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Why Nigerian manufacturers should worry about Coronavirus

A deadly flu-like infection is causing the global economy to shiver, and Nigerian manufacturers are not left out, as development of the virus holds major implications for them.

Known as the coronavirus, the epidemic has ravaged the Central province of the world’s most populous nation, China, from where the virus is believed to have originated from and spread to other parts, making countries of the world take a cautious stand.

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Over 70, 000 people have been confirmed to have been diagnosed of the virus while the number of deaths from the outbreak have exceeded  2000 as of Wednesday, according to China’s National Health Commission.

From a collapse in crude oil price, declining stock markets, down to slower global demand, the economic and human cost of the coronavirus outbreak are climbing across China and beyond, which could impact  Africa’s biggest economy.

Since the discovery of oil in large quantities around the 1950s at Oloibiri in Niger Delta, after half a century of exploration, Nigeria has remained a mono-product economy.

The virus has a major implication on foreign exchange earnings.

By being a mono-product economy, the Nigerian economic system is essentially based on the existence of only one major economic product upon which the economy is sustained. 

Data from the government-funded National Bureau of Statistics (NBS) show that the oil sector accounts for about 85 per cent of Nigeria’s foreign exchange earnings and over 70 per cent of the government’s revenue.

This has made the country susceptible to oil shocks, hence when oil prices go up the Nigerian economy booms and vice versa.

Since the coronavirus started in early January, there has been a slowdown in the demand of oil from China which happens to be the world’s largest importer of the commodity, bringing in about 10.04 million barrel per day.

Brent crude, which is the international benchmark of oil prices, has fallen 14.03 per cent to 57.24, from the high of$65.44 per barrel before the outbreak of the epidemic struck, according to Bloomberg data.

Falling oil prices does not sit well with Africa’s largest economy that depends so much on the commodity to attract dollars.

Nigerian manufacturers need dollars to buy inputs and equipment  for their day-to-day operations.

A decline in oil prices would mean lower dollars coming into the country and this can exact pressure on the Central bank reserves. The CBN needs the reserves to settle monthly import bills.

It could also make the apex bank resort to naira devaluation as it weakens the CBN’s firepower from using its reserve to continually keep the naira at a fixed rate to the dollar.

Devaluing the naira would cause a devastating effect on manufacturing countries that would have to pay more to get dollars.

A clear case example was in 2016 when Africa’s largest economy suffered a huge dollar shortage owing to a collapse in crude oil prices and oil production.

In that period, oil prices fell to as low as $28.94 barrel per day while the disruption of oil pipelines sent production to $1.2 million barrel.

These factors culminated into sending the economy into five quarters of negative growth, and triggered massive capital outflows, as foreign investors left in droves.

The situation was much more precarious for manufacturers as they were left to battle with inadequate dollar liquidity to import, falling demand and the big naira devaluation that eroded their investments.

Data from the Manufacturers Association of Nigeria (MAN) say a total of 54 manufacturing firm went down the drain due to the harsh economic condition at the time.

The country may have exited the recession, but its pace of growth is still weak at an average of 2 per cent and largely centred around activities in the oil sector.

The virus, which has taken a toll on oil prices due to slower demand from China, could have negative consequences on the health of the Nigerian economy—though probably not as bad as the 2016 scenario—which would, in turn, affect the manufacturing sector.

To show the extent to which the virus has an impact, oil price rallied four per cent after rumours that vaccines for the Coronavirus have been found. However, the price tumbled after the World Health Organisation refuted claims that the cure had been found.

The Coronavirus is casting an ever-widening shadow on global demand and stocks, with analysts revising downward, forecast of growth.

The epidemic has forced the world’s most populous country, which accounts for roughly 20 percent of global gross domestic production, into lockdown and idled its manufacturing industry, a vital supplier to companies everywhere.

New studies show that the new coronavirus outbreak and subsequent shutdown of many parts of China could impact more than five million businesses worldwide, and Nigeria might not be left out.

Although Sun Saixiong, political and information officer of the Chinese Embassy, has debunked rumours that the spread of the Coronavirus may hurt the trade relations between Nigeria and China, analysts say they see a slower growth following the continuous outbreak of the epidemic.

The International Monetary Fund (IMF) downgraded Nigeria’s outlook for 2020 to 2 per cent from a previous forecast of 2.5 per cent, citing declining oil prices that were caused by the coronavirus. 

Trade between Nigeria and China reached $8.6 billion in the first half of 2019, according to data released by Chinese Consul-General in Nigeria, Chu Maoming.

BusinessDay reported earlier that prices of phones, accessories and electrical appliances have skyrocketed on the back of the extension of holidays in China since many of these products are imported from there.

As earlier noted, a falling oil price would, to a large extent, not sit well for Nigeria as this would make the government handicapped in carrying out its fiscal obligations, particularly capital expenditure.

Manufacturers need good roads, constant power and other basic infrastructure to remain competitive and produce at a low cost.

Already, Nigeria has a huge infrastructural deficit that could gulp about $100 billion or N3 trillion of its finances annually through the next 30 years, according to a statement by Zainab Ahmed, Nigeria’s minister of finance. A further decline in the government finances would worsen the deficit.

As a percentage of GDP, Nigeria’s infrastructure stock hovers around 25 per cent, a far lower value when compared to the 70 per cent benchmark set by the International Monetary Fund (IMF).

For the 2020 fiscal year, Nigeria pegged its oil benchmark at $57 per barrel, while it aims to achieve an oil production target of 2.18 million barrel per day.

Using this assumption, Nigeria hopes to rake in as much as N8. 155 trillion, comprising oil revenue of N2.64 trillion, non-oil tax revenues of N1.81 trillion and other revenues of N3.7 trillion.

The country would, however, spend as much as N10.33 trillion of which N4.88 trillion would go to non-debt recurrent expenditure while N2.14 trillion of the amounts would be for capital expenditure.

An oil price below the targeted oil benchmark would mean less revenue for the government that depends on it for its finances.

This would widen the variance between the actual and the budgeted revenue, and further increase the budget deficit which was put at N2.2 trillion.

In the 2019 budget, when oil prices traded below target by 49 per cent, the Federal Government realised only N2.04 trillion as actual aggregate revenue (excluding Government-Owned Enterprises), as of June 2019, data from the Budget Office of Federation show.

This revenue performance was only 58 percent of the 2019 budget target due to the underperformance of both oil and non-oil revenue sources.

This reflects the lower-than-projected oil production, deductions for cost under-recovery on the supply of premium motor spirit (PMS), as well as higher expenditures on pipeline security/maintenance and Frontier exploration.

Within the period, daily oil production averaged 1.86 as against the estimated 2.3 mbpd that was assumed.

This made the government fail to implement any capital spending within the period. It was not until the end of September 2019 that some N294.63 was disbursed as CAPEX.

However, this did not stop the government from spending a total of N3.39 trillion out the prorated expenditure of N4.46 trillion as of 30th June 2019.

This goes a long way to showing that in the event of declining revenues from the government, the capital expenditure aspect of the budget suffers.

The Organisation of Petroleum Exporting Countries(OPEC), for which Nigeria is a member, and its allies, have held preliminary discussions about making deeper cuts to oil production as a fallout from the coronavirus outbreak. This might help in pushing oil prices north.

 

MICHAEL ANI

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