An unexpected plunge in oil price by most since 1991 on Monday forced an emergency meeting of Nigeria’s fiscal and monetary authorities, who are expected to decide on what best tools available to avert a crisis.
Oil plunged as low as $31 per barrel after the coronavirus outbreak tested the strength of OPEC+ alliance, prompting fears that Nigeria could be set to repeat 2016.
As a result, President Muhammadu Buhari ordered a high-level committee to look into the potential risk posed to Nigeria both by the coronavirus and the oil price war between Saudi Arabia and Russia.
At a conference in Abuja, Finance Minister Zainab Ahmed, a member of the committee, on Wednesday described the odds now stacked up against Nigeria as “very strong headwinds” which served as a wake-up call for the country to look beyond oil.
Godwin Emefiele, the Central Bank governor, also said “the team will not hesitate to deploy additional measures to shield the Nigerian economy from headwinds”.
Ahead of the committee’s announcement, here are possible options it could consider for Nigeria.
FISCAL POLICIES
Petroleum Subsidy Removal
As one of the possible fiscal adjustments to check effects of the coronavirus outbreak and oil price decline on the economy, Nigeria can move for removal of the petroleum subsidy to free up resources for more expedient use (like financing projects) and ease perennial fiscal deficits that have prompted more borrowings by the government.
According to NNPC data, the government spent N730.9 billion in 2018 on what it called “under-recovery”, a euphemism for subsidy. This is higher compared to the budget of the Ministry of Education for that year (N651 billion), Ministry of Health (N356 billion), Ministry of Transportation (N267 billion), and Ministry of Agriculture and Rural Development (N203 billion).
Even though the government claimed it budgeted N350bn for petrol subsidies in 2019, N462.09bn had been spent in the first nine months of the year, according to NNPC data.
Higher Eurobond issuance
Another option for the government might be tapping the international debt market for higher dollar-debt borrowings than it has planned for 2020 as a way to boost holdings of the greenback in reserve.
The government already seeks to raise $3.3bn in Eurobonds to paper over budget cracks.
However, the cost of such borrowing might be higher since international rating agencies like Moody’s and S&P have downgraded Nigeria’s creditworthiness.
Tax cut
The fiscal authorities can lower the tax rate as a way of stimulating the economy to mitigate the impact of the coronavirus on growth.
Specifically, the government could cut the company income tax rate to create headroom for growth of firms and provide similar tax incentives to support business environment.
Similarly, fiscal authorities can also mimic a nominal devaluation of the exchange rate by increasing taxes on imports and reducing them on exports.
This would serve to ensure a favourable balance of payment and boost dollar receipt.
Budgetary adjustments to reduce wastages
Another option for Nigeria would be to review the 2020 budget to cut off unnecessary costs and re-prioritise needs.
For instance, in the 2020 budget, personnel cost for MDAs alone stood at N2.83trn compared to an aggregate capital expenditure of N2.78trn.
Efficiently running the government and its agencies will reduce budget deficit and there would be less pressure to borrow.
MONETARY POLICIES
Naira devaluation
Removing the peg on the naira which would allow the FX market to determine its exchange rate could be one of the measures to keep Nigeria immune from the shock from crude price.
This could save CBN the funds it has been using to stabilise the local currency against the dollar and thus reduce depletion of the reserves.
The value of the naira dropped by more than 2 percent against the dollar on Wednesday as fear of a possible devaluation amid the price war led to a surge in demand for the US currency.
With two currency devaluation under his belt, CBN Godwin Emefiele said naira devaluation would only happen when the crude price drops below $45/barrel. A barrel of crude oil dropped to $30 on Monday on the price war between Russia and Saudi Arabia.
Economists have projected that the apex bank may be forced to leave the market to determine the exchange rate when reserves get some more heat from the declining oil price.
The reserve which has maintained downward trend in the last eight months worsened by a 49 percent decline from $37.73 billion the week earlier to N37.23 billion as of 13th February 2020, data by the CBN show.
A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners which will mean that imports, such as petrol, food and raw materials will become more expensive. This will reduce the demand for imports. With exports more competitive and imports more expensive, Nigeria which is an import economy will likely see higher exports and lower imports.
Nigeria recorded a trade deficit of N579.06 billion in the fourth quarter of 2019, the first negative balance since 2016, as compiled from the data by the National Bureau of Statistics (NBS).
