The past few weeks have revealed that the turbulent effect of COVID-19 transcends, not only the mortality of humans but also the vitality of the economy.
In other words, the perspective to which COVID-19 should be viewed is beyond the death of a human, but also the death of the world economy (Nigeria inclusive). Thus, the fight against COVID-19 is not just for the health agencies, but the economic agencies and policymakers.
The on-going outbreak, COVID-19 (formerly called Coronavirus) as caused by SARS-CoV-2 coronavirus, was first cited in Wuhan, Hubei, China on December 31, 2019. Latest statistics reveal that over 100,000 cases of COVID-19 have been reported globally. Out of this figure, 73 per cent of the confirmed cases are from Mainland China, with 7 per cent each from Italy and South Korea.
In Africa, as at Wednesday, 104 cases had been confirmed; of which 55 cases are from Egypt, 20 cases from Algeria, 13 from South Africa, 5 from Tunisia, 4 from Senegal, 2 from Cameroon, Nigeria, Burkina Faso, and 1 case from Togo.
The vampire that sucks the global economy
On the global scene, about 55 per cent of these cases have been confirmed to have recovered from the disease. About 3 per cent of deaths have been recorded, while about 41 per cent are still active.
This proves that the reality of COVID-19 is beyond health implications, as economic implications abound.
The global economy, since the inception of COVID-19, has been disrupted. China, the world’s second-largest economy after the United States- in terms of nominal GDP – has suffered output contractions via restrictions on the movement of goods and services, people, factory closures, among others. Its ripple effect has affected the world economy via the financial markets, supply chains, business travel and tourism, commodities and pessimistic view of the economy.
A recent report released by OECD showed that the world economic growth could be further dampened with about 0.5 per cent point this year (1.5 per cent if the outbreak persists) compared to the expected annual drop of 2.4 per cent in 2020. Also, the UN trade agency posited that this economic vampire might cost the world economy a total of $2 trillion by 2020.
The Vampire That Sucks the International Crude Oil Market
In international market trade, China was ranked 2nd among the top importers in the world after the United State with about $2.1 trillion. According to trading economics, China’s importation shrank by 4 per cent (YoY) to about $300 billion in January – February 2020 combined, due to COVID-19 oriented production stops and business disruption that stirred a reduced need of raw materials.
In crude oil and oil product market, China, which was ranked 1st, followed by South Korea and Italy in the global outbreak of the disease, was simultaneously ranked 2nd, with South Korea and Italy ranked 5th and 7th respectively, among the top importers of oil in the world.
Research shows that the top three leading countries in disease outbreak accounted for 35 per cent of the total oil demand in the global market. To this end, a drag effect on the economies of these countries has stirred a sharp decline in oil demand globally.
This further stirred a need for the consistent fall in the oil price, which leaves oil-dependent nations like Nigeria in an economic quagmire. Beyond the effect of the outbreak in the oil market is its effect on the global stock market. If the effect can be this huge on the world economy, what will then be its flutter effect on the Nigerian economy?
The Effect on Nigeria’s Economy
Following the membership of Nigeria in the OPEC Treaty in 1971 and the oil boom of 1973, the country has become solely reliant on crude oil as the major source of revenue and foreign earnings, neglecting other critical sectors of the economy.
The Nigerian oil sector contributes over 90 per cent to foreign earnings and 44 per cent to government revenue (Medium Term Expenditure Framework (MTEF) 2019). From the indication above, it is not surprising if the economy experiences fluctuations as a result of overdependence on oil revenue which is susceptible to external shocks such as war, diseases, etc.
The incidence of coronavirus to the current drastic fall in international world oil price is not the first of its kind. The crude oil price has experienced several shocks, for instance, between 2014 and early 2016, the global economy faced one of the largest oil price shocks.
The 70 per cent price drop over the period was among the third-largest decline since World War II. This was triggered by the discovery and surge in the U.S. shale oil production and unstable policies by OPEC which led to excess production and demand shocks.
Within that period, the global growth moderated from 2.8 per cent in 2014 and 2015 to 2.4 per cent in 2016, amid weakening global trade and deficient capital flows.
The Reality of Nigeria’s 2020 Budget in the face of Coronavirus
Nigeria’s 2020 budget saw a total expenditure of N10.33 trillion with a projected revenue worth of N8.15 trillion assigned by President Muhammadu Buhari, late 2019. In total, about 32.39 per cent of the projected revenues are to come from oil sources while the remaining balance is to be earned from non-oil sources.
The actualisation of the budget was based on the assumption of targeted oil production of 2.18mbpd, an oil price of $57 per barrel and an exchange rate of N305 per dollar. It then became a case to worry that any decline in the world oil price as a result of external shocks will send a severe pain to the Nigerian economy since the economy solely depends on the oil sector as a source of revenue and foreign earnings.
However, the recent disagreement between the world’s largest producers of crude oil (Russia and Saudi Arabia) has sent a serious warning to all countries that depend only on their crude oil for a revenue source.
The case of Nigeria is particularly a pitiful one.
