Unless you have been hiding somewhere under a rock you have probably already heard of COVID-19 popularly known as the corona virus. It is a new strain of a virus that has spread almost all around the world relatively quickly, with a fatality rate that while not as bad as our frequent visitors like Lassa fever or even Ebola, is deadly enough to cause concern. Perhaps more importantly, it spreads relatively easily, and this is what has many worried. Indeed, since it started in China it has spread to almost every country with Nigeria and South Africa the latest hosts. This ease of spread is why many are battling round the clock to prevent that spread. And oh, it has no known cure yet even though most recover from it.
Nigerians are worried as should be expected. Even though sometimes I wonder why given that malaria and more recently Lassa fever have killed more people than the coronavirus probably can. Still there is no maximum limit on the number of things we can be worried about. In terms of the economy though, the direct effect is likely to be limited. It is likely to be just another illness to add to the compendium of illnesses that already limit our productivity. Although if we become a hive for the virus while others recover then we may become involuntarily isolated from everyone, which will be really bad for the economy.
The real threat to the Nigerian economy from the corona virus is its effect on the global economy. Already, many economies are having to slow down activities in response to the virus. China, the haven for the global supply chain for many things, has had to shut down entire cities. So much so that you can see the effect on reduced pollution from space. But as China has shut down cities and forced people to stay at home, demand for fuel has collapsed. If people stay home then they don’t burn fuel going to work. Which means demand for crude oil has collapsed. And you can all guess what a collapse in the demand for crude oil does. The price has fallen in tandem. In the first week of January the price of a barrel of crude oil was as high as $68 per barrel (pb). As at the time of writing this article the price had dropped to $50.74 pb.
We know what a drop in the price of crude oil means for Nigeria. First on the budget. The budget assumes a price of $57 pb which was supposed to be a conservative estimate. A current price of $50 means that wahala may dey with the scale of the wahala dependent on how long the virus keeps oil prices low. You could be forgiven for thinking that we can ramp up production to deal with the effects of a lower price. But first, we are mostly already operating at maximum capacity and second, OPEC will not sit by and watch us flood the market. In fact, they have already agreed to cut global production by 1.5 million barrels per day in reaction to the fall in prices. We might need to bear a part of that burden so we may actually be forced to produce less.
The wahala does not just end with the budget. Remember that crude oil still makes up a large part of our foreign exchange inflows. Lower prices eventually mean lower inflows. Lower inflows mean that the CBN, who has already been struggling to manage the fall in foreign reserves, will struggle even more to keep its fixed exchange regime in place. Expect more circulars if weak oil prices continue. All this of course has consequences for the wider economy which is already struggling with growth.
The morale of this story is that whether or not the corona virus gets here in full scale we are already affected. And our policy makers should already have plans in place for mitigating the fallout from the effect on global economic activity. We should also be doing our best to ensure the virus does not spread here because if it does beyond a certain point then we may find that our Ebola preparedness history will not be enough. So, everyone please wash your hands with soap for at least 20 seconds regularly. And if you feel funny and you have reason to believe you have the virus please go into self-quarantine and call the authorities.
NONSO OBIKILI
Dr. Obikili is chief economist at BusinessDay
