Nigeria may be headed for another recession as oil prices go into a tailspin following the coronavirus pandemic devastation across global and national economies. Initial admission by senior officials that these developments threatened the 2020 budget and the economy has soon given way to the usual hollow assurances of stability amid dire projections of turbulence by the private sector and global agencies. To stave off disaster, the regime of the President, Major General Muhammadu Buhari (retd.), will need to demonstrate uncommon creativity and devise policies to enable the country to survive the turbulence.
On past records, the future appears rather bleak for the country’s 200 million people. Oil prices plunged by the sharpest percentage since 1991; they dropped initially by 34 per cent for West Texas Intermediate and 24 per cent for Brent crude, the market benchmark, on March 9. By Monday, Brent was $29 and $26.11 on Wednesday. Before then, prices had come under pressure as the world grappled with the coronavirus pandemic, with China, the world’s major driver of global energy demand, as the epicentre.
With Europe, South Korea, the United States and China scampering to contain the spread by quarantine, travel restrictions, bans on crowds, lockdown of large swathes of territory, the world economy is shrinking fast. Italy, the world’s eighth largest economy, has kept its 60 million people indoors, while China has imposed what Time magazine described as the “largest quasi-quarantine in human history” with about 760 million people under varying forms of restriction.
With the global investment bank, Goldman Sachs, predicting prices dipping to $20 per barrel over the next six months, $8.63 billion could be wiped out from expected earnings enshrined in the 2020 budget. The report said $335.7 million was lost in the first week of the crash when prices plunged to the $30 to $36 pb range compared to the budget anchor of $57 pb. Rating agencies have downgraded the country’s credit rating that will make it stiffer to raise lower interest credit and reduce global investor appetite for Nigeria Eurobond. The panicky pull out of $1.8 billion from the capital market by investors could become a flood unless the right steps are quickly taken. Prices at $20 pb would derail the national budget of N10.59 trillion.
For a country that has stubbornly failed to wean itself off dependence on oil revenues, which bring in over 65 per cent of government funding and about 90 per cent of export earnings, the chickens have come home to roost. To survive after the last oil crash of 2014/15, the government has been borrowing furiously, including legislative approval for $22.7 billion loan package last week. Debt servicing was N2.26 trillion in 2019 and N2.72 trillion in 2020. The situation is made worse by the absence of fiscal buffers after the government ignored frequent warnings from stakeholders and multilateral agencies.
The regime says it is strategising and believes it can weather the storm. The Presidential Economic Advisory Council also made recommendations on Tuesday, among them, immediate cuts in the budget, mobilising the private sector, curtailing recurrent spending and boosting public revenues.
The International Monetary Fund last month lowered its forecast of 2.5 per cent Gross Domestic Product growth in 2020 to 2.0 per cent, citing expected fallout from the pandemic and projected rise in inflation. The more upbeat forecast of 2.9 per cent by the African Development Bank came with the caveat that achieving this “depends on implementing the Economic Recovery and Growth Plan (2017-2020), which emphasises economic diversification.” Structural diversification has however not happened and incremental improvement in non-oil exports as reported by the National Bureau of Statistics could not stop oil exports in Quarter 4 in 2019 from accounting for 76.1 per cent of total exports.
Had successive administrations been more fiscally responsible, the Excess Crude Account fund that was to help when oil prices drastically fall would have come in handy. Rather, only $71 million was left in it as of February. Foreign reserves carefully husbanded over the years by Saudi Arabia, Kuwait and Algeria helped these countries to weather the pains of the 2014/2015 oil price fall. Nigeria’s, at $36.38 billion, may be enough to finance a full year’s imports but is under stress from frequent drawdown to defend the naira exchange rate. With the naira exchanging for about N400 to one US$ in panic buying last week, this buffer too may not stave off recession.
Survival today and in the future requires unaccustomed discipline and robust proactive measures. First, the federal and state governments need to cut down the cost of governance and their extravagance, slash the large army of aides, the obsession with buying vehicles every year and unnecessary travels.
How to weather economic headwinds can be gleaned from Greece that, in response to its debt crisis, adopted three successive economic adjustment programmes (2010-2018), strengthened the banking system, overhauled the tax administration and deployed IT to earn more and tame evasion. Look also to Malaysia, Indonesia, Singapore and Philippines that, with IMF’s $110 billion loans, implemented tax reforms, privatisation and drastic cuts in costs to climb out of the Asian Financial Crisis of 1997. Thus, the Buhari regime needs to privatise all loss-making state commercial assets, sell off most of the nine presidential aircraft, widen and deepen the tax net with zero tolerance for wealthy offenders, and open the space for foreign direct investment.
The monumental folly of a major crude producer retaining decrepit state-owned refineries and importing almost 90 per cent of refined products is wildly foolish. Over N1.7 trillion was wasted on petrol in 2019 alone. Diversifying the economy requires the states to develop vigorous policies to attract investors to develop agriculture, mining and industry, improve tax collection and make job creation top priority to mop up the youth unemployment that Labour and Productivity Minister, Chris Ngige, forecast to reach 33.5 per cent this year, but could get worse with the global contraction.
All this demands a strong economic programme, a sound team and sinewy coordination to succeed and prevent ruin. The onus is on Buhari to provide the badly needed leadership by harnessing available expertise and imposing fiscal discipline to achieve this goal.
