The Federal and state governments, as well as the Central Bank of Nigeria (CBN), are largely short of firepower in their battle to ward off any impending economic turmoil arising from the coronavirus pandemic.
Governments in other advanced and emerging countries have all swept into action, rolling out various fiscal stimulus that will complement those coming from the monetary side, to assist businesses in boosting output as well as household demand, as the global economy totters on the verge of sliding into a recession.
Government fiscal stimulus in other countries.
The US is planning a $1 trillion fiscal stimulus plan that would put cash in the hands of Americans after the Federal Reserve on Sunday cut interest rate to near zero and launched a $700bn asset purchase program.
Similarly, the Canadian government has announced an $82bn package to provide $27 billion in direct assistance to workers and families, as well as making $55 billion available in liquidity as part of efforts to support the economy.
Poland also announced a package of around $52 billion while France announced a €45 billion / $48.8bn aid package for small businesses and Oman’s central bank said it is prepared to support the economy with $20.8 billion.
Nigerian’s still awaiting Buhari’s response
For Africa’s largest economy, not much has been heard from the federal government, with the CBN’s taking up the duty of using monetary tools to do the heavy lifting.
CBN Governor, Godwin Emefiele, Monday announced some policy measures that include a moratorium of one year on all principal repayments on CBN intervention loans, effective March 1, 2020, as well as interest rate reduction on all applicable CBN intervention facilities from nine per cent to five per cent per annum for one year effective March 1, 2020.
President Buhari is yet to make an official statement like other leaders have done, regarding the government’s move to stimulate growth at a time in which the economic activities have almost been brought to a halt.
The Federal government has only announced a cut in the price of petrol from N145 to N125 and has restricted flights coming in from about 13 high-risk countries.
But analysts, as well as renowned economists who spoke to BusinessDay, says those are still not enough to cause the needed boost of output for businesses.
This could imply that businesses operating in the country are left alone to survive in the wake of slow economic growth as well as weak consumer demand that has enveloped the country, without much fiscal push from the government.
FG finances stretched to limit
The Nigerian government appears to be more cash-strapped than ever, with the fall in oil prices which has further cut deep into the revenue into the country.
Crude oil proceeds, which accounts for over 70 per cent of the government revenue, and 85 per cent of the country’s dollar earnings, has suffered greatly as the Pandemic outbreak of the coronavirus continues to spread across countries of the world.
Brent crude which is the international benchmark for oil tumbled to $25.42 per barrel yesterday, its lowest level in 18 years.
That is less than half the $57 in which Nigeria pegged its 2020 budget. It is also lower than the $28 levels in which oil traded in 2016 that made the country record five-quarters of negative growth.
The federal government is almost handicapped as it appears it has little room to manoeuvre such as making a new borrowing plan or using (non-existent) buffers to engage in an expansionary plan to boost spending and output.
In terms of debt stock, the Federal government alone has increased its borrowing by 54.7 per cent to N13.90 trillion as at September from N8.98 trillion in 2015.
The Excess Crude Account (ECA), which could have stood as a fiscal buffer for the government has also been depleted by more than 96 per cent to $70 million from $2.07 billion, a level where it was in 2015.
Dwindling oil prices has also made the government-run to the CBN for life support to the tune of over N4 trillion, a move it might not be able to replicate given that the apex bank’s balance sheet is almost stretched to breaking point.
Businesses worst-off now than in 2015
The stock market shed 17.36 percent in 2015 following the decline in oil price, and extended the loss by 6.17 percent in 2016.
Investors gained N120bn in 2015 but in dollar terms lost $1.26bn due to currency movement. By the end of 2016, investors lost N817bn or $3.2bn in the year.
By sector, banking stocks were the worst hit with a year-to-date plunge of 23.59 percent in 2015 as investors priced in risk of bad loans given the high exposure of lenders to the Oil and Gas industry.
The Consumer Goods shed 17.41 percent over demand and currency shock, and Pension stocks fell at similar rate.
Also, Oil and Gas stocks plunged 6.2 percent while Industrial stock’s gained by 1.27 percent.
By the end of 2016, Industrial Goods stocks lost 26.37 percent to end the year as the worst performing sector and Oil and Gas fell 12.31 to emerge second-worst.
