With recession staring the country in the face in the wake of the
Coronavirus pandemic, falling oil prices, and crashing value of the
naira, economists insist that only deft steering of the economy to
outrun the economic headwinds that are now buffeting the country from
the outside could prevent her from landing awkwardly sooner than later
While they also stressed the need for key structural changes and
robust interventions to ensure the economy gradually returns to a stable
state, they were emphatic that the only successful path forward would
mainly require fiscal and structural responses, with monetary policy
playing a supporting role.
Recently, the Minister for Finance, Budget and National Planning,
Zainab Ahmed, warned that the country might yet again be plunged into
another round of recession if the Coronavirus disease persists beyond
the next six months.
Ahmed while giving an update on various measures taken by the Federal
Government to mitigate the effects of coronavirus on the nation’s
economy on a television programme that she appeared said: “We are
hopeful that this pandemic will be limited in time,” adding, “If it is
an average of three months, we should be able to close the year with
positive growth. But if it goes longer than that – six months, one year –
we will go into recession.”
She pointed out that the federal and the states’ governments would
struggle in terms of revenue, as long as the crude oil price is as low
as $30 or below $30 per barrel.
However, the trio of former Deputy Governor of the Central Bank of
Nigeria, Dr. Obadiah Mailafia, Partner – West Africa Financial Services,
Leader and Chief Economist, PricewaterhouseCoopers (PwC) Nigeria, Dr.
Andrew S. Nevin and Development Economist, Dr. Chiwuike Uba, maintain
that with sheer economic wizardry, something can still be salvaged
before matters get out of hands.
Mailafia, who blamed plunging oil price and the crashing value of
naira on the lockdown in Asia and Europe said: “There is yet another
geo-political spoiler – Saudi Arabia. The Saudis have boasted that they
are prepared to bring down oil prices to $10 per barrel. That has less
to do with the pandemic than with their desire to settle geopolitical
scores with Iran and the Russians, whom they believe are allegedly
encroaching on their traditional markets. If this continues, we may well
be heading to a nightmare scenario. As you know, the naira has taken
some hard knocks. The other week, it went to as low as N400 to the
dollar. It is currently hovering at more than N364 to the dollar. The
CBN recently announced that it is now to operate a unified rate for the
exchange rate. This is a welcome development. As far as I am concerned,
the operation of multiple exchange rates was only a willful form of
profligacy that opens the door to rent-seeking and corrupt behaviour.
So, better late than never.”
He continued: “I am just so sad that the level of iniquity involved
in maintaining multiple rates has done untold damage already. Worsening
oil prices and a falling exchange rate will create a further fiscal
crisis. Imports will become more expensive and inflation pressures will
rise, even as the productive sector continues to wobble. Unemployment
and poverty will worsen. Our external reserves currently stand at
$36.4b. Governor Emefiele himself had announced a threshold of $30b at
the level at which some form of devaluation might be unavoidable. At the
rate we are going, we are careening dangerously close to the edges.”
The development economist, who expressed sadness at the untold damage
that maintaining multiple rates has done to the country said a lot
could still be salvaged if measures to cushion the impact of the
pandemic recently announced by Emefiele are implemented.
“All these measures, if fully implemented, will help to cushion the
effects associated with the pandemic while restoring business
confidence. Going forward, we need interventions that restore confidence
and reassure the public. I would also recommend loosening up the
Monetary Policy Rate (MPR) so that a lower cost of borrowing will
reflect positively on the productive sector. I welcome the fact that the
government has approved a reduction in the pump price for petrol from
N145 to N125. This will surely help in easing some of the pressures. The
president needs to pass an executive order easing debt repayment for at
least two months so that businesses owing money to financial
institutions will have a bit of breathing space.”
While proffering a way out of the impasse, Mailafia stated:
“Economics is the science of alternatives. As revenues dwindle, we must
of necessity re-organise our priorities. My biggest worry is that
consumption has been the dominant paradigm in our public expenditure
system instead of capital projects and long-term investments. We must
therefore re-prioritise in the context of increasing scarcity. Secondly,
at a time of anxiety and mass panic, the government must preach
calmness. Behavioural economics theory shows that panic, fear, and
emotions can be more destructive than generally realised. So, the
authorities need to come out and reassure the public. Sadly, the
president we have has seemingly self-isolated himself as it were. He is
not coming out to address the public and to allay their fears. I also
expect an announcement of a big intervention fund to make quick
injections into the economy to cushion some of the deleterious effects
of the fallouts from the global pandemic.”
NEVIN, who described the Coronavirus pandemic and Saudi Arabia’s
decision to crash oil prices as two black swan events that have arrived
simultaneously to put tremendous pressure on the Nigerian economy at
every level, and in every industry, said even though the CBN has
publicly stated that it will continue to work to defend the naira, “this
will be increasingly difficult as long as low oil prices (currently $30
for Brent Crude) persist. In addition to the forex issues, the Federal
Government will have a massive revenue shortfall as a result of the oil
shock and will have challenges implementing the 2020 budget, including
the much-needed capital expenditures.
