Coronavirus is basically a bio-health issue but it has come to the centre stage of the global economy; it has snowballed into a major economic crisis. So a new word has entered the lexicon of known economic jargons, Coronanomics.
For Nigeria, the economy was on tenterhooks already, bleeding on all fronts both public and private sector. As at last count oil revenue which funds the bulk of 2020 budget is heading to a red zone, spiralling every other micro and macroeconomic index.
Besides, pressures are mounting on non-oil revenue and the 2020 Capital Expenditure, CAPEX; fiscal deficit is bound to escalate without any known source of funding; debt service is set to be in crisis; the tepid GDP growth recorded in 2019 is set for a reversal; Foreign Portfolio Investments, FPIs, are predictably already taking the exit doors; and the nation’s Foreign Reserves is on the speed lane southwards.
Which way out? Public finance policy executives led by the Finance Minister, Zainab Ahmed, and the Central Bank of Nigeria, CBN Governor, Godwin Emefiele, set out some conversations around answering this question last week. But at the end of the CBN’s round-table, no concrete measures or steps were mapped out. Perhaps some measures would be announced this week but it appears late already as the impact has already become colossal.
The Group Managing Director, GMD, of the Nigerian National Petroleum Corporation, NNPC, Mele Kyari, has already indicated the country is not ready with reasonable response. He said if the oil price drops to $30 per barrel, Nigeria’s crude oil sales would be at huge losses since the country is not competitive in cost of production.
But already this has started playing out negatively even before the price threshold with over 50 oil cargoes stranded as unsold.
A cost-effective production is projected to happen in over five years from now. The NNPC should, therefore, revisit its strategies. We maintain the view that government’s non-oil revenue drive should be stepped up against the backdrop of its economic diversification agenda which has not gone past the paper works.
In response to weaker oil and non-oil earnings, the government should reduce its capital expenditure but more importantly, the cost of governance; in other words, a cutback on recurrent expenditure.
The combination of a larger than expected deficit and possible re-pricing of foreign and domestic government borrowing is likely to lead to higher debt service burden in 2020.
This should tell government that further borrowing is not tactical.
We also advise that CBN should raise interest rate on its Open Market Operation, OMO, Treasury Bills to defend the Foreign Reserves (and compensate for new risks) at the expense of higher interest expense in its treasury.