Hike in MPR
Raising the Monetary Policy Rate (MPR) from the current 13.5 percent could be one of the key decisions the central bank may want to consider at a time when the naira is losing its grip against the dollar.
Higher interest rates tend to attract foreign investment, increasing the demand for and value of a currency like naira. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency’s relative value.
The total value of capital importation into Nigeria stood at $3.8billion in the fourth quarter of 2019. This represents a decline of 32.42 percent when compared to the third quarter of 2019.
Also, higher interest rates tend to reduce inflationary pressures and cause an appreciation in the exchange rate.
The fear of a further spike in inflation rate forced the CBN to undertake a moderate tightening stance at the first monetary policy of 2020, leading to the raising of banks’ cash reserve ratio (CRR) by 500 basis point, from 22.5 percent to a new level of 27.5 percent.
Nigeria’s inflation rate jumped to 21 month-high in January 2020 at 12.13 percent.
While the Monetary Policy Committee (MPC) is due to hold its next meeting on March 23, 2020, the central bank may consider holding an emergency meeting in order to counter the economic fallout of the coronavirus outbreak.
Capital control
In 2015, the CBN started restricting FX for the importation of certain items that can be produced in Nigeria. That initiative has in some way reduced the pressure on the demand for dollar for importation purposes.
Even though that may come at a cost, the central bank may also want to consider adding some items that have alternative sources in Nigeria to the more than 42 items that have been restricted from accessing dollar.
Economists define capital control as a residency-based measure such as transaction taxes, limitation to FX, or outright prohibitions that a nation’s government can use to regulate flows from capital markets into and out of the country’s capital account.
CBN should limit government financing
The central bank of Nigeria may want to consider limiting its finance to the Federal Government in order to save enough in the national purse to enable it to bear the money needs of the country.
As at the end of August 2019, the CBN had financed the Federal Government to the tune of N4.4 trillion, according to official data. The apex bank continues to act as a piggy bank to a struggling sovereign while turning a blind eye to the economic consequence.
The money, which is the net sum of outstanding CBN overdrafts to the FG minus the government’s treasury single accounts (TSA) deposits with the CBN, went into plugging a higher-than-expected budget deficit this year as well as some carry-over obligations from the last two years.
What analysts say
Andrew S. Nevin, partner/chief economist, PwC
With Coronavirus and oil shock arriving at the same time, Nigeria is suddenly in a very difficult situation. There are no easy answers and the FG and CBN are facing some very hard and very urgent decisions about the economy.
Ayorinde Akinloye, a consumer goods analyst at Lagos-based CSL Stockbrokers
It’s important to state that economic managers have messed up by not preparing for this downturn. We had good five years to prepare, so any attempt to build some resistance now could be inadequate which means the inevitable is unavoidable.
But as to what they can do now: Proper management of FX is important to prevent unnecessary scarcity.
The federal government must work on fiscal stimulus for key sectors that may be affected in the event of widespread COVID-19 virus as well as possible devaluation.
Some of the fiscal stimulus could be lower taxes, selective credit schemes etc. But I strongly doubt they would consider fiscal stimulus as the federal government is heavily concerned about its own revenue than what happens to the private economy.
Obinna Uzoma, chief economist at EUA Intelligence
Monetary policy
1. Devalue the currency to reduce the depletion of the reserves
2. Raise MPR to 15 percent to attract FPIs
3. Reduce LDR to 60 percent to allow banks stop creating more risk assets
4. Increase liquidity ratio to 35-40 percent to allow banks hold more cash in case there are significantly higher customer withdrawals
5. Fund AMCON to be able to buy some bad debts from Banks in the event of a widespread default in loans
Fiscal policy
1. Raise up to N5trn to fund the deficit due to oil price crash
2. Scale back budget to have an actual spending of around N8trn
3. Increase allocation to health by at least N100b to combat covid-19
4. Improve tax collection to ensure stronger revenue
5. Use Tbill borrowings to support FAAC allocations. This will ensure everyone gets a salary and job loss is contained
Paul Uzuma, MD, Halo Nigeria Capital Ltd
Diversify the economy from crude oil export oriented economy. Tilt the economy to a private sector driven economy by reducing government involvement in economic/business activities, fiscal discipline (stop the persistent and reckless budget deficits), promote the inflow of FPI and FDI which can help with autonomous supply of forex. On the monetary policy side, as a short term palliative measure, the CBN could introduce 1 year 2 year forward contracts on USD, to give comfort to FPIs and private equity firms.