In agreeing with Emefiele and Ahmed that the country risks another
recession, the PwC chief said: “The CBN Governor was quite correct that
Nigeria requires some key structural changes to prevent future economic
crises, reduce unemployment and alleviate poverty, including
diversification, improved business environment and increased investments
from Nigerians, the Diaspora, and Foreign Direct Investors.
Unfortunately, while there has been progress by both the Federal
Government and some states on the key issues, the pace of change has not
been fast enough to outrun the economic headwinds that are now
buffeting Nigeria from the outside… Addressing the economic challenges
will require great economic leadership from everyone in the Federal
Government, the CBN, NNPC, states, and all Nigerians pulling together to
help the country weather this storm.
On pragmatic steps that the government can take to arrest the
situation, he said: “The Federal Government might consider three types
of actions – selective fiscal stimulus in areas that will have an
immediate uplift for economy (an example might be paying arrears of FG
contractors); simultaneously, given the severe fiscal constraints, the
Federal Government will have to cut back on some other areas,
particularly when it sends a positive signal about being serious about
improving the business environment (an example might be addressing the
high cost of governance).
The Federal Government can also take some
difficult structural decisions (e.g. reducing the number of MDAs) that
would send a very positive signal to investors that it is serious about
taking advantage of the economic crisis to take some hard decisions that
will help the Nigerian economy in the medium term.
While commenting on what monetary policies that could be tinkered
with presently, Nevin said that the “CBN has been a very effective
manager of monetary policy for a long time. However, there is a limited
amount more that can be done with monetary policy. Globally the economy
is facing both a massive supply shock and demand shock, something
unprecedented. Also, as an oil exporter, Nigeria faces additional
challenges from the oil price shock. The only successful path forward
will mainly require fiscal and structural responses, with monetary
policy playing a supporting role.
UBA, who is of the view that the country commenced the journey into
recession in early 2019, long before the advent of the COVID-19 and its
collateral damages resulting in the plunging of oil price and crashing
of the naira, explained that the socio-economic indicators present a
bleak future for Nigeria’s economy.
According to him, “with an already existing poor/low growth in the
non-oil sector, the drop in the oil price to below $30 per barrel would
lead to higher fiscal deficit and with dire economic consequences on
economic activities and growth. Don’t forget that our economy is
naturally structured for consumption; the reason we use the word,
sharing when the states converge on Abuja to share the monthly FAAC.
On whether the Federal Government has done enough to stem the tide
since signs of an imminent recession began to show, he said, “I would
say that the Federal Government has not done enough to avert this
outside the usual government orders and policies, which come without an
adequate and implementable action plan. I would commend the CBN for the
interventions it has made to boost the economy so far. To ensure the
economy does not go into recession, the CBN made loans available through
the loan-to-deposit (LDR) policy to revive some comatose sectors. In
addition to other interventions, the CBN and other money deposit banks
set aside five percent of their annual profits to fund projects at a
single-digit interest rate in the country. Painfully, the government,
despite the promise to diversify the economy to boost non-oil growth has
not put in place any concrete measures to address challenges facing the
economy. The infrastructure deficit, perennial clashes between farmers
and herders, and the unending Boko Haram insurgency, which were
identified as constraints to domestic production and contribution to
food inflation have received little or no real attention from the
government.
Currently, Nigeria has an uncompetitive and unproductive economy that
is not innovative but saddled with poor infrastructure, poor human
capital and education, and poor welfare. Therefore, there is an urgent
need to abandon the current protectionist trade policies and tightly
managed currency regime to encourage investment. To improve the business
environment and address some of the challenges of urbanisation, it
important to have the longstanding projects completed, such as the rail
lines and major roads.
“Also, the current public debt is unsustainable and Nigeria is
already in a fiscal crisis; hence does not need to accumulate more
debts. What we need is an innovative and cost-effective measure to
increase revenue and a quick approach would be to have a graduated VAT;
say from five percent up to 20 percent depending on the goods and
services. Most of our elites avoid tax, with graduated VAT rates, they
would be brought into the tax net. Furthermore, it is important to
recognise that comparative advantage is dynamic. Local production of
staple foods is still below consumption. Therefore, it is important to
lift the ban on food importers from foreign exchange markets. The ban
contributed immensely to the increase in food prices with an attendant
implication on Nigeria’s inflation rate.
Uba, who also believes that it is important to lift the ban on forex
imposed on some goods, said whereas the ban encouraged local production
of staple foods, which of course is still below the national consumption
requirement, it also contributed to the increase in the prices of the
foods by over 50 percent. The poverty level in the country is already so
high; therefore, it is inappropriate to subject the citizens to further
hardship with the current policy. The CBN is already doing so much in
the provision of loans to businesses. Nevertheless, it is important to
have a policy that mandates money deposit banks to give out a certain
amount of money as loans to small businesses in a year, at an interest
below six percent. This ultimately would result in higher investment and
the purchase of consumer durables.
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