Fragility of  Nigeria’s economy: Effect of Coronavirus, oil price collapse By Dr Kazeem Bello

There is need to revisit the issue of the fragile nature of the Nigerian economy. For sometime now, the economy has been seating on the edge with so many delicate issues begging for attention.

We recollected late last year that we tried to examine, review and analyze the 2020 Nigeria Budget. I remember that I stated clearly that I will not conduct an analytical examination of the 2020 Budget for two reasons, despite the fact that I already collected and gathered facts and data from Global Financial Analysts such as the Brooking Institutions: Bloomberg Financials, Brentwood Institutions and IIF ready to do the analysis:
1. Nobody in Government reads them or needs them.
2. I believe it is turning into an annual academic exercise since the country continues to get the same results doing the same things over and over and the economy continues to face series of serious challenges especially continued slow growths.

Due to popular calls however, I offered a tacit review and made some critical submissions. It has become very important to revisit the budget especially since we are just in the first quarter of the year and every financial indicator and assumptions the 2020 budget was predicated upon are tumbling at the global level. Nigeria is not immuned or isolated against these serious global threats to the world Economy.

This has been created by the threat of the Coronavirus to global trade and growth for this year and also the unprecedented effect of the current oil price crisis.

During our review late last year, we submitted that the following may happen in 2020:

1. The budget will be passed but it will be inadequate and very shallow to solve the problems on the ground especially that of addressing the growing poverty index in Nigeria.

2. That there will be revenue challenges except the Government gets very creative in terms of seeking additional revenue sources. Of course, we knew that the solutions offered to partially solve that problem was the quick passage of the Finance Bill by the Congress which ultimately raises taxes across board for both consumers and corporate taxes.

3. I also pointed out the need to reduce Government debts which have over a couple of years crowded out the private sector from domestic money market, making it hard to achieve desired growth for the economy. It was pointed out in that piece that Governments generally do not create productivity which eventually makes up the numbers that stimulate growth. It is the private sector that generates growth through production and trading activities. But the Federal Government’s borrowing frenzies over the years has shutdown the private sector to have access to the much needed Debt Capital to increase productivity and grow the economy. That was the major reason why in 2019, the economy barely achieved a disappointing 1.9% growth rate. In the 2020 budget, there was no attempt to address this issue despite consistent warning from the IMF and World Bank and others.

This led to a global projection of about 1.7% growth rate for the Nigerian economy in 2020. The budget actually projected about 2.8% and 3.2% in 2021.

4. I also submitted that we may witness a possible devaluation of the Naira during the year. The CBN has actually sent out several warnings about this due to the fast depletion of the Foreign Reserves and its inability to fund the several unnecessary interventions in the FX market. The threat of the global market meltdown this year due to the outbreak of the Cononavirus may make this very inevitable at last. When I made this call in December, there was no virus issues, but basically based on the budget in – equilibrium position and unmatched financial numbers in the budget.

5. At the end, I made a call that the Federal Government of Nigeria may be forced to declare Austerity Measures to try to curtail budgetary spending especially that of fiscal and running cost budgets. Again, the potential economic crises that this season of global virus will create may make this also inevitable.

However, there is always hope and light at the end of the tunnel. There would be need for the Federal Government to task its Economic Team immediately to conduct a surgical review of the budget in terms of the unfolding global economic trends and challenges. This is the right thing to do and it must be done immediately before it turns into a panic issue.

Again, Nigeria’s economy is almost at the edge and a serious earthquake shock that will rock the economy cannot be allowed to happen. That earthquake is currently unfolding and like it happened in the global meltdown of the 2002-2006, the United States Government today started right on time by announcing series of palliative measures to absorb the economic shocks that the virus and the global oil price crash may cause. Nigeria should do the same immediately but with careful study of the parameters and the trends.

In the aftermath of what is happening around the world, it is clear that there may be :

1. Devaluation of the Naira due to the current fall in demand and fall in the price of oil globally. Whatever the revenue projections in the 2020 budget derivable from oil sales is currently at jeopardy. It is hard to see the global demand for oil falling so drastically due to the effect of the coronavirus and prices are falling so astronomically at the same time. This will put a whole lot of pressure on Nigeria’s Foreign Reserves and it may lead to an eventual devaluation of the Naira to assist Government raise extra cash in Naira to fund the budget shortfalls.

