Trilema of saving lives, livelihoods & post-Covid19 economic recession
As the world is battling to survive the ravaging COVID-19 pandemic which has claimed thousands of lives, there has been growing concerns among Policymakers on the adverse effect of the pandemic on the global economy particularly the emerging markets and developing economies. As we are having a sober reflection on the structural decadence in our health sector and virtually all sectors of the economy going by the recent revelation of the ‘sorry state’ of our health system. It is however imperative to take a critical look at what the post COVID-19 economic crisis could be and hit the ground running to right the wrongs.
Before the sudden outbreak of COVID-19 pandemic in Africa and Nigeria at large, the Nigerian economy had already been shattered coming from recession that struck the country for 5 successive quarters due to the 2015 global fall in oil price. It will be noted that since we overcame the recession, Nigeria has been finding it difficult to scale up monumental growth that enhances economic development.
Major economic indices were so weak to rapidly drive the growth rate while the debt profile was overbloated to the tune of $83.9bn and 60% of the revenue was set aside from the budget to service the debt which implies that for every N100 earned N60 is used to service the debt. The population growth rate of 2.7% surpasses Nigerian GDP hovering around 2.5% and the GDP growth rate was insignificant to put the economy on the track of progress. The unemployment rate is expected to increase from the current 23% to 35% cumulatively with underemployment rate of 16.6% and double digit inflation of 12.2%. These gloomy statistics already showed a clear signal of a slumbering economy before the outbreak of COVID-19 pandemic.
As gloomy as most of these economic indices were before COVID-19, one could think the Policymakers would embark on aggressive fiscal and monetary policies to push forward the slumbering growth rate as well as ensuring drastic reduction in unemployment and inflation rates. However, it was business as usual and hence the shifting of the economic burdens on the hapless and helpless Nigerians by embarking on contractionary policies that further suppressed the purchasing power of individual households. The VAT was increased from 5% to 7.5% and the inflation went up to double digit rate while large chunk of the budget deficit was allotted to the political officeholders with accumulated debt of N25.7 trillion and loan servicing gulping %60 of the revenue.
POST COVID-19 ECONOMY AND THE WAYFORWARD
There is no gainsaying in the fact that Nigerians should brace up for a serious financial pandemic since the Great Depression of 1929. The ravaging COVID-19 pandemic is hitting hard both the supply and demand side of the global economy and Nigeria as a monolithic economy where almost 80% of our earnings depend on commodities. The crude oil contributes a significant impact with almost 70% of the revenue coming from the sector. Looking at the supply side, we face more glut as most of our trading partners from emerging markets to developed economies battle to reconstruct their hardly hit economies due to the ravaging pandemic COVID-19 and the recently settled trade war between Saudi and Russia. Definitely, there will be quiet low demand in our crude oil as major countries that use crude oil in aviation, tourism, transportation and other areas grapple with low patronage due to the psychological and economic effect of COVID-19 on the customers as well as accumulated debt incurred by these sectors before the pandemic time.
The low patronage of the Nigerian trading partners leading to more stranded vessels of crude oil on the sea with few or no buyer as we have currently no fewer than 50 vessels of crude oil idled on the sea with nowhere to go. Going by the recent settlement of price war between OPEC+ with the agreement of 10m barrels supply cut and the belief that there will be oil price surge to about $35 to $40 per barrels after the cut, this may be farther from the truth as this agreement may have little or no impact on the long run after the pandemic COVID-19. The thirst to capture global production market may be a major hindrance to the agreement which may be counter-productive to the projected outlook of the price increase and this further leads to decreasing decline from the current price. Meanwhile, even if the global oil price rebound and stable at $30 price benchmark with the agreed production cut from 2.1million barrels to 1.4million barrels and discount of about $5, Nigeria will not be at breakeven curve meaning that we receive less than the production cost between $35 to $40 per barrel. The manifestation of this on the FAAC is that Nigeria will start witnessing great shortfalls in the revenue and if that persist the inability of various States to pay the salaries of their workers is imminent.
On the overall demand side, the continuous shortfalls in our foreign exchange earnings due to the fall in global crude oil price may further compel CBN to deplete the Forex Reserves in its bid to defend the naira against dollar while the forces of demand and supply in the market continue to dribble the monetary authority to further devalue from the current official rate of N380. The increasing trend of this will shore up the inflationary trend from the current 12% due to the imported inflation that makes both final consumption and raw materials used by various industries less affordable. The illiquidity caused by the shortfalls in FAAC coupled with low purchasing power leads to reduction in both local and national demand for goods and services and this may be unpalatable for industries whose capacity utilization will be shrunk and the resultant effect of massive laying-off of workers will further worsen the unemployment rate.
WAYFORWARD AND POLICY FRAMEWORK
Recently, the IMF in its world economic outlook concluded that the global economy is in the worst economic recession since the Great Depression and predicted global economy to be contracted by 3% and Nigeria to be 3.4% negative growth. Definitely, we will pay a big price but as miserable as these projected economic indices could be we can navigate through the looming economic crisis and come out strongly without the economy being devastadedly hit with the following recommendations:
1. There should be aggressive fiscal spendings on the real sectors and any sector hit by the COVID-19 pandemic as well as SMES to keep them afloat, thereby boosting their production capacity as well as maintaining status quo in staff register.
2. This is an appropriate time to scale down almost 30-40% of overhead cost being allocated to the lawmakers as well as large chunk of budgetary allocation allocated to the political officeholders. There should be at least 30-40% reduction in allocation given to the politicians and divert it to the productive sector of the economy. We cannot afford to budget almost 70% of our budgetary allocation on recurrent expenditure while we expend the remaining 30% on capital project. This will not drive a meaningful growth.
3. The monetary policies should be geared towards maintaining stability in exchange rate to ensure attraction of portfolio investment for the usage of productive private sector to boost investment capacity which leads to the creation of more jobs. Ease of doing business should be further strengthening to enhance both local private investors and foreign direct investors.
4. There should be tax incentives to some of the affected critical sector as well as suspending the 7.5% VAT increase to strengthen purchasing power while all efforts must be made by the monetary policy makers to bring inflation down to single digit and pursue a relatively low and affordable interest rate.
5. To free up the budget deficit and overbloated debt burden, we must approach our bilateral lenders for debt relief.
6. It is high time we stopped chasing shadow and look critically on where we have great comparative advantage and invest heavily in it. The time to diversify our economy from commodity products and prioritize monumental investment on mechanized agriculture is now.
Above all, the looming economic crisis could be averted if government prioritizes fiscal prudency and embark on expansionary policies to reflate the economy while each state takes a look at its peculiarities to formulate a policy framework geared towards mitigating the adverse effect of the looming economic crisis.
Ismael Taiwo, MNIM
Economist and Public Affairs Analyst.