Coronavirus, the economy and global oil price

That global oil prices recently witnessed a drastic drop in the early days of March because of the shock to the world economy from the corona virus (COVID-19) pandemic should be of huge concern to the government and people. This global health crisis, which subsequently became an economic crisis has significantly ravaged the global economy including the advanced economies of the Organisation of Economic Cooperation and Development, (OECD) as well as the emerging markets. Nigeria, as a major oil exporting country, has been caught up in this spiralling global crisis. The Nigerian economy is currently in tatters given that the price of crude oil, the country’s main foreign exchange earner has crashed with the drastic fall in demand by China, one of the major destinations of Nigeria’s crude oil. In fact, the price of crude oil has dropped by half in 2020 due to this global demand shock caused by the virus pandemic.  It can be recalled that the deal entered into by OPEC and its allies including Russia, in the effort to manage the crisis, could not hold with Russia rejecting further output cuts with a reaction by OPEC to remove limits to its production levels. This rigmarole by the major global oil suppliers in combination with the global demand shock has made many oil exporting developing nations very vulnerable in the management of their domestic economies.

The management of this crisis is quite challenging for Nigeria. This is particularly so given that the country has, over the years, failed in its quest to diversify the economy. This is quite unfortunate despite the promise by the Buhari administration to refocus and diversify the economy through the launch of its Economic Recovery and Growth Plan (ERGP). The promise is that by 2020 the dependence of the economy on oil would have been drastically reduced. The whole plan has turned out to be a mirage. According to the Fitch rating agency, this COVID-19 crisis will have a downside risk for short-term growth of the Nigerian economy in view of the fact that most of the country’s non-oil exports are usually destined for the Chinese market. The services industry has also been affected by this crisis. Largely it has been affected with supply chain disruptions due to seaport and air travel cancellations. For example, the air travel disruptions are quite damaging to the economy with the loss of over twenty thousand jobs and over N160 billion in revenue, if estimates by the International Air Transport Association (IATA) are anything to go by.

The question to ask is whether there is any way out of this economic quagmire. In the short term several issues have been raised. One of which is how the country can meander its way in implementing the 2020 federal budget, which is based on a $57 per barrel benchmark in determining the expected revenue to be derived from oil. Expectedly the government has come up with a strategy to drastically reduce the size of the budget. One wonders however, whether the government’s reaction of cutting the budget benchmark price to $30 per barrel will do the trick. The government’s plan, which includes a 50% cut in revenue from privatisation, cut in capital expenditure by 20% across all ministries, departments and agencies, MDAs, 25% cut in all government expenditures and a suspension in recruitments appears insufficient in addressing the issue. This strategy is based on the assumption that oil price will be at least $30 per barrel whereas it currently hovers around $25 per barrel. In addition, it is not quite certain when this whole corona virus imbroglio will come to an end. Could it be that the crisis would persist longer than the government’s strategy anticipates or is it not even doubtful that the country would be in a position to service its current public debt of over N25 trillion?

One strategy proposed by the Senate is that the naira should be devalued. That is a major step that could have different implications for the economy. While the Central Bank of Nigeria (CBN) has denied having any plans to devalue the naira, it nonetheless offered dollars to its investors and exporters foreign currency window at N380 as well as moving the official exchange rate from N307 to N360 per dollar. Though the CBN calls this a price adjustment, many see it as a subtle devaluation of the naira by the apex bank. This is more so given that the country’s excess crude account is virtually empty and the foreign exchange reserves have been declining since 2019. The reality dawning on all and sundry is that the Nigerian economy is currently not on a sound footing.

In the short term, government should undertake a cost cutting posture across all its MDAs as it has already proposed. It should do more particularly for appointments and programmes that do not add value to the common good. The cost reduction should start from the top. Unnecessary appointments of special assistants, special advisers, white elephant projects and programmes should be cancelled. The bogus expenditure profiles of the presidency and the other arms of government should be drastically reduced. In fact, a number of the expenditures by this administration have not been producing tangible results as would have been expected. For example, about N11 billion is said to have been budgeted for the Aso Villa Clinic since 2015 and not much has been seen on ground to justify such humongous expenditures. If those funds were judiciously spent on the health sector, one wonders whether it would have been necessary for the president and top government officials to travel abroad for medical attention. Overall, if expenditures on the health sector were done judiciously, Nigeria would have been better prepared to combat the current COVID-19 pandemic. This lack of preparedness and poor response to the crisis has led to a near total shutdown of the economy with very devastating effects on the very poor and the micro, small and medium scale enterprises in the country that need daily cash flows to live at the subsistence level.

In the long term, this country should seriously consider the restructuring of the polity and the economy. The overly dependence on oil has become a curse to the country. No wonder international scholars have referred to the “oil curse” as the main problem confronting third world oil exporting countries. Nigeria should seriously embrace fiscal federalism as was practised in the first republic where each region developed from within and was able to generate revenue to execute its various development programmes with the appropriate agreed percentage remitted to the centre. Currently, the country is operating a “sharing economy” and not a “producing economy”. Unless we restructure as a country the economic rigmarole we have been experiencing since the 1970s will continue. While it is hoped that this pandemic will be short-lived, we need to put on our thinking cap and ensure that “never again” should this country be operating below its God-given potential. In the main, it is a time to migrate from rhetoric to action on the diversification of the economy.