But that is not an advisable measure for a currency that has been in trouble form already. The least that Nigeria, an import-oriented country can afford now is to devalue the Naira. That will ultimately kill private sector investments that have been in coma for such a long time in the first instance. We just have to get creative to avoid the temptation of devaluing the Naira. There are several creative ways to raise extra cash (which I will present later in this article) than put further pressure on the Naira.

I am sure, someone will say, then Government should consider increasing domestic borrowing. NO, that will continue to crowd out the private sector and it is not equally advisable with the current astronomical level of domestic borrowing by the Federal Government standing at over N22 trillion.

It is therefore necessary to avoid all temptations to devalue the Naira. It will create untold problems and aggravate the inflationary pressure that is almost looking uncontrollable as we speak.

2. Like I have stated, I will be surprised if the Federal Government did not announce Austerity Measures very soon. The symptoms are getting more infectious to the economy already struggling to find growth. The problem is what measures will be placed on austerity in the first place for an administration that has continued to present shortfalls in spending. The Minister of Finance in her briefing in January reported that 2019 budget recorded about 74% performance level. That is a gross shortage of over N2.2 trillion Naira in budgetary spending in 2019. There is a tacit self inflicted Austerity already in the system. But it’s looking more likely that some spending cuts may be necessary if the revenue profile remains very gloomy. Well, Austerity measures may be avoided as well if some measures and revenue drive strategies are put in place.

3. Right now, the 2020 budget is at risk with the fall in demand for oil and falling prices of oil at the same time. We have indicated that the budget will earmark approximately N2.1 trillion for Debt Servicing. It is not certain where that money will come from. We equally cannot afford to default in debt servicing. That will down grade Nigeria’s rating in global Debt market and make life very difficult for the Government. We must address this issue immediately also to avoid default. Again, I will offer my suggestion later on how to tackle that problem.

4. The 2020 budget was predicated by Government to have a 2.8% growth rate. As stated above, experts believe it may tank at about 1.7% but the problem unfolding again globally may have made the Federal Government projection very unrealistic. It has to be reviewed to reduce the pressure on all other economic indexes.

Perhaps, the only savior will be for the Federal Government to find new revenue sources to reduce the impact of the looming global meltdown on the economy. Right now, no one is buying Nigeria’s Oil and at the same time the prices are falling. What a double tragedy!

We need to seriously worry about arresting the fast growing unemployment and increasing poverty index. The only way to tackle these two monsters is to grow the economy and we have stated that a minimum 7% growth rate should be the target not even the reduction we are facing now.

5. There is one more projection that will surely slow down this year. The FDI inflow. The Foreign Direct Investment, FDI, will surely reduce from the 2020 budget projection of $7.0 billion. Last year, Nigeria barely reported an FDI of about $3.5 billion in real non-portfolio capital importation. With the global slow down in trade, the FDI will become more competitive this year moving into 2021 depending on the global response to addressing the problems created by the Coronavirus.

One point that is clear is that the FDI will become more competitive this time around with the funds chasing opportunities in countries worse hit by the slow down in investments as an aftermath effect of the virus. FDI donors will consider those economies faster than Nigeria once the effect of the virus mellows down and global investments turn-on button restarts again. That is equally challenging for Nigeria that has been struggling in recent years to attract FDIs

6. The Federal Government must also avoid and not be misled into the temptation of dishing out stimulus package or economic relief bail outs to anybody. That will not work in Nigeria. Again, the United States, China, Russian, Japan and other big players have started to issue stimulus and bail out packages. It is not designed for Nigeria! The last meltdown in which the Federal Government doled out economic bail outs to several private sector groups ended up in disaster and gross mismanagement. Almost all the beneficiaries mismanaged the funds and it ended up in over N6 trillion debts with the AMCON till today.

Nigeria’s private sector groups consider those funds as Government largesse because the Government itself failed to do the right thing and put in place right administrative strategies to manage the package. The private sector groups are grossly deficient in corporate governance and generally indisciplined to attract and utilise those kind of benefits appropriately hence Government should just not entertain such calls which will soon start to happen in view of the Initiatives by the rest of the world.

