As fears of a global coronavirus pandemic continue to grow, there are increasing worries it could bring the global economy to a standstill. The new coronavirus, otherwise referred to as COVID-19, which originated in the central Chinese city of Wuhan, has already killed almost 4,000 people and infected over 100,000 across at least 25 countries and territories. Although Wuhan and several other cities have been locked down, the virus continues to spread, with one confirmed case in Nigeria.
Given the overall vulnerability of the Nigerian economy to external shocks, particularly to volatility in global crude oil prices and disruptions in China, the nation’s biggest trading partner, the impact of the coronavirus on Nigeria cannot be underestimated.
Already, the outbreak has caused severe economic and market dislocation across the globe, disrupting global supply chains and travel. This is particularly compounded by the strategic importance of China to an increasingly connected global economy. The effects of all these on Nigeria are not insignificant.
Most glaring is the impact of the pandemic on the global prices of crude oil, Nigeria’s major export. Since January, the spread of the coronavirus has sent global stock markets tumbling and reversed nearly all the positive momentum in oil prices over the past four months. As the virus spreads beyond Asia, the oil market continues to suffer enormous losses, with Brent crude oil prices falling to $45 per barrel. Furthermore, the near-term outlook looks grim while the forecast for the rest of the year remains considerably unfavourable.
The effect of this development on the Nigerian economy could be significant. The last major crash in the price of crude oil in 2014 precipitated the downturn in the nation’s economy, culminating in a recession. Thus, there are reasonable fears that a sustained period of low oil prices could send the nation’s economy spiralling into another downturn.
This is quite worrying given that since the 2014 slump in global oil prices, the Central Bank of Nigeria (CBN) has rolled out a string of policies geared towards maintaining an artificially strong Naira reliant upon high crude oil prices and external borrowings. Thus, if crude oil prices remain in the $40-range for an extended period of time or drop even further, there could be even more pressure on the already pressured exchange rate and the nation’s overall economy.
In addition, the current crude oil price of $45 a barrel is significantly below the $57 a barrel benchmark planned in the nation’s 2020 federal budget. Therefore, if the low crude oil price regime persists for an extended period of time, the viability of the nation’s 2020 budget will remain further in doubt. Already, the nation’s Finance Minister has alluded to this, expressing worries that a sustained period of low crude oil prices could scupper the nation’s financial projections.
Another risk posed by the COVID-19 pandemic to the Nigerian economy is the likelihood that the nation’s already high inflation rate could rise even further. Given that China accounts for about a quarter of Nigerian imports, greasing much of the country’s supply chain; and that the nation is reliant on China for raw materials, inputs and machinery utilized in local production, there is a significant possibility that the pandemic could induce an increase in the cost of local production or at least a significant reduction in the already limited local production capacity.
All of these highlight a fundamental structural problem with the Nigerian economy. Nigeria typically exports low value raw materials and imports high value finished goods, a situation which makes the nation’s economy highly susceptible and vulnerable to external shocks
Furthermore, if China remains unable to export due to a myriad of reasons, there is a risk that raw material and inputs usually sourced from China for the manufacturing industry might need to be sourced from other nations where they are presumably more expensive. The economic effect of this will also be an increase in the prices of goods and services, thus resulting in a rise in the inflation rate.
All of these highlight a fundamental structural problem with the Nigerian economy. Nigeria typically exports low value raw materials and imports high value finished goods, a situation which makes the nation’s economy highly susceptible and vulnerable to external shocks. Therefore, there is a need to encourage local manufacturing and spur the export of processed goods.
Perhaps most importantly, there is a need to address the biggest elephant in the room: Nigeria’s reliance on the sale of crude oil as the major source of the nation’s foreign exchange earnings. There is a need to diversify the nation’s economy away from a reliance on crude oil. The need to restructure and diversify the productive base of the economy, with a view to reducing dependence on the oil sector and imports has never been more apparent. As long as the Nigerian economy remains a mono-economy totally dependent on oil revenues, the nation will continue to remain vulnerable to oil price shocks. Therefore, Nigeria needs to ensure sustainable fiscal management that is resilient to global oil price cycles.
Overall, there is a significant likelihood that the economic impacts of the coronavirus pandemic on the Nigerian economy could be even more far-reaching and extensive than anticipated. Given the overall vulnerability of the Nigerian economy to volatility in global oil prices and disruptions in its biggest trading partner, China, the impact of coronavirus on Nigeria might go far beyond infectious diseases.
Therefore, now is the time to act and set plans in motion to protect the nation’s economy from an impending COVID-19 induced disaster.