The World Bank, on Thursday, published the Nigeria Development Update (NDU), a keenly anticipated report series that assesses recent economic and social developments and prospects in Nigeria. The report provided an in-depth examination of selected economic and policy issues and an analysis of Nigeria’s medium-term development challenges. Its content is useful for policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Nigeria’s evolving economy.
Here are some of the key points from the report, most of which BusinessDay had earlier forecast.
Economic recession to be twice as deep as 2016
In the baseline scenario, the World Bank projects the Nigerian economy would contract by 3.2 percent this year. This assumes an annual average oil price of $30 a barrel. It also assumes that the spread of COVID-19 eases by the end of the second quarter and is contained in Nigeria by the third quarter of 2020. This revised growth projection is over 5 percentage points below the pre-COVID-19 forecast of 2.1 percent. This will make the predicted 2020 recession at least twice as deep as that of 2015–16 and the deepest since the 1980s. In this scenario, real GDP growth would recover gradually and by 2022 would converge with the population growth rate of 2.6 percent.
The country’s growth outlook is highly uncertain, however, the World Bank said, because it depends on how the world economy and oil prices recover.
Weakening global demand for oil, compounded by the unpredictable policy decisions of the Organisation of the Petroleum Exporting Countries and other major oil producers, are serious threats to Nigeria’s economic outlook. A more severe domestic outbreak and/or a more protracted decline in oil prices relative to the World Bank’s baseline scenario would further deepen Nigeria’s recession. In a high-risk scenario—one that assumes a severe outbreak of COVID-19 and a slower recovery in oil prices, Nigeria could experience negative growth of -7.4 percent in 2020, and the recession would extend into 2021. According to the Washington-based bank, failure to contain COVID-19 domestically would not only deepen the recession, but also impose a major burden on the already strained healthcare system. is, in turn, could cause a spike in morbidity and mortality rates, especially for low-income households and vulnerable communities.
Bold reforms seen as only way out of the woods
The current unprecedented crisis facing Nigeria will require an equally unprecedented response form the entire Nigerian public sector, together with the private sector, to contain the outbreak and protect lives and livelihoods of low-income and vulnerable Nigerians, according to the World Bank.
The trajectory of the global pandemic and its long-term economic impact are subject to an extraordinary degree of uncertainty. Even so, the government is in a strong position to determine the speed, quality, and sustainability of Nigeria’s economic recovery. Much will depend on how the government’s clear initial response to this unexpected turbulence evolves going forward. In the near term, the next 3 to 6 months, coordinated fiscal and monetary policy actions will be necessary to ease the human and economic costs of COVID-19. In the medium- term, the next 6 to 12 months, a series of bold reforms represent the best opportunity for ensuring a robust and sustainable recovery. While dealing with the disruption of the pandemic, a post-COVID-19 reform package would be needed to overcome some of Nigeria’s more persistent macroeconomic challenges, including its low level of economic productivity.
Banks’ NPLs to jump as oil rout, pandemic bite
The economic downturn and the collapse of global oil prices will likely reverse the declining trend in banking sector NPLs, starting with loans to the oil sector, which represent almost 30 percent of private-sector credit, and progressing through the remaining sectors as demand weakens.
On-balance-sheet dollar-denominated exposures, which represented 38 percent of banks’ loan portfolio and 55 percent of their liabilities at end-2019, will also be a source of strain.
Over the past five years, oil has represented more than 80 percent of exports, 30 percent of banking-sector credit, and 50 percent of general government revenues. A large share of the country’s non-oil industrial and service sectors also relies on foreign-exchange in inflows generated by the oil industry.
Nigerian banks already applied to the CBN to restructure 33 percent of their loan books as they struggle with the downturn in oil prices and the economic implication of the pandemic.
Credit to private sector declines by 65.7%
Nigeria’s external position exposed by falling FPI flows
A persistent current-account deficit and falling FPI inflows are exacerbating the deterioration of Nigeria’s external position. In 2019, the current-account deficit was mainly financed by net FPI inflows of US$9 billion, which were attracted by a stable exchange rate and high returns on fixed-income securities (especially OMO bills) early in the year.
However, due to increasing risk aversion in global capital markets, total FPI flows into Nigeria declined by 54 percent during Q1 2020. Meanwhile, in a context of pervasive policy and regulatory uncertainty, weakening demand, and rising macroeconomic headwinds, net FDI inflows fell in 2019 by 8 percent from their already low level of less than US$2 billion, or 0.5 percent of GDP. While FPI and FDI both declined, FDI fell faster, causing the share of FPI in total capital inflows to rise to over 50 percent in 2019. The shift from FDI to FPI represents an increase in Nigeria’s reliance on “hot money” to finance the BoP, which exacerbates the vulnerability of the current account. Finally, net external reserves fell from US$42.1 billion in 2018 to US$37.8 billion by end-2019, equivalent to 4.6 months of imports, and intensifying pressures on the naira exchange rate. These variables are all markedly worse than on the eve of the 2015–16 shock.
Government revenue as percentage of GDP to fall to 5%
The protracted slump in global oil prices has reduced Nigeria’s general government revenue from an already low 8 percent of GDP in 2019 to a projected 5 percent in 2020. This sudden drop in revenue comes just when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy, creating a financing gap that threatens to destabilize the government’s fiscal position. Lower government revenues casts doubt over the feasibility of implementing the N2.3 trillion stimulus lined up by the government to soften the blow of the pandemic on the economy.
Crisis provides opportunity for Nigeria to leverage diaspora
The World Bank urged the government to find ways of better leveraging the strength of its diaspora.
Diaspora remittances in Nigeria are larger than both foreign direct investment (FDI) and official development assistance.
Thus, leveraging the diaspora more effectively in support of the country’s sustainable growth and development is now more important than ever. Remittances help many Nigerians meet their health needs, not only in a pandemic like COVID-19 but throughout their lives, the Bank noted.
Recipient households are also shown to be more likely to increase their investments in education and entrepreneurship, thus helping put Nigeria on a firm footing for the future. Nigerian emigrants dispersed across Africa, Europe, and North America are also well positioned to catalyze development through trade, investments, technology transfer, and knowledge exchange. At present, intense migratory pressures have overwhelmed the capacity of established systems to deliver safe, regular, and organized migration. In response to COVID-19, the Nigerian authorities now have a timely opportunity to strengthen these systems by actively collaborating with counterparts in destination countries. In the short to medium term, policy reforms could also encourage skilled emigrants to return and also attract foreign workers with valuable knowledge and advanced skills. The total effect would be to maximize the developmental impact of Nigeria’s widespread diaspora.
Nigeria faces significant health challenges that will undermine human capital and economy
Nigeria faces significant health challenges that undermine the country’s human capital and economic development. Nigeria ranks 152nd out of 157 countries in the human capital index despite being a lower- middle income country. This low ranking reflects the country’s prolonged underinvestment in human capital— health, education, and nutrition of its citizens. Health outcomes in the country are among the poorest in the world, and there are large regional and socioeconomic inequalities. Compared to regional and low- and middle-income averages, Nigeria underperforms on life expectancy (53 years in 2016), maternal mortality (576 per 100,000 live births in 2013), and infant mortality (infant mortality rate of 65 per 1,000 live births in 2017). The poor health outcomes and insufficient coverage of essential services demonstrate the need for increased resource allocation and enhanced financial protection for healthcare in Nigeria.
The Nigerian government spends less on health than nearly every country in the world.
In 2018, only 4.5 percent of the Federal Government’s budget was allocated to health, compared to 7.1 percent for education and 7.8 percent for power, works and housing. Total government expenditure for health in 2017 was 0.5 percent of GDP and as a share of total government expenditure, government health spending is also low at 4.6 percent. Health spending in Nigeria is dominated by out-of-pocket expenditures—77 percent of total health expenditure, one of the highest in the world. Consequently, about a quarter of all households in Nigeria spend 10 percent or more of their total household expenditure on health—the World Bak finds the situation worrisome as the high out-of-pocket expenditure pushes over 1 million people into poverty and causes many more to forgo care.
Agriculture tipped as only sector to grow in 2020
Agriculture is the only sector that is projected to grow in 2020, the World Bank noted in the report. This is because the sector is somewhat shielded from the effects of lower oil prices. Nonetheless, it is highly probable that the disruption of supply chains due to lockdown measures will affect the planting season, lowering agricultural output later in the year. The difficulties arising from COVID-19 inevitably extend to the labor market, with significant impacts on employment anticipated for some time to come. As of May 2020, 4 in 10 workers in Nigeria were already reporting a loss of labor income, and disruptions to markets and supply chains are impeding agricultural activity.
Besides the pandemic, agriculture in Nigeria is still vulnerable to the effects of agroclimatic change. Collectively, these challenges call for the government, first, to lessen the pandemic’s effects on food security and, second, to accelerate the creation of more and better jobs by transforming agricultural and agribusiness value chains. In the short term, it is important to ensure that agricultural systems continue to produce enough food for the population. Equally critical is that markets function effectively so that this food is widely available throughout Nigeria. Ideally, domestic production would supply national food reserves for emergency and relief needs and school feeding programs. Taking steps to ease immediate problems will help protect farmers’ livelihoods and provide food security in the coming months. They also serve as building blocks for the longer-term recovery, which targeted measures can help accelerate. Because the sector is inherently resilient, it has considerable potential for creating more and better jobs through targeted investments that transform agricultural and agribusiness value chains.
Pandemic to throw additional 5 million into poverty pit
The human cost of COVID-19 will be high, according to the World Bank. Beyond the loss of life, as the economy contracts and per capita incomes fall, the pandemic is projected to leave 5 million more Nigerians living in poverty in 2020 relative to the pre-COVID forecast.
Household circumstances already leave Nigerians highly exposed to the pandemic; a reality that is hard to mitigate without certain reforms within Nigeria’s economy. In 2019, about 83 million people—equivalent to 4 in 10 Nigerians—were already living below the national poverty line, with millions only barely above it, making them vulnerable to falling into poverty when shocks occur. Over 75 percent of poor Nigerians live in the north of the country, most of whom depend on the informal economy or on smallholder farming. Household incomes are higher in central and southern Nigeria where job creation has traditionally been concentrated. Before COVID-19, the poverty rate was expected to increase by about 0.1 percentage points from 40.1 percent in 2019 to 40.2 percent in 2020, implying that the number of poor Nigerians would rise by 2.3 million, largely due to population growth. However, due to the recession, the poverty rate is now projected to increase by 2.4 percentage points to 42.5 percent in 2020, implying that the number of poor Nigerians would rise by 7.2 million. Thus, the COVID-19 shock alone is projected to push an additional 4.9 million Nigerians into poverty in 2020.
The World Bank concludes by identifying five possible policy areas which the government can target to ease the negative impact of the pandemic on the economy.
They include:
– Ramping up efforts to contain the pandemic and preparing to deal with a more severe outbreak.
– Enhancing macroeconomic management to boost investor confidence.
– Safeguarding and mobilising revenues
– Reprioritising public spending to protect critical development expenditures
– Supporting economic activity and providing relief for poor and vulnerable communities.
