. To be fair, Goodluck Jonathan was dealt a better hand, but his action was decisive and efficient. Buhari’s has been less visible, deepening the longstanding impression of flippancy and ambivalence.
Nigeria’s private sector and domestic agencies have mobilised resources to combat COVID-19
The current administration faces difficult policy choices. There are five key areas that need attention – the currency, the question of fuel subsidies, lifting import restrictions, emergency budgetary adjustments and security funding.
First is the question of the naira. The reluctance to greater free float is largely ideological, but inflation pass-through (manufacturers’ and retailers’ inability to pass increased costs on to strained consumers) will be muted due to weak consumer demand. Allowing currency depreciation will provide a much-needed boost to agriculture exports and further improvements in the current account balance, having a natural stabilising effect on the currency.
Also, with oil at current lows, now is not the time to remove fuel subsidies which could help cushion some of the household economic hardship. Further opening the market to private players and loosening price control could have a beneficial long-term impact for consumers and free up some fiscal space. Offsetting the impact of the recent VAT hike by zero-rating more items could also alleviate some consumer strain, and removing import bans on items would lend further consumer support.
Authorities must also expedite an emergency budget with funds to fight COVID-19 and measures to minimise the pandemic’s impact on citizens, particularly the poor.
Finally, funding for security also needs to be increased in lieu of a likely flare-up of threats in the oil delta as patronage suffers. The coronavirus outbreak and the impact of restrictive responses like lockdowns could also lead to wider social unrest. Boko Haram and other extremist groups could use the situation to their advantage to launch new offensives.
Given the need to fund a wide range of measures, accepting external aid will be more important than ever. Nigeria cannot solve its problems on its own and will need to overcome its historical aversion to seeking help from global bodies like the World Bank and the IMF. Moves in this direction are positive. It is also encouraging that the private sector and domestic agencies have mobilised resources to combat COVID-19, and this must continue to be facilitated.
From a policy perspective, monetary and fiscal responses need to be coordinated and bold reforms undertaken to gain traction when the COVID-19 threat begins to wane. To do so will require compromise. Ideological differences and rigid economic views on the currency, deficits and debt will need to be set aside.
This time really is different, and a failure to act boldly, adapt and collaborate will have consequences far beyond government healthcare and financing. Inaction could see disaffectedness rising with the potential for political instability.
Ronak Gopaldas, ISS Consultant, Director at Signal Risk, Fellow at Gordon Institute of Business Science
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Picture: Amelia Broodryk/ISS
