Global economies, especially oil-producing countries, have been grumbling over the continued plunge in prices of crude oil since 2014.
The price of oil, which averaged $110 per barrel from 2010 to mid-2014 has continued to hover around $40 per barrel at present.
While Nigeria was battling the collapse of oil prices and how to keep the economy running, COVID-19 pandemic struck. The impact of the pandemic on the economy was underestimated at the beginning but not anymore.
Every sector of the economy has been adversely impacted. Many businesses have closed shops and the unemployment rate rose to 27.1 per cent in the second quarter meaning about 21.7 million Nigerians remain unemployed.
No sector – banking, telecoms, manufacturing, e-commerce, insurance, to mention but a few are exonerated from the losses, uncertainties and rising cost of operation triggered by the pandemic.
Hence, when the National Bureau of Statistics released its third-quarter 2020 Gross Domestic Product (GDP) report showing that the economy officially plunged into recession as the GDP
The NBS said the performance of the economy reflected residual effects of the restrictions to movement and economic activity implemented across the country in the early first quarter in response to the COVID-19 pandemic.
For instance, the oil sector contracted by –13.89 per cent (year-on-year), indicating a sharp contraction of –20.38 per cent points relative to the rate recorded in the corresponding quarter of 2019.
The non-oil sector also contracted for the second time as the economy continues to reflect the impacts of Covid’19 pandemic. The non-oil sector grew by –2.51 per cent in real terms during the reference quarter, which is –4.36 per cent points lower than the rate recorded in the third quarter of 2019 but 3.54 per cent points higher than in the second quarter of 2020.
One of the shocks on the state of the economy came from the International Monetary Fund (IMF), which had predicted that the drop of Nigeria’s oil and gas export caused by COVID-19 pandemic will lead to the loss of $26.5 billion.
The Fund officials told Nigeria that the sharp fall in international oil prices and reduced global demand for Nigeria’s oil products have worsened the fiscal and external positions.
It said the oil and gas exports (84 per cent of total exports) are expected to fall by more than $26.5 billion.
The Fund had asked for the unification of all Nigeria’s exchange rates to the Investors’ and Exporters’ (I&E) Forex Window rate and advised the authorities to urgently present a supplementary budget to parliament, reflecting the oil revenue shortfall, higher health spending and an additional targeted and temporary package to protect the businesses and households impacted by the COVID-19 pandemic, particularly given the large size of the informal sector which is estimated at 60 per cent.
IMF Head in Nigeria Amine Mati, said the economy would contract by almost 3.5 per cent in 2020, representing a six-percentage point drop relative to pre-COVID-19 projections, pointing out that the already high downside risks—particularly from sharper and protracted falls in oil prices declining oil production from future OPEC caps, or inability to sell oil cargoes and more protracted disruptions to economic activities due to a more expansive effect of the pandemic—have heightened.
The official said the country faces an immediate balance of payments need, given the sharp contraction in oil prices and the COVID-19 pandemic, which, if not addressed, in its opinion, would result in immediate and severe economic disruption.
“There is also a high degree of uncertainty on the duration and scale of the COVID-19 impact, which imply that an upper credit tranche (UCT) quality programme cannot be quickly put in place,” the IMF chief said.
Aside from the IMF, other stakeholders had predicted a gloomy picture of the economy in the face of the pandemic.
In a report, the PricewaterhouseCoopers (PwC), an international tax and audit firm, said all sectors of the economy are facing the adverse impact of Covid-19 at certain degrees. The banking sector has to contend with rising bad loans, the telecom sector, although the ongoing shift to remote work is driving demand for networking infrastructure and connectivity, the demand could also strain the system and lead to public perception issues if reality the right technology, which requires heavy capital outlay is not provided.
The PwC explained that excessive demand on mobile and communications networks — including temporary suspension of data caps — could affect service quality, creating a ripple effect as companies across various sectors implement remote-work plans.
PwC says the crisis underscores the need for more flexible, resilient business models, that does not include draining liquidity through taxes from the telcos, banks or manufacturers.
It said several telcos have high debt loads, which could put pressure on their debt-reduction programmes.
Former Executive Director, Keystone Bank, Richard Obire, said it was no surprise that the economy has once more slipped into recession.
“We seem to be borrowing to finance debt repayment and to pay salaries of a bloated public bureaucracy. Investments in education, health and business enabling physical infrastructure is grossly insufficient. Increased security challenges have severely affected farming leading to lower output and higher food and raw material input prices for consumers and industrial producers,” he said.