In the final analysis, it is apparent that the Federal Government needs to revisit the 2020 budget ASAP. I’ll offer some measures to be considered if necessary and if at all the Government Economic Team is looking in that direction.

1. The summation of all the above problems is that the Federal Government needs to raise more revenue by all means to tackle any possible shock from the above identified global economic problems at this time.

If Oil prices are falling and nobody is buying our oil, we cannot increase taxes again, it was just recently increased, it is strongly advised not to increase debts by borrowing, then where is the money or revenue going to come from.

There are several ways to raise extra revenues. It was so easy when oil prices hit the top of the roof during GEJ regime and we were posting about $20 billion on extra oil revenue alone. Now we would be lucky to sell as much oil to cover half of the 2020 budget.

Again, there are creative ways to raise cash revenue.

2. It is important first that the Federal Government considers a Debt Payment Reschedules for this season citing the global meltdown and oil prices fall to our Creditors. The Creditors will be willing to negotiate a rescheduling than a default in payment. That will remove the pressure at this time to payback due debts and services the remainder of the Debt. Based on the 2020 budget, we should be spending approximately N2.1 trillion on Debts in 2020. We could strike a deal with the Creditors to defer the Debt payment again due to the current global economic crises. That way, the Government can save a portion of the N2.1 trillion for other economically advantageous projects to stimulate the economy.

2. Nigeria can also raise extra cash to cushion the effect of the potential shortfall in revenue by revisiting the issue of sales of Assets. I want to believe this issue has been lingering on for so long that we have heard nothing from the Federal Government except some clandestine sales that are going on under without the knowledge of the public.

We can immediately address the sales of some Assets especially oil wells and facilities. That should be good to raise an additional N2 to N 3 trillion for the Federal Government if well managed and executed not like the fraudulent sales of Telecom and NEPA Assets.

3. AMCON is currently seating on a moribund debt portfolio of over N6 trillion owed to the Federal Government and TAX payers money. There is need to overhaul the Technical Team of AMCON and its operations. There’s too much bottlenecks there. There is absolutely no reason why they should be seating on debts almost backed by depleting and depreciating Assets without being creative to adopt necessary Debt management mechanisms. There are several ways to turn Debts into Cash and relieve the Government. We play politics with so many things in Nigeria and in the process lose critical value and money. AMCON is a typical case in question. I have written and posted this issue before and the solutions. No need to bother us again about this mess.

In any case, AMCON can generate another N2.5 trillion for the Federal Government if the right strategies are adopted. There are Debt repudiation and repurchase and recreated mechanisms out there. At worse, we should consider Debt Securitization strategies to release some cash to the Government and save those Assets and Debts from totally being written off as BAD.

The three approaches alone should release a revenue of about N7 trillion Naira to the Federal Government. That will go a long way to solve the current trending problems and raise the much needed extraordinary revenues.

It will also assist to generate increase in the growth projections and may be assist to increase liquidity in the system to decrease the chances of any potential Naira devaluation.

It’s all possible scenario. There is no hard and fast rules to resolving all these. We just have to get creative and move away from our comfort zones to become more proactive and get the best out the situation.

It is now dawn on Nigeria that oil is fast becoming a major easy source of revenue or bail out. In the past, any economic shock was easily addressed through drawdown from the NNPC revenue accounts. That is fast thinning out. NNPC itself is struggling to remain profitable at this time. So that comfort zone no longer exists.

No Government will fold its arms anyway to any potential threat as we are witnessing . The Government must focus on issues that will generate growth necessary to put the pressure on low productivity due to long term slow down or shutdown in manufacturing as a result of several problems including power supply; nominal reduction in interest rates through reflationary measures and strong liquidity; reduction in the growing poverty index which is fast becoming a monster; increase in the investment environment akin to tackling the current nationwide security problems to allow the economy breath relief and achieve descent and reasonable growth despite the potential global economic challenges of this year.

God Bless Nigeria

Dr. Kazeem Bello is Principal Partner/CEO- Afrique Capital and Equity Funds Ltd, New York, USA; President, Nigerians In Diaspora Organization, NIDO, New Jersey Chapter and Chairman, Steering Committee of the proposed Nigerian Credit Union.