Nigeria’s COVID-19, oil price crash and fiscal crisis calls for a more fundamental response

A combination of the COVID-19 pandemic and the crash in oil prices has created a perfect storm for Nigeria’s economy – which was already fragile even before COVID-19. I believe the government and people of Nigeria should seize the moment to commence a far-reaching restructuring and repositioning of Nigeria’s economy.

I make this suggestion based on my strong view that our 100 million countrymen and women who live in extreme poverty, giving us the title of “poverty capital of the world” are not poor because we lack intelligent economists. Nigerians are impoverished by their country’s politics, politicians, and by its unworkable constitutional structure which creates perverse incentives that ensure the country is locked into the resource curse of oil.

The Federal Government of Nigeria borrowing $3.4 billion from the International Monetary Fund under the Fund’s Rapid Financing Instrument program a and seeking another $3.5 billion from the World Bank and the African Development Bank without structural economic and constitutional reforms, in an age of declining oil revenues, is to postpone the evil day. Our country’s moment of reckoning has arrived.

The fundamental problem is: our extreme reliance on oil for revenues, no fiscal savings, and unwillingness to cut the bloated costs of governance and restructure Nigeria constitutionally to make its economy more productive, cannot be solved by borrowing for balance of payments.

We need more than $7 billion to solve the balance of payments challenge, but that is not the point. If, as is likely, oil prices remain low for some time, this is just band aid.

With these loans, our reserves position may improve temporarily. Central Bank of Nigeria will restart intervention to create artificial strength for the naira, and those who don’t understand the fundamentals of economic transformation will think we have overcome our problems.

We also need to be mindful of a further implication of the many loans our federal government seeks to take: borrowing so much without a real source of revenue to repay will likely result in a sovereign debt crisis. While we are told that our ratio of debt to our GDP is a moderate 21 percent, the more relevant ratio is that of revenue to debt servicing which in the region of 60 percent or more. This means simply, that nearly two-thirds of our country’s revenues go to debt servicing. Nigeria is entering a dangerously vicious cycle.

We need to re-incentivise the economy to be productive. The surest way to do so after the COVID crisis subsides is to wean ourselves of oil dependence by commencing a constitutional restructuring that devolves far more powers to regions (not states, many of which are not viable on their own) so they can make use of the economies of scale to create viable regional economies.

In the meantime, if and when the oil price returns to $40 or above the Nigerian government must enter into hedging contracts to protect our oil price at a “floor” price regardless of the fluctuations of the market. In a hedging contract we would lose the upside on a price surge but secure a floor of revenue below which we cannot fall. Since it is unlikely that oil will return to the $133 price level that would be required to balance our budget and cure the budget deficit, the potential loss of oil profits doesn’t matter anyway.

Mexico, which has deployed hedging as a risk management tool to protect its fiscal revenues from oil price fluctuations, has made a $6 billion windfall in the current oil price crash. That’s almost as much as the $7 billion the Nigerian government is borrowing from international financial institutions.

In any case, the COVID-19 crisis will see oil prices depressed for several months because the global economic recession it will entail will see demand for oil remain depressed because of decreased productivity in the national economies of industrialized countries. So, the hedging proposal is simply a holding pattern until we diversify our economy by restructuring its political foundations.

In the meantime as well, the federal government should deploy at least $500 million of the RFI from the IMF to the establishment of a venture capital fund (NOT credit funds such as the CBN has been established) to provide equity capital to unemployed youth (with a skills training component), urban slum and rural unemployed citizens to start new, small and micro business ventures. The fund will be a co-owner of the businesses in order to ensure return on investment and corporate governance. This venture capital Fund should be run by the private sector based on a PPP arrangement and transparent guidelines that guarantee equal access to qualified Nigerians in all parts of the country. It is clear, from experience with the COVID-19 palliatives debacle, that the Nigerian authorities lack the infrastructure and capacity to run an efficient and effective country-wide program of such magnitude and potential impact. This is necessary to stimulate the economy and address the increased unemployment brought about by the COVID crisis.

In conclusion, Nigeria should prepare for and take the following steps immediately after the COVID crisis:

1. Deploy $500 million from the $3.4 billion IMF loan to boost employment and sustainable wealth creation for the extremely poor and the unemployed through a venture capital fund.
2. Commence hedging contracts on the price of oil as soon as the oil price recovers to a level that makes this a viable option.
3. Drastically reduce the cost of governance.
4. Ensure that the 2021 budget allocates not less than 15 percent of the budget to health and education respectively. This allocation should be for capital investments and reforms, not for recurrent expenditure.
5. Restore fiscal savings through an oil price rule that determines a percentage of oil revenues that must go into a savings fund.
6. Convoke a constitutional conference to prepare a framework for a new Nigerian constitution that restores Nigeria to genuine federalism on the basis of six or more geopolitical and geo-economic zones.

Kingsley Moghalu

Moghalu is the former Deputy Governor Central Bank of Nigeria, Convener, To Build a Nation