...As budget defict hits $4.456 trillion
By Emeka Okoroanyanwu
Three and a half years after Nigeria exited from economic recession, there are palpable fears that a fresh recession is looming in the horizon.
The fear is hinged on very sluggish recovery from the devastating effects of the coronavirus pandemic which hit Nigeria and other countries of the world unexpectedly.
The Nigerian Xpress investigations have revealed a deep hole in the Nigerian economy as many state governments have failed to pay June and July salaries of their workers, blaming lack of funds. This is even as many private establishments have failed to pay salaries since March this year as many have failed to reopen for business while others have closed shop outright.
The slow economic recovery can be felt on all fronts. This is accentuated by weak crude oil demand as a result of the COVID-19 pandemic, tight consumer spending and widening income inequality which have slowed down growth in the consumer goods sector since the 2016 recession.
A sign that there has been a crack in the nation’s economy showed up early in the year with the outbreak of the novel coronavirus which caused the shutdown of many businesses.
As at last week, Nigeria’s 2020 budget of N10.509 trillion has recorded a deficit of N4.563 trillion from the previous N1.847 trillion already recorded.
This information was disclosed at a meeting on the revised 2020-2022 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) held by the Finance Minister, Zainab Ahmed and members of the Finance Committee of the House of Representatives. According to the Minister, earlier targeted revenues from all the relevant agencies have been drastically slashed in the new proposals.
Besides, 77 per cent of the newly proposed revenues from the various sources like the Nigerian National Petroleum Corporation (NNPC), Federal Inland Revenue Service (FIRS), Nigerian Customs Service (NCS) etc, has been set aside for debt serving. The country is using over 40 per cent of its revenue for debt servicing leaving little for capital expenditure.
Ahmed in her response to a question on the likelihood of recession said: “Very clearly the Gross Domestic Product (GDP) has been reduced because of the economic crisis that we found ourselves in, but Nigeria is not alone in this.
“The global economy is predicted to be also slipping into recession. What we are hoping to do by our own collective efforts – the executive and the National Assembly – is that we minimize how far we go into recession.
“National Bureau of Statistics (NBS), has made an assessment that we will go into recession to the level of 4 per cent. So, some of the work that the executive is doing is preparing a stimulus package as remedy, so that if it happens maybe we are going into 0.5% or 1% not going much lower. That is our unfortunate reality and the reality of the global economy.”
According to her, slashed projected revenues for the various agencies are the N1.5trillion earlier proposed for Nigeria Customs Service, reduced to N950billion , N463billion earlier projected as stamp duty revenues for FIRS now reduced to N200billion , N1.222trillion earlier projected for NNPC’s federally funded projects now reduced to N484billion .
Recently, the International Monetary Fund cut its projection for Nigeria’s 2020 economic growth to 2% from 2.5% due to plunging oil prices stemming from the coronavirus outbreak. Nigeria is Africa’s biggest oil producer and depends on crude oil for 90 per cent of its exports. The country will need at least three months to clear a production backlog even as crude prices are gradually recovering.
Nigeria had by June this year over 50 unsold cargoes of crude oil.in the international market. The oil price shock due to the coronavirus came as a great surprise to the Nigerian government and the impact put a significant strain on the budget and the currency. The country had to adjust its 2020 budget which was based on a crude price of $57 a barrel.
It’s not only the government that is feeling the brunt, but private businesses are also reeling under the effect of the virus. In fact, the consumer price index, (CPI) which measures inflation increased by 12.20 per cent (year-on-year) in February 2020. This is 0.07 per cent points higher than the rate recorded in January 2020 (12.13) per cent. As at July, the figure has hit 12.18 per cent from the 12.12 per cent in June.
Today, Nigeria’s average GDP growth has slowed to 1.7 per cent compared with the 4.8per cent recorded pre-recession before 2016. Similarly, Nigeria’s harsh operating environment, poor infrastructure, rising inflation, trade and FX restrictions, porous land borders and logistical setbacks have also dampened the performance of the economy.
The price of Nigeria’s sweet crude, the Brent, even though has risen to about $45.25 per barrel, as at Wednesday morning in the international spot market, the rise is still little to have a positive effect on the overall economy. The falling oil prices has already wiped out over $15 billion from the country’s 2020 budget of $10.59 trillion which was predicated on the country selling crude at $57pb.
The demand and supply disruptions caused by COVID-19 coupled with weaker oil prices have laid the foundation for a looming economic recession. The slump in global oil prices created FX illiquidity, thus posing a major challenge for players who depend largely on imported raw materials for production. The minimum wage adjustment which was perceived as a major driver of growth in the sector, is unlikely to deliver expected benefits given increasing unemployment, poor fiscal buffers, rising inflation and currency devaluation.
