Economy: Will these panic measures stop the hemorrhage?

From manufacturing to services, Nigeria, like every other country, will see Coronavirus contracting the economy. But the strength of the impacts will be a function of the potency of the scourge. And if the country is isolated from the spread of the virus, it will not be detached from its bite on the global economy.” 

This sounded like a speculation fortnight ago when The Guardian published a special report on the possible economic impacts of the Coronavirus Disease 2019 (COVID-19). What has changed since then? The virus has been nothing but a nightmare tormenting all nations. Countries have become increasingly nationalistic in desperate efforts to stem the spread. Quarantine and social distancing have become buzzwords. 

The severity of the turmoil of COVID-19 is akin to the Great Depression. But while different countries experienced their depression at different times within the four years it lasted, the entire global economy is going through the horrifying COVID-19 pandemic together. Whether this travail lasts for six months, a year or more, it still has all the characteristics of the structural break the Great Depression was – the number of countries affected has grown; factories are closing; production has dipped; stocks prices have crashed further and growth forecasts have been discarded as nations scramble for survival. 

And if the virus “disappears” soon as President Donald Trump earlier prophesied, the compressed economic pains might remain for several years.   

Coronavirus (as it mostly called) has revealed the underbelly of human ingenuity and ridiculed the perceived intellectual superiority of the West. The control strategies – quarantine, border closure and shutdown – are no brainer. But those are the only options the stern virus is willing to concede to all despite the sophistication of the different countries facing the public health issue. For once, the world is fighting a challenge in isolation with similar strategies.  

Like Coronavirus, like its economic affliction. Countries are throwing money in. Similar to President Barack Obama’s economic stimulus, the United States government is dangling a $1trillion cheque to boost Americans’ consumption. Australia, Canada, Italy, the United Kingdom and many other countries are rolling out similar economic stimulus packages to soften the effect of the draconian measures taken to contain the Cononavirus pandemic, which has continued to grow. 

Back home, the government has realised it cannot continue to play the ostrich. In a single Federal Executive Council (FEC) meeting last week, the FG approved the reduction of premium motor spirit (PMS) pump price from N145 to N125, reviewed the 2020 budget benchmarking oil price at $30 just as it extended travelling ban to countries with over 1000 Coronavirus cases. The government also reviewed its port-of-entry visa issuance, a policy aimed at improving on the unappealing business environment. 

In the same week, the Central Bank of Nigeria cut the interest rate on its special intervention funds by about 44 percent and boosted the programme by an additional N1trillion. Interest in the intervention funds, which earlier stood at nine percent was reduced to four percent. Those who are familiar with the sundry intervention funds know that interest rate is the least of the programme started by Mallam Sanusi Lamido Sanusi when he was the governor of the apex bank. Accessibility and bureaucracy are the twin major challenges it faces, a reason much of the stimulus, which competes with the core lending operations of the banks charged with its disbursement has remained unutilized.       

For the first time, a lethargic Buhari administration appeared decisive, albeit in the face value of the decision. Many people were not expecting a downward review of the pump price, at least not when speculations of a possible increment were rife a few months ago. 

While many economies are jolted by the Coronavirus outbreak, the shock only compounded the revenue shortfall and exposed the shortcomings of the already bleeding domestic economy. 

The logic behind the PMS pump price review is logically infertile. Its (pump price) debate has a tortuous historical path in the life of the country. The pro-capitalism advocates have always supported a fully-deregulated market, while the socialists have held on to their old pro-subsidy stance. And average consumers want an affordable price whether this comes from a government-funded subsidy or deregulation. Today, they are happier they are saving N20 per liter of fuel they buy. The government is also justifiably comfortable with the new price.

The hasty reduction of PMS pump price is a trap. If the price of crude returns to its pre-Corona oil level leading to a rise in the landing cost of the PMS, will the current pump price be retained? If it is retained, will the Federal Government be able to pick the subsidy bill? Has the government fully assessed the direction of the foreign exchange rate, which ultimately determines the landing cost? 

Is the new price a temporary measure? 

To sustain a strong naira that will keep the landing cost of PMS low, Nigeria needs a buoyant foreign reserve. But with crude still accounting for over 90 percent of the country’s foreign exchange, the Central Bank’s insistence that naira will not be devalued looks more like a mere statement of intention rather than assertion supported by strong economic fundamentals. In the past two weeks only, oil prices price tumbled from near $50 to about $30. Brent on which the Nigeria crude is benchmarked actually crashed to about $24. 

