Nigeria’s economy, CBN’s prognosis and COVID-19

In the last three meetings of the Monetary Policy Committee (MPC), the Godwin Emefiele-led policymakers of the Central Bank of Nigeria (CBN), had reiterated the uncertain global economic events that would shape the outcome of activities in Nigeria.

These included global growth projections by experts and multilateral institutions, the unfavourable outcomes of a trade war between the United States and China (both strategic to Nigeria), impending Brexit (now realised), with its unfolding dynamics, and a mix of crude oil price uncertainty, rising inflation associated with bilateral and domestic policies, including the mooted resource curse.

Of course, the apex bank’s monetary policy moves in recent years have been tagged “panicky” by some, especially since the turn of events in the twilight of 2014, till date, but developments have shown that foresightedness and discreetness are ingredients of public policy.

By the last MPC meeting in January, though not too obvious in the risk assessment of local policymakers, there were indications of an emerging variable that was to distort the global economic order, including Nigeria. Of course, that was the beginning of the “rise and rise” of the Coronavirus, tagged: COVID-19, which is now a pandemic.

The virus infection started from China, a strategic bilateral partner of Nigeria, but it is now taking the country and the monetary policy authority back to struggle for price stability and growth. It is more worrisome because it is a global issue, with mutual suspicion that is now grinding economic activities to a halt.

Although the present destabilising factor is distinct, the solution for Nigeria lies in “one, but too many” calls for diversification and development of export basket by the CBN.

Cautious approach and call for fiscal buffers, as well as monetary tightening and interventions across several growth-enhancing sectors of the economy, have been ongoing since 2015, as part of recovery efforts from the state of low capacity utilisation, import dependence and dwindling fortunes of crude oil, which is Nigeria’s major foreign exchange earner.

According to Emefiele, it is possible to envision a vibrant economy that is less dependent on crude oil, as he recalled a time in the sixties, when “our cities and rural communities were brimming with activities, as industries sprung up in Lagos, Kano, Kaduna, Onitsha and Aba, to mention a few,” and rural dwellers supported increased cultivation and exports of cash crops such as cocoa, palm oil, and cotton.

Emefiele recalled: “These activities enabled the creation of jobs for rural and urban dwellers, while working to stem rural-urban migration. Our reliance on crude oil revenues beginning in the ’70s was the advent of our problems in Nigeria. Oil rose from three per cent of our total exports’ earnings in 1960 to over 90 per cent by 1976.

“Today, oil constitutes close to 80 per cent of our export earnings. Our dependence on oil exports contributed to the decline of our local industries as well as our agricultural sector, as it enabled an excessive reliance on the imports of goods and services.

“This reliance on imports contributed significantly to the challenges we now face in our agricultural and manufacturing sectors, but more importantly, it resulted in the loss of job opportunities for Nigerians. Our craze for imports of everything and anything supported factories, farms and the creation of jobs in other nations while turning our industries into warehouses for these imported goods.”

These have been his usual messages in the last five years, with emphasis at various engagements that diversification of the economy away from oil and rediscovery of local resources and capacity utilisation remain the way forward, as a foil against next round of distortion.

True to his assertions, the majority of Nigeria’s imports come from China, just as in many other countries. Now with the COVID-19 pandemic, China’s commercial and manufacturing cities are shutting down activities in the fight against the virus; products from the country are at risk of infection, including business visits; demand for crude oil has fallen, leading to crash in oil price; and the oil-dependent economies are already in a fresh round of “sneezing”, including Nigeria.

Beside the financing interventions in the real sector, the next campaign he spearheaded is targeted at reducing high unemployment levels, as well as the smuggling and dumping of goods in Nigeria, by putting in place policies that support increased production of goods in Nigeria.

“If we do not deal with these issues, the challenges of kidnapping and banditry would only fester, as those involved in these nefarious activities would only resort to these activities with intensity in the absence of job opportunities.

“Addressing domestic and external challenges to growth requires that critical stakeholders support and generate great and workable ideas and solutions. We must all work together in order to harness the true potential of our nation,” he added.

For Emefiele, it is home-grown philosophy for localised challenge. It is a struggle to rein in lingering depressed local capacity caused by negligence and over-dependence on foreign/luxury products, fuelling not only inflation and unemployment, but stoking exchange rate crisis, and pressuring the national reserves, as well as fiscal balance.

It was time for the real fight to enthrone a regime of price stability for inclusive growth and build domestic capacity, using endowed resources. It was time to exercise sheer will and the essence of the renowned Philips Curve model, using trade-offs and stabilisation mechanisms.

There is no doubt that Nigeria’s food production level has gained global recognition. While unemployment level still remains high, one would imagine what it would have been like without the development financing interventions that he opened up for women, youths, small business, artisans and creative sectors; and mostly, the agriculture sector.

COVID-19 Effect
The outbreak of Coronavirus and its sweeping effects on the global economy explains the proverbial “stitch in time”, which bothers on making the use of time and opportunities. Though several gains have been recorded through the monetary policies that are aimed at substituting the import orientation, much is still needed. An in-depth diversification will mean that the economy can stand without oil earnings. This is doubtful at the moment.

In the meantime, COVID-19 has touched the core of Nigeria’s fiscal base, as the machines of production in China and its far-reaching trade base across the globe are temporarily grinding to a halt, with no particular date in sight for a restart. Unless these activities are restored to normalcy, demand for crude oil and its price in the international market will remain dampened.

The Head of Macro-Strategy at EFG Hermes Research, Simon Kitchen, explained that lower oil prices could, indeed, pull the trigger against the local currency amid already dwindling foreign reserves.

“The market is growing nervous in light of the drop in oil prices, with foreign investors largely shunning away from the once-popular carry trade, preventing the economy from one of its key sources of foreign exchange in the past few years. The government is preparing a $3.3billion Eurobond issuance to halt the drop, an amount that could buy some time, but would not reverse the currency’s fortunes in case oil prices remained that low.”

Senior Research Analyst at FXTM, Lukman Otunuga, pointed out that the staggering depreciation in oil prices could not have come at a more disruptive and critical time for the Nigerian economy.

“Oil prices are on a slippery decline with more negative headlines on the Coronavirus outbreak compounding downside losses. Oil tumbled more than 30 per cent overnight and now sits below $34 a barrel. These levels have not been seen since early 2016. The fall comes after Saudi Arabia announced massive discounts to its official prices for April as a response to the OPEC allies failing to reach a middle ground over deeper supply cuts.

“The country’s export earnings and government revenues will take a direct hit from the steep decline in oil prices. This will hit foreign exchange earnings, the Central Bank of Nigeria’s ability to defend the Naira, and may even result in rising inflationary pressures.

“Questions will be raised over Nigeria’s ability to effectively implement the 2020 budget which has set the benchmark for Oil at $57 – with an Oil revenue goal of N2.64 trillion. If severely depressed Oil prices hit export earnings, reduce government revenues, weaken the Naira and stoke inflationary pressures, Nigeria’s economy will be under threat in 2020,” he said.

Indeed, the last five years have presented great headwinds that called for an inquest – a review of trends in resource management, capacity, potentials for increased productivity and ultimately, leadership’s self-assessment.

For Ucha Nwagbo, an economist, “something must give for a change to occur and it’s either the process or the will of both. The ‘potential’ mantra is rhetorical, it’s the realisation that makes an economy and it takes deliberate effort. The resource curse narrative must give way for inclusive development gains.”