Will COVID-19 lead to another recession?

As the world continues to battle the COVID-19 pandemic, it is becoming increasingly clearer that the economic repercussions of the pandemic could be even more drastic than anticipated. Already, the outbreak has caused severe economic and market dislocations across the globe, disrupting global supply chains and travel, and causing a crash in the price of crude oil. Given the overall vulnerability of the Nigerian economy to external shocks, particularly to volatility in global crude oil prices and disruptions in the nation’s biggest trading partners, the impact of the coronavirus on the Nigerian economy cannot be underestimated.

Before the pandemic, the Nigerian economy was yet to fully recover from the recession it suffered in 2016, with its 2019 GDP growth tapering around 2.3 percent. In fact, the IMF had in February revised the 2020 GDP growth rate from 2.5 percent to 2 percent, as a result of relatively low oil prices and other macroeconomic headwinds. Furthermore, the country’s debt profile had also been a source of concern, with debt servicing already consuming over 60 percent of the nation’s revenue. Now with the outbreak of the pandemic, it seems inevitable that the nation’s economic indicators could get even worse,

Since the outbreak of the pandemic, the oil market has suffered enormous losses, with Brent crude oil price falling to less than $30 per barrel. Furthermore, the near-term outlook of the nation’s principal export looks grim as 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.

In addition, the current crude oil price of below $27 a barrel as at Monday 12:24pm is significantly below the $57 per barrel initial benchmark of the FG’s 2020 budget and also below the revised benchmark of $30. 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.

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

Furthermore, 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 utilised 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.

Against this backdrop, the notion that another recession might be looming is not farfetched. It is therefore pertinent that the nation’s economic managers adopt the right policy frameworks to manage the impending economic repercussions of the pandemic.

Already, the Central Bank of Nigeria (CBN) seems to be taking the right steps by moving toward a flexible exchange rate, in contrast to the stance adopted in 2015. It should be recalled that in the aftermath of the 2014 slump in global oil prices, the CBN rolled out a string of policies geared towards maintaining an artificially strong Naira reliant upon high crude oil prices and external borrowings. A situation which put even more pressure on the already pressured exchange rate and the nation’s overall economy.  Therefore, the CBN’s new policy which aims at a flexible exchange rate seems a step in the right direction.

Furthermore, the decision to implement a monthly pricing modulation style which reflects the global oil market fundamentals to determine the price of petroleum products in the country is a welcome development. The implementation of the price modulation policy has led to a drop in the price of gasoline, which should help curb rising inflation, especially food price inflation.

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 economic recession.