On Thursday, the Minister of Finance, Zainab Ahmed confirmed the obvious. Nigeria is heading for a recession – the second economic contraction in 5 years. Falling revenues from crude oil sales and historically low prices due to the Saudi-Russian price war, take a huge chunk of the blame for the economic fallout.
Under the Organization of the Petroleum Exporting Countries agreement with Russia and other crude oil stakeholders, we have had to cut our crude oil production to a paltry 1.41 million barrels per day. Naturally, this presents significant challenges for a country that earns around 40% of government revenue from crude oil sales.
That is not to say that the economy was doing great prior to this crisis. We have only just started recovering (very slowly) from the effects of the last recession of 2016/17. With ballooning debt, scanty foreign exchange and government commitments to infrastructural projects, the challenge for this administration is both unprecedented and dire.
What Does This Mean?
In simple terms, Nigeria is facing a double whammy financial crisis many years in the making, but that picked the worst possible time to materialize. On the one hand, we need to fund infrastructural projects to enable businesses to thrive. On the other hand, we need cash to fund these projects and the government is borrowing (excessively, as some think).
- Expect inflation: Latest figures released from the Nigerian Bureau of Statistics, reveals that inflation levels reached 12.34% on the back of an eight-month-long upward march. Food prices increased the highest, across the nation signalling increased difficulty in affording staple food items for Nigeria’s low-income earners.
- A Budget Cutting Party: It has been a few weeks since the Federal Ministry of Finance, Budget and National Planning announced budget cuts amounting to over 1.5 trillion Naira on “nonessential” capital spending. The downside of these government cuts is that it affects businesses and infrastructural projects dependent on the now non-existent funds. The ripple effect in the economy can be imagined.
- Fall in demand: With businesses closed and an uncertain environment exacerbated by government policy swings, discretionary spending has slowed – in some cases ended completely. People want to keep whatever money they have as the economic crisis bites deeper.
- Expansionary fiscal policies: To drive money out of banks and financial institutions, the Central Bank may opt to lower the cash reserve ratio. This would be monumental as the reserve ratio was just increased to 27.5 % in January.
- Government bonds issue: In addition to seeking foreign loans and support, the government is trying to raise money locally. On Friday, the Federal Government announced a new bond offering for up to 150 Billion Naira Ijarah Sukuk with tax-free earnings of up to 11.20% per annum (just 1.14% shy of current inflation rates). The
The NNPC is smiling again…
It’s a subdued smile, but it is noticeably there. After a few weeks of worry about our inability to sell crude (the economic backbone of Nigeria). Indeed Faith Birol, the Executive Director of the International Energy Association exuded hope when he tweeted that, “After ‘Black April’, the heaviest demand destruction may be behind us…” He added that markets are showing signs of rebalancing and repairing the damage. Our foreign reserve earnings match the overall positive mood. This May has seen over $1.5 added to our foreign exchange reserves after months of zilch growth to the Nigerian FX account.
The popular refrain has been that COVID-19 and the subsequent government responses and consumer behaviour leading up to the present economic crisis is the turn of a new era. For that matter, one sector that perhaps best illustrates how dramatically economic fortunes nosedived during the pandemic, is the petroleum/crude oil sector. For weeks, oil tankers laden with crude floated offshore waiting for buyers that were nowhere.
Suddenly everyone was talking about diversifying from crude oil and the government developed what many Nigerians hailed as a healthy appetite for long overdue and sweeping reforms.
Not for long, however. With Brent crude trading at around $35 at the close of trade on Friday and Nigeria’s oil tankers now finding buyers, talk about diversification appears to be fading into the political backstage where they have traditionally remained until Election Year makes them suitable for “manifesto” documents and rallies.
The optimism of the Group Managing Director of the NNPC, when he commented on the “gradual easing” of the revenue crisis arising from the oil glut is all well and good. But renewed crude oil earnings is no cause for celebrations or a return to “normal” operations in both the short term or the long term.
Regardless of how this turns out, optimizing economic growth by supporting other revenue sources is not a choice. It is a necessity.
The COVID-free State
All 35 States of the Federation have confirmed cases of COVID-19. The only exception is Kogi State.
Last month, officials from the National Centre for Disease Control left the State after the governor, Yahaya Bello asked them to be quarantined and tested for the virus. The NCDC team declined and left the state. The governor firmly believes that there are no cases in his state even though, it is bordered by states that have collectively recorded over 750 cases.
Mixed reactions, of course, have trailed this piece of disconcerting news. As unbelievable as it sounds, one can only hope that it is indeed true.
Featured Photo by Namnso Ukpanah on Unsplash