So far in 2020, investors have lost N1.82trn since March 9, just before Russia’s refusal to agree to OPEC+’s planned cut sent oil price in a downward spiralling.
States’ Unsustainable Addiction to FAAC Handout
It’s not only the Federal government that is facing a tough time, but also Nigerian state governments majority of whom have also, over the last 45 years been unable to build economically viable entities and are now in a more precarious financial state, with the falling oil prices which have collapsed to its lowest levels since 2016.
It is the norm that at the end of every month in Nigeria, commissioners of finance of the 36 states and their accountant-generals, evacuate their states and get domiciled in Abuja to await their monthly allocations from the national treasury. These allocations are the most viable source of income available to practically all the states.
State governments get their revenue from two main sources. The first being the revenues generated internally by each state governments (IGR) and those received from the federal government when receipt from crude oil sales are shared (FAAC).
These 36 states of the federation and the capital city could see their revenues come under intense pressure as the price of oil which accounts for the biggest chunk of their revenues, collapse.
With lower allocations for February, some states will find balancing their budgets difficult. With no alternative means of income, will states require another bailout soon?
Average FAAC allocation to state governors at 86%
Data compiled by BusinessDay shows that state governments on the average, rely on allocations from the federation account (FAAC) for virtually 86 per cent of their revenue, a pointer to how vulnerable their finances would be in the wake of a collapse in oil prices.
A decline in the revenue gotten from oil would invariably mean that state government would have less to spend.
Bayelsa, Kebbi, Yobe most affected
States like Bayelsa, Kebbi, Yobe, would have their finances hit hardest as they rely on FAAC for 98 per cent, and 97 per cent of their revenues respectively, while Katsina, Taraba and Bauchi follow next having exposed 96 per cent of their finances to the volatility that comes from oil.
At the other end is Lagos and Ogun, the outliers, as the state’s finances are exposed to only 49 and 55 per cent to FAAC.
“The FG can still find a way around the situation due to its sovereignty, as they can easily borrow from local markets due to low rates compared to the states government,” said Moses Hammed, a research analyst at financial services firm, Investment One.
“For most of the states it would be a bad time for them as even tourist sector which should be a boost to the Internally Generated Revenue is affected due to the Coronavirus Pandemic,” Hammed said.
Nigeria National Petroleum Corporation (NNPC) remitted a total of $7.29 billion to FAAC in 2016 despite oil settling at $28.9 in January 2016.
However, things have gotten worse, as the oil price is trading at $27.73, a development that points how weak the finances of the government would be, a situation that has made the government call for a review of the budget.
“Whatever happens to the federal government is what happens to the state but just at a varying degree. While the state’s revenue are limited to largely Payee and other smaller levy, the FG has the benefit of generating revenue from not just oil but also from Company’s Income Tax (CIT), education taxes, custom duties and other income,” said Oluwapelumi Joseph, head of investor relations at africapractice, a strategic advisory firm, operating at the nexus of industry and government.
According to Joseph, the biggest string for most of the states is actually their people’s cost, and with the increase in minimum wage to N30, 000, it becomes a challenge as they would not be unable to fund it. “I see a backlog of salary payment which would lead to a contraction in economic demand and that would depend on whether the FG would be able to bail them out as we saw in the past,” Joseph said.
Minimum wage payment under threat
A plunge in FAAC would hamper states ability to fund their budget and pay salaries, worsen states debt already at uncomfortable thresholds and increase the poverty level in the country.
It would also mean an inability to meet up with the 67 per cent increase in the new minimum wage to N30,000 which they agreed with the organized labour group.
As at September last year, 14 states owed more than N100bn each according to Debt Management Office data which showed sub-national debt at N4trn (compared to their estimated IGR+FAAC of N5.73trn in 2019).
Using annualized revenue for states, our data shows only Sokoto, Anambra, Jigawa, Delta, Ebonyi, Gombe, Bayelsa and Yobe states have their total debt- revenue ratios less than 100 per cent. A debt-revenue ratio of less than 100 per cent means that a state can conveniently offset its debts from its current income stream.
For the FG, it might mean another round of state bail-out to prevent the collapse of their respective economies.
Last year the FG began deductions from states FACC allocation to recover its N614bn national budget support loan facility it gave to 36 states of the federation as bail-out in 2018 to enable them to meet their obligations after months of owing workers’ salaries and pension.
