2020 in retrospect: Nigerians groan as pandemic brings economy to its knees

The monetary value of all the finished goods and services produced, including anything produced by its citizens and foreigners within a country’s borders, in a specific time period is refered to as Gross Domestic Products. CHIMA NWOKOJI in this report dissects the chain reactions that characterised the import-dependent Nigerian economy in 2020 as lockdown of economic activities crippled everything in the first quarter.

Before the 2016 recession, Nigeria’s economy grew at 6.3per cent. By contrast, before the COVID-19 pandemic, the economy was growing at 2.2 per cent. Inflation was in single digits in 2014, compared to about 12 per cent in 2019 and 14.8 per cent in November 2020.

This year, the hard blows from COVID-19, rising inflation and escalating unemployment have made mincemeat of the macroeconomic framework used by economists to interpret the economy and its policy tradeoffs, leaving most stakeholders confused as to what exactly is happening.

However, the National Bureau of Statistics has not minced words about its records of what has been happening in the Nigerian eeconomy. It will be recalled that the first quarter of 2020 was greeted by a combination of health crisis, declining growth of Gross Domestic Products (GDP), reversal of capital flows, financial handicap and, for some countries, a sharp drop in commodity prices, as the effects of  the coronavirus pandemic hit the global economy and particularly Nigeria so hard.

At the height of the pandemic, great capital cities were affected. Nigeria’s capital city Abuja was panic-stricken and the usual sharing by the Federation Account Allocation Committee’s (FAAC) was no longer a celebration.

Describing what the country faced at the period, governor of Nigeria’s Central Bank, Mr. Godwin Emefiele said, on May 12, “permit me to state that we are currently faced with a public health and economic crises of unprecedented proportions, driven primarily by the 55 per cent drop in crude oil prices between January and May, 2020.

“This unparalleled shock requires that the federal and state governments along with the organised private sector, work together to address these challenges in order to preserve lives, restore economic activities and reset the economy of our dear country.”

In its Macroeconomic Review and 2021 Outlook for Nigeria, analysts at FSDH Research, the research arm of FSDH Merchant Bank noted that the problem with the Nigerian economy is beyond COVID-19 but  more of a structurally-weak economy affected by externally-induced shocks.

Trade weakness

COVID-19 induced lockdowns, supply chain disruptions, foreign exchange (FX) accessibility issues and sustained border closure worsened the decline in the last two quarters (Q3’20: -12.1% YoY, Q2’20: -16.6% YoY), consequently setting trade activities back to 2012 levels. Notably, the recent contractions have shrunk the sector’s contribution to GDP to 13.9 per cent (2015: 16.9%; 2019: 16.0%). According to a herd of economists, but for the contraction in the sector, GDP would have declined by only 1.8per cent in the third quarter.

Declines in other manufacturing and some services sub-sectors compounded the adverse impacts of trade weakness on the economy, even though telecoms and construction sectors provided some support to aggregate output. Telecoms sustained its impressive growth momentum (+17.4% YoY) as movement restrictions accelerated the adoption of virtual communication, while construction (+2.84% YoY) appeared to have benefited from limited rainfall and greater government focus on the sector.

Border closure

Nigeria has re-opened four of its critical land borders after 16 months of closure, others are likely to be re-opened later. The borders were closed in August 2019 to minimize smuggling of rice, ammunitions and narcotics, among others. This move inhibited regional trade, which contributes approximately 13.88 per cent  to GDP and account for 16.9 per cent  of total employment according to Bismark Rewane-led Financial Derivatives company Limited (FDC).

Informal trade has a significant share in Africa’s regional trade, accounting for approximately 30per cent-40per cent.  The region has a GDP size of $2.6trillion, with Nigeria accounting for about 21.9per cent. With talks on the ECO currency and the AfCFTA commencing in January 2021, the re-opening of the land borders according to FDC, will boost regional trade and integration.

Financial system stability

Non-Performing (NPL) ratios in the banking industry has remained low at 5.7 per cent. The capital adequacy ratio of the banking industry, at 15.5 percent, remains above the prudential requirement per cent (regulatory). In addition, return on earnings in the banking sector was over 21percent as at October 2020.

Industry sources said while the news of the continued growth in the banking and finance sector in the third quarter of the year is encouraging, the CBN governor said the ultimate strength of Nigeria’s financial system would depend on three key factors: ensuring that banks have adequate capital buffers to withstand similar pandemics, developing adequate internal controls that will be able to identify potential risks to banks, and being able to adapt  business model to changes taking place in the business environment.

Information Communication Technology

Another sector which emerged as a significant source of resilience in mitigating the impact of the COVID-19 pandemic on the economy, has been Information and Communications Technology (ICT). The growth of startups in the fintech and health care space rose in response to the pandemic.

The Central Bank recently issued Payment Service Banks licenses to three firms as part of efforts to drive financial inclusion and ensure that majority of Nigerian citizens are banked. The Payment Service Banks, along with Mobile Money Operators and Banks are expected to leverage ICT channels in improving penetration of digital finance.

Agriculture

Available records from the national accounts show that the agriculture sector grew by 2.2 per cent when compared year by year (y/y) in Q1 2020, compared with 2.5per cent recorded in the previous quarter. Crop production accounted for 88 per cent of agriculture GDP and grew by 2.4 y/y. However, CBN records show that growth in agriculture (+1.4% YoY) has materially slowed (average of 2.2% in the last eight quarters vs prior 5-year mean of 3.5%) despite prolonged monetary and fiscal support.

Debt profile

Nigerian states and the Federal Debt Stock data as at 31st March 2020 reflected that the country’s total public debt portfolio stood at N28.63 trillion. Further disaggregation of Nigeria’s total public debt showed that N9.99 trillion or 34.89% of the debt was external while N18.64trillion or 65.11 per cent of the debt was domestic.

States and the Federal Debt Stock data as at 30th June 2020 reflected that the country’s total public debt portfolio stood at N31.01trillion.

The Minister of Finance, Budget and National Planning, Zainab Ahmed, recently said