Minimising impact of COVID-19 crisis on Nigeria’s economy

With global case currently put at 1.39 million and 101,000 deaths, Coronavirus is arguable the biggest challenge facing humanity today. In December 2019, a cluster of pneumonia cases from an unknown virus surfaced in Wuhan, China. Based on initial laboratory findings, the disease named Coronavirus disease 2019 (abbreviated as COVID-19), was described as an infectious disease that is caused by severe acute respiratory syndrome coronavirus.

While there are ongoing efforts to curtail the spread of infection which is almost entirely driven by human-to-human transmission, it has accounted for over 400,000 confirmed cases with over 100,000 deaths.

Indeed, the COVID-19 outbreak has since spread to about 196 countries and territories in every continent and one international conveyance across the globe.

Beyond the tragic health hazards and human consequences of the COVID-19 pandemic, the economic uncertainties, and disruptions that have resulted come at a significant cost to the global economy.

The United Nations Trade and Development Agency (UNCTAD) put thecost of the outbreak at about $2 trillion in 2020. Most central banks, finance ministries and independent economic experts around the world have taken solace in the prediction that the impacts might be sharp but short-lived, and economic activities would return to normal thereafter.

But the tumultuous events that COVID-19 had spread across the globe cut across every facet of human existence and the consequences may linger. As discretionary spending by consumers continues to decline, companies, hotels, and hospitality are facing declining demand and patronage as a result of the pandemic.

For example, in Hungary alone, about 40 to 50 per cent of hotel reservations have been canceled. Also, the pandemic is placing up to eight million jobs in the leisure and hospitality sector at risk, with travel crashes and cancellations expected to continue.

The virus is also taking its toll on health facilities and infrastructures across the globe. Italy is currently the largest affected country with a number of deaths surpassing China, since the outbreak of coronavirus.

Worse still, the slowdown in the global economy and lockdown in some countries, such as Italy, Spain and most Eurozone economies and beyond, as a result, COVID-19 has also taken its toll on the global demand for oil. The decline in oil demand is estimated to surpass the loss of nearly one million barrels per day during the 2007-08 recession.

This is also coming at a time when two key players in the global oil industry – Russia and the OPEC cartel – are at loggerheads on the decision to cut output. The unequivocal oil price war started between these two global oil market giants may have more dire consequences on the oil price that has started to dive.

For instance in Nigeria, the odds of sliding into a recession are gradually expected as the global coronavirus outbreak puts severe pressure on the nation’s economy.

Even before the Coronavirus crisis, the country is still grappling with recovery from the 2016 economic recession which was a fall out of global oil price crash and insufficient foreign exchange earnings to meet imports.

President Muhammadu Buhari had in December 2019, signed a N10.50 trillion 2020 national budget. In the budget, Nigeria pegged oil production at 2.18 million barrels per day, with a price benchmark of $57 per barrel.

Unfortunately, the emergence of COVID-19 and its increasing incidence has called for drastic review and changes in the earlier revenue expectations and fiscal projections.

Lastweek Thursday, the federal government announced a reduction in 2020 budget by over N320 billion to N10.27 trillion from initial N10.59 trillion.The new budget proposal, already sent to the national assembly for consideration became imperative in view of the devastating effect of the ongoing COVID- 19 pandemic and the falling oil price on the global economy.

In addition, the revenue projection for the 2020 budget was also reduced by N3.3 trillion (about 39 per cent) from the initially approved amount of N8.41 trillion to N5.08 trillion.

The revised revenue projection is contained in a proposal sent to the National Assembly by the executive. The new budget proposal reduces the oil benchmark from $57 per barrel to $30 per barrel while the oil production volume was reduced from 2.18 million barrels to 1.70 million barrels, the newspaper reports.

But financial experts at the weekend argued that aside revising the budget downward, government needs to restructure its finances and eliminate overlapping ministries in various departments.

In addition, government should also liberalise the downstream oil and gas sector completely it must minimize the impact of COVID -19 crisis on the nation’s economy.

Specifically, an economist, Johnson Chukwu said eliminating overlapping ministries would help to reduce overhead cost in one hand while deregulation of the downstream oil sector will attract private investment into refining business on the other hand.

According to him, the budget reduction was most expected because the significant drop in foreign exchange income and other government earnings have completely voided all the revenue projections even before the pandemic.

“The only saving grace is that government just adjusted the exchange rate to 360 thereby being in a position to convert the little foreign exchange earnings at higher exchange rate, and increase the naira payable by federal government. It would have been very difficult to even achieve anything in terms of revenue earnings this year.

“But all said and done, it was expected, we now need to take strategic measures to restructure the finances of government. Such measures will include; eliminating overlapping ministries in different department of the government to reduce overhead of the government, fully liberalizing the downstream oil and gas sector.

“What I mean by fully liberalising is that government should deregulate it fully to attract private sector investment into refining business and therefore cut down on the demands of forex that we currently incur today as a reimported refining petroleum product.

Chukwu, who is also the Chief Executive Officer of Cowry Asset Management Limited suggested that whatever funding government would realise from multilateral agencies should be deployed into public works to create employment and spur demands for increased production.

“We pray the health crisis does not linger, government need to restart the economy. This means there are some sectors that suffer damage more than others like the aviation industry. They may need some level of government financial support.

“ So we need to look at the sectors that were grossly affected and then intervened directly to restart their commercial activities such that employment and business will return back to normalcy at the earliest possible time.

The Head of Research, FSL Securities Limited, Victor Chiazor said the review of the country’s 2020 budget did not come as a surprise to giving the current realities on ground.

He pointed out that the downward review of the budget and reduction in revenue projection will have a direct impact on the country’s debt profile as 43.14 per cent of the funding required to run the budget wil be sourced from borrowing

“The review suggests that most sectors which had earlier complained of low capital injection will now receive lower funding on the back of the review while the fiscal deficit will rise to NGN4.43 trillion from NGN1.59 trillion which will increase our debt servicing to revenue ratio to a level that may become toxic to the economy.

“Going forward the government must begin to think of different ways to generate revenue outside of oil, as oil prices have become very volatile and unpredictable, hence the need for the country to find alternatives outside of oil.”

“This will ultimately increase our debt servicing to revenue ratio to a level that may become toxic to the economy,” he said.