Additionally, the lockdown implemented in April to contain COVID-19 disrupted business activities, thus slowing sales during the period even as the risk of the consumer goods sector being impacted adversely by the pandemic remains high, although essential goods manufacturers are moderately affected.
Looking ahead, the impact of COVID-19 may soften in the second half of the year, although consumer spending recovery would remain slow post-COVID-19.
It was reported that over $330 billion was lost from the budget in the first week of the pandemic and oil crash, prompting the government to go for a drastic slash of $1.5 trillion from the appropriation.
In quick reaction to the low oil price which has hit adversely Nigeria’s economy, investors rushed to pull out a staggering $2.3 billion from the capital market, further putting the economy in serious jeopardy.
According to the Nigerian National Petroleum Corporation NNPC, the low oil prices could drag on for a long time and would have collateral effect on the country’s economy. Managing Director of the NNPC, Mele Kyari who listed the COVAD-19 pandemic and over supply as the two challenges plaguing the oil and gas industry said the two “means that there would be a lull in activities in the oil industry,” adding “if forecasts are right, we may witness very low oil prices throughout the year and that will have a collateral effect on the economy.”
Dr Diran Fawibe, a petroleum economist and Chief Executive Officer of International Energy Services Limited in a recent interview predicted a gloomy picture of the effect of falling oil prices on the country’s economy. He said the slump in prices will affect oil companies’ total revenue, from which the Nigerian government gets its own share in terms of taxes, royalties and others.
“We will see the impact very soon when the government will cry for revenue. As you know, we depend substantially on oil revenue, particularly foreign exchange earnings. And if foreign exchange earnings drop, this will constrain the ability of the central bank to support the prevailing exchange rate. You need buoyant foreign exchange reserves to support the currency, already there are indications that the exchange rate will go up,” he said.
“For the companies that have to import raw materials, it means that they have to look for more naira to buy dollar or other foreign currencies to do what they have been doing before. So, by the time it permeates the entire economy, you will then discover that the economy is worse off. That is why many analysts are already projecting that if this situation continues for quite some time, the Nigerian economy may go back into recession. If price of oil is averaging $30 per barrel, then it will mean that the budget will reduce by half. A budget that was prepared on the basis of deficit, and now you are having a serious reduction, so it means that it will constrain the ability of government to execute some of the infrastructural projects and social services that had been planned,” the economist lamented.
Fawibe bemoaned that for International Oil Producing companies IOCs, the consequences of the cut in prices may be much. He predicted that a number of projects in the oil sector will be suspended or cancelled outright and this will have a direct debilitating effect on the oil servicing industry as most players will be forced to cut down on the number of staff. Said he, “by the time this scenario plays out, quite a number of people would have lost their jobs. Everybody will be hit. Some of the indigenous producers are high-cost producers; it is a period of hardship for indigenous producers as well as the major producers.”
Against the backdrop of checking the rapidly spreading pandemic and keeping the economy off recession, Nigeria’s Central Bank announced a N1.1 trillion intervention fund to support critical sectors of the economy. Out of the amount, N1 trillion, would be used to support the local manufacturing sector as well as boost import substitution.
Other policies already put in place include, temporary and time-limited restructuring of the tenor and loan terms for businesses and households. This is expected to create stability of the lending sector as disruptions to business would make repayments difficult, thereby increasing the non-performing loans (NPLs) of the sector which had gradually started sliding towards the CBN required rate per bank of 5% or less.
The CBN has also cut down interest rates on intervention programmes from 9% to 5%. The rate cut on intervention fund, analyst at Proshare have said, would cushion the adverse consequence of business disruption that would likely result from production closures, supply chain disruptions and demand collapse as social distancing and restricted movement lead to lower domestic consumer and producer spending
However, a N50bn targeted credit facility expected to assist in creating liquidity in the domestic credit market may prove inadequate to repel a recession as it would not address the tricky problems of supply chain disruptions, rising domestic inflation rate (reduced real consumer spending power) and the rising risk of lending into a reclining domestic economy.
Analysts are of the view that regulatory forbearance would mean that the CBN would ease enforcement of strict rules around advancing credit. The relaxed enforcement regime would allow the banks give customers breathing space to repay loans without suffering heavy charges against their profit and loss accounts by way of impairments. In other words, the CBN would hope to keep the financial system, particularly the credit market, stable. The move is commendable but may not achieve much as the problem would still remain the lack of production throughputs to create sellable goods which in turn would generate revenues, profits and free cash flows.