How COVID-19, oil price crash choke Nigeria’s economy?
Nigeria faces two intimidating enemies; the coronavirus pandemic and crashing oil prices, both are beyond the country’s control and have the potential to do priceless harm to the biggest economy in Africa.
On March 26, Nigeria joined many other nations banning flights into the country and urging shelter-in-place and social isolation practices amid the coronavirus COVID-19 pandemic. There are already 135 confirmed cases of the virus and two deaths, across 13 states of the Federal Republic of Nigeria. President Muhammadu Buhari had on Sunday announced lockdown of Lagos State with 81 confirmed cases, Ogun State, 4 cases and the Federal Capital Territory 25 cases as of Tuesday.
On Tuesday, oil prices continued a free-fall with the Brent crude crashing to Brent Crude to two decades low of $26.25 per barrel and the West Texas Intermediate falling to $20.49 a barrel. Nigeria has since adjusted its 2020 budget benchmark for crude oil from $50 to $30 a barrel putting the country’s public finances under severe strain. This means from the Federal to State and Local government levels, spending will be reduced and some states may struggle to pay salaries.
Global oil markets have faced a major downturn because the demand for crude has oil has fallen. The main industrial economies have literally shut down as a result of the coronavirus, this took down with it global demand for oil and has affected the price.
Oil companies in Nigeria have ordered their staff to go home as a protective measure against the virus. “So, operations are skeletal right now. Contractors are heavily affected as decisions on cutbacks in projects and costs are being made by producers,” Gbite Adeniji, former special technical assistant to a former minister of state for petroleum resources told BusinessDay.
President Buhari has approved an N10 billion grant to the epicentre Lagos to fight the outbreak and N5 billion grant to support the Nigeria Centre for Disease Control.
Exports of oil and gas will continue and more fiscal and monetary policy measures will be needed, said the president. Having left interest rates unchanged during its March meeting, the Central Bank of Nigeria (CBN) still has scope to reduce its key rates if inflationary pressures recede.
This raises the central question of what will happen to inflation levels. Food prices may rise sharply if measures are not taken to cap them under the current circumstances. Prices of pharmaceuticals, masks, and hand-sanitiser in Europe were capped as part of government measures to control skyrocketing prices for these goods, for example.
Other goods which feed into price benchmarks are petrol and electricity. These are expected to fall along with the price of oil and government coffers will see some relief from the fuel subsidy, which had risen on the back of higher oil prices earlier this year.
The International Monetary Fund estimates that with each 10 percent fall in oil prices, oil-exporting countries such as Nigeria will see a 0.6 percent drop in the gross domestic product (GDP) and an increase in fiscal deficits of 0.8 percent of GDP.
Under the current circumstances, the Federal Government appears well aware after announcing an N10.6 trillion cuts in the 2020 budget and a change in the benchmark oil price from $50 to $30 per barrel. The Naira is weakening and may fall further against other currencies if foreign reserves decline below $30 billion. A weaker Naira would add to inflationary pressures.
“All told, the coronavirus pandemic is expected to have an unprecedented impact on the Nigerian economy. The disease represents a major threat to the economy because of plummeting oil prices and close trading ties with China,” said Lukman Otunuga, senior research analyst at FXTM, forex trading platform. “While China is in the recovery stage of its coronavirus outbreak, the country’s industrial growth fell by 13.5 percent in the first quarter.”
There is little doubt that aggressive monetary policy and strong fiscal responses must be put in place to cushion the damage inflicted by the coronavirus outbreak in Nigeria. Such steps would increase confidence for foreign portfolio investors to keep investing in Nigeria’s financial instruments and position the economy on the path to recovery after the pandemic is over.