According to him, the forex management regime has seen a decline in foreign exchange inflows and a heavy decline in the value of the naira.
Then there was also the prolonged lockdown response to Covid-19 which had a heavy toll on the economy, hence a recession was therefore expected.
On how long the recession would be, Obire said the outlook does not seem pretty. He said there was a need to see two things happening together or individually.
First, is to see consumer demand for goods and services going up to stimulate increased production leading to more jobs and income growth. Secondly, production going up because of lowered input costs leading to lower prices which then drive increased consumer demand stimulating further increased production.
“Both prospects look very bleak in the short to medium term as forex price rises continue which together with increased fuel and energy costs have the effect of raising price levels generally and therefore lowering savings and consumer demand. We don’t seem to have much wiggle room on the fiscal side either,” he predicted.
According to Obire, there are also concerns on how to raise taxes to finance expansionary investments in social and physical infrastructure in an environment where household and corporate incomes are heading south.
“It seems to me therefore that we are going to be facing some serious headwinds for some time. I am not seeing a short-lived recession,” he predicted.
Also speaking, Managing Director, Financial Nigeria International, Jide Akintunde, said the current economic recession was caused by the COVID-19 pandemic.
He said: “It was an external causal factor, given that the pandemic did not originate in Nigeria; COVID-19 spread to the country. Likewise, the 2016 recession was caused by an external shock, in the form of the collapse of oil prices in the international market”.
“What this means is that the Nigerian economy is highly susceptible to external shocks. But this is not new. What is new is that the domestic policy environment has been especially weak to support resilience to the economic crisis. During the 2008-2009 global financial crisis, the country could rely on fiscal saving in the Excess Crude Account to support government spending. There is no fiscal buffer for the economy anymore. Rather, the country is highly indebted and spending over 60 per cent of government revenue on debt service”.
Akintunde said the country is also more politically fragile today.
“With widespread insecurity, agriculture is unable to support general output growth. So, the issue is not that the country is susceptible to external shocks. The issue is that there are acute weaknesses in the domestic environment. They make it impossible for the economy to withstand any significant headwind. It is uniquely a feature of the last five to six years, compared to any other period since as far back as 1999,” he said.
Continuing, he said the current recession will be short-lived. It has come after a spell of weak growth. “What would follow, however, would be another stretch of weak growth – like we had between 2017 and 2019. The real GDP growth rate of less than four per cent average in the next three years would mean poverty would be growing and not reducing. That would be disastrous. But that is the more likely scenario, given the weak policy environment”.
Vice President, Chartered Institute of Taxation of Nigeria (CITN), Adesina Adedayo, said that businesses are already facing major challenges, like inadequate infrastructure that has led to the high cost of operation.
According to the tax expert, and entrepreneur, the banking sector is also having its challenges. The sector’s revenue shrinking due to competition with financial technology firms offering banking services to both the banked and unbanked within the population.
He said that banks have also given out loans, that are threatened due to the pandemic, with 32,000 loans pencilled down for restructuring by 17 commercial lenders.
He said: ” The banks are also affected because of the interdependency of the economy. We expect to see more loan defaults in the sector, so now is not the time to ask them to pay taxes in advance”.
He said that with more options available to users of financial services, the competition on which platform to conduct transactions continues to widen, shrinking banks’ profit base.
An economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said banking industry attractiveness is deteriorating and rivalry intensifying. For him, transaction banking is being threatened and cannibalised by leading financial technology firms.
For the former Executive Director at Keystone Bank, Richard Obire, the economy is heavily challenged, and every segment impacted by the Covid-19 pandemic. He said even though the ICT resources were part of the tools used to adapt to the new normal, that does not exclude the sector from the negative impact the pandemic has had on the economy.
He said the sectors need more cash to improve their services, boost production and consumption which will help to reflate the economy.
He said the world has changed, including the way people live and do business. COVID-19 has had an enormous impact on people’s lives and businesses, hence the need for government, its agencies and private sector operators to take steps that would guarantee continuous profitability for companies.
Managing Director, Countryside Consult, Stevens Adoke, said companies can only have more money to grow their businesses in a growing economy. According to him, every business has the ambition to grow year-on-year, but that would be difficult to achieve under a shrinking economy.
Source: the Nation