Explicitly, the effect of coronavirus on oil demanding nations like China, cannot be overemphasized. China is the largest consumer of crude oil in the world, with over one billion people and massive industrial sectors who need energy for their production.
As of 2015 and 2016, China bought over 0.5 million barrels per day on an average and 0.9 million barrels respectively. As of February 2020, the Chinese oil demand has dropped by about 3 million barrels a day, that is, 20 per cent of the total consumption, as coronavirus shrinks the economy. This has led to a demand shock in the world oil market.
In response to this, a meeting was held last week in Vienna by OPEC to discuss the mitigating factors to the dwindling oil price caused by declining demand from the world’s largest importer.
The agreement to further cut oil output by as much as 1.5 million barrels per day was outrightly rejected by Russia, being a strong force when it comes to oil production in the world.
The war over who will have the largest market share in the world oil market spurred Saudi Arabia (the largest oil-producing state in the world) to cut crude oil price by $6 to $8 per barrel and also increase oil production to about 10mbpd. This was done to win the market share and chase away competitors like Russia and the U.S. The comparative advantage of the Arabians in oil production is a strong one.
The current oil price of $36 per barrel (as at Tuesday) caused by a coronavirus and the impeding effect of the decision made by Saudi Arabia is worth a concern for every Nigerian as far as the 2020 budget is concerned.
Likely Effects on the Nigerian Economy
The Nigerian economy being monolithic, had projected her 2020 budget on the assumption of a stable crude oil price, which is now in shambles. It is high time the Nigerian government prepared for another recession as the projected revenue to be generated from the crude oil is now a mirage.
There is a need for the government to re-adjust her budget, which will come with several austerity effects on the economy or source other ways to generate loans to finance the impending economic quagmire.
Taking a cue from the last recession that happened in the first quarter of 2016, the fall in world oil prices followed by Nigerian policymakers’ devaluation of naira had a very terrible effect on economic development.
Is it still advisable for the country to devalue the currency since the foreign reserve is gradually approaching the $30 billion, which is a threshold for devaluation, to ensure the safety of the naira?
The likely responses to the current Nigeria economic quagmire and likely repercussions
1. Slashing of the budget:
The Nigeria 2020 budget was pegged at N10.33 trillion. With the current reality that the oil sector revenue does not have the potential to generate as expected, the federal government might want to slash the budget.
The truth about this is that the detrimental effect might lead the economy into recession. The realisation of job creations, good infrastructure, and the development of human capital might turn out to be a mirage.
As it stands, the recurrent expenditure has the largest share of N4.88 trillion as salaries and pension payment has improved tremendously. The effect of the budget slash in this segment will fall heavily on the households and business firms. This will be seen in delay in salary payment and even owing, refusal to pay pensioners.
This analogy is typically a train of RECESSION.
The capital investment, which has been receiving a third-largest share of the total spending after debt servicing will also experience massive neglect in terms of projects. Lots of uncompleted projects will exist based on paucity of funds to complete them. This will serve as an avenue for some scrupulous politicians to siphon public funds in the name of acquiring sub-standard materials and technology to execute a compulsory capital project.
If this occurs, the aspiring of the ERGP of making Nigeria the top 100th country in the ease of doing business will become a daylight dream as foreign investors will rather invest in other smaller economies than invest in a weak economy with substandard infrastructure.
2. Sourcing for more loans to sustain the economy from the oil price shock
The Nigerian economy’s debt profile as of 2013 was about N12.12 trillion. It increased by 79.25 per cent in 2017 to N21.73 trillion. As of 2018, the total debt profile was around N25.70 trillion and then to N26.22 trillion as of January 2020 (which is 116 per cent of 2013 base year debt stock).
The theme of these statistics shows that the Nigerian economy has been experiencing a rise in debt profile overtime in which the multiplier effect on economic growth and development has been infinitesimal.
According to self-made calculations from MTEF 2019, the result shows that the Nigerian economy has been servicing debt with about 55k for every N1 generated as revenue. Where then does our fate lie? To continue borrowing and mounting more and more debt on the incoming generation to pay on what they never enjoyed?
The assumption that borrowing is sourced to finance capital expenditure is unthinkable because MTEF 2019 report shows that of all the allocation made to capital expenditure, we hardly spend 60 per cent. Further borrowing will have a further negative impact on debt service to revenue. Why then borrow more when the true cost is enormous?
3. Inward looking for revenue generation
One important consideration for the government is to liaise and form a joint-stock investment agreement with affluent and great business tycoons in the country. An instance of the current construction of the Apapa expressway as supported by Aliko Dangote is worthwhile in terms of quality and quick execution.
Lobbying with other great and rich men in the country for financial and technological and manpower assistance would not be a bad idea as far as the safety of the economy is concerned. This agreement will later turn out to be a win-win situation for both Nigerians and the local investors who will benefit from adequate returns on their loans and also enhance better business operations for all and sundry.
Paul Alaje is a senior economist, SPM Professionals
He can be reached via email@example.com