A rise in crude price or a continual fall of the naira could significantly alter the landing cost of PMS. What happens when either of these happens? Deregulation, which experts have suggested would end the perennial subsidy debacle, has been approached with caution majorly as it is perceived to trigger a sudden rise in price. With oil currently trading below $30, the landing cost of PMS, according to the Expected Open market Price (EOMP) has fallen to below about N93 per liter. So, deregulating the downstream sector at this critical time would save the day, which is the reason some stakeholders have called for outright deregulation. 

The government can only keep a N125 pump price for as long as the landing cost remains within the bound. The 2020 budget is already in tatters. The original budget had about $2.8 billion deficit to be funded by loan while there is another outstanding Eurobond that matures in January. There is yet a certain two billion dollar plus loan proposal the Federal Government says it would spend on infrastructure. Perhaps, the government has realized that a wary international credit market is not an option now, a reason it has put the planned borrowing arrangement on hold. The government is now in strain to meet its existing obligations to creditors. So, this may not be the best time to contemplate a fresh facility. 

Public infrastructure across the country is everything but functional. A report by Africa Infrastructure Country Diagnostic says addressing Nigeria’s infrastructure challenges will require a yearly sustainable expenditure of about $14.2 billion in over a decade. The N2.4trillion allocated for capital projects (much of which will go into ministries’ ‘upkeep’) makes a mockery of the infrastructural needs.  

A buoyant economy is a function of an efficient infrastructural system, which Nigeria does not have. With limited access to the international credit market and dwindling income, infrastructure will be further starved of the needed fund. 

Historically, capital projects are the first casualty of a dwindling public. Already, President Muhammadu Buhari has reportedly given a directive that salaries and allowance of civil servants must be taken care of as a matter of priority. Of course, that is expected. There is also no indication that the allowances of public officials will be cut. This is not the first time Nigeria would go through hard times, and there is no record that politicians conceded to a reduction of their unjustified allowances in the interest of the public.

What does this imply? The government will come hard on businesses and the ordinary people to, at least, keep the recurrent spending going. Ongoing capital projects, which would have eased business transaction and made life easier for the people will be suspended.  

The Minister of Finance, Budget and National Planning, Zainab Ahmed, has given a hint of how the labour market will fair in the coming months. “On recruitment, there is already an instruction to stop recruitment. What the agencies have been doing is a replacement but even that is being suspended. When things improve we will go back to the issue of recruitment but for now, our wage bill is already very high,” Ahmed said while announcing the government’s decision to review the 2020 budget.

The government leaves with the public so much room for speculation, which triggers uncertainty. The reported N1.5 trillion cut is guesswork according to the minister. “I can just say that the bulk cut is about N1.5 trillion” she concluding after pointing the areas that would be affected. What is more absurd is FEC’s resolve to keep the crude benchmark at $30 at 2.18 million barrels per day. With less than $5 per barrel production cost, Saudi Arabia, which is leading the current price war in which Russia and United Arab Emirate are involved, can sell its crude at $10.  

The United States is already excited about the price war, and it is throwing its antics into it. The good news about Coronavirus-induced slowdown is that the Chinese are returning to factories. The bad news, however, is that its market (Europe and the United States, especially) and other production hubs are neck-deep in the health crisis. 

Perhaps, the Federal Government was deceived by the momentary halt in the free fall of crude prices mid-last week. The moment of stability came on the heels of the widespread announcement of economic stimulus. So, whatever prices oil sold a day or few days after the announcement of the outlandish packages, even a layman knows, is not a reflection of the true state of the market. The market acts more like a child (who is prone to momentary excitement) than an adult. 

The fear about the price war, which will ultimately determine the short- or medium-term economic performances of countries that cannot afford, is real. Three countries – Saudi Arabia, Russia and UAE – can afford it. And, sadly, the underlying motive is not economy, but ego. Logic, as it were, does not apply in this case.

It thus means that the trouble confronting Nigeria is a real challenge only measures taken out of deep thinking can solve. The country cannot afford half-baked solutions much as it cannot afford the economic woes.