In a sign of just how severely Nigeria’s economy has been affected by the coronavirus pandemic and the oil price crash, Africa’s biggest crude producer this week warned of an imminent recession, requested $7bn in emergency funding and ditched a costly oil subsidy scheme.
Although the country of 200m people had recorded a relatively modest 254 cases of coronavirus by Wednesday, with just six deaths, Zainab Ahmed, the finance minister, warned that Nigeria would fall into its second recession in five years if drastic action were not taken to cushion the economic blow.
Ms Ahmed estimated this week that the economy could shrink as much as 3.4 per cent this year without a massive stimulus plan that includes billions in central bank, federal government and international support.
The warning came as the IMF began considering Nigeria’s emergency request for $3.4bn in funding, and the World Bank, from which the country has sought up to $2.5bn, released $82m to strengthen the country’s healthcare infrastructure.
“We need to do things that are very radical, and very bold and very different and maybe even unusual so that we don’t slip into a recession,” Ms Ahmed told AriseTV. “Our economy is in crisis.”
The Central Bank of Nigeria’s N1tn ($2.6bn) stimulus package amounts to just 0.7 per cent of 2019 gross domestic product, and the $3.4bn requested from the IMF is only 0.8 per cent of GDP, noted Yvonne Mhango, an economist for sub-Saharan Africa at Renaissance Capital. By contrast, many western economies have announced stimulus packages of 10 per cent of GDP or more.
“As a percentage of GDP, the amounts are small . . . Nigeria, like most [of sub-Saharan Africa], doesn’t have the capacity to put forward a sizeable stimulus package,” said Ms Mhango, who has cut her GDP forecast for 2020 from 1 per cent growth to a 0.4 per cent contraction.
“It was already on the back foot pre-crisis with an extraordinarily low revenue-to-GDP ratio of 6 per cent,” she said. “So, yes, the loans will help. But only to fill the funding gaps . . . not enough to jump-start the economy.”
Global consultancy McKinsey this week estimated that a best-case scenario “contained outbreak” would produce a 2.5 per cent contraction. An “uncontained” one could see Nigeria’s economy shrinking 8.8 per cent.
It is unclear how much oil production cuts agreed this week to counter the effect of the biggest demand collapse in history will help Nigeria, which has been hit hard by falling prices.
Ms Ahmed has already reduced the government’s projection of 2.1m barrels a day of oil production to 1.7m, and is working to cut Nigeria’s record $35bn budget for 2020, passed in December and based on an oil price of $57 a barrel, by about 15 per cent. Oil is currently trading at about $30.
Nigeria relies on crude receipts for more than half of government revenues and virtually all its foreign exchange. Both Fitch and S&P have downgraded Nigeria’s credit rating in recent weeks on the oil slump. Fitch also said that all 10 Nigerian banks were at “severe risk” because of their exposure to the oil sector.
The previous time oil prices plummeted, in 2015, the country sank into a recession from which it has only recently, and barely, recovered. Economists said that downturn was both exacerbated and prolonged by policy errors, including central bank resistance to what was an inevitable naira devaluation.
President Muhammadu Buhari has been a staunch opponent of a weak currency, partly because of its perceived impact on inflation, which disproportionately affects the 87m Nigerians living in extreme poverty.
But, last month, the central bank buckled to pressure, and devalued the official naira rate to N360 to the dollar from N305. The more widely-used black market rate, which had hovered around N360 for about three years because of central bank support, has spiked to about N415. In its downgrade note this week, Fitch described the currency move as too little, too late.
The oil price drop has pushed the government finally to remove the petrol subsidy, which had fixed fuel at N145 a litre and absorbed billions of dollars in spending. Economists have long advocated an end to the costly subsidy regime, and on Wednesday, Mele Kyari, head of the state-owned Nigerian National Petroleum Corporation, acknowledged on local TV that the subsidy had mainly benefited multiple car-owning elites.
“The stoppage of subsidy . . . will ensure monies are freed up for government to fund critical infrastructural projects such as education, health, roads and many others, for the benefit of the ordinary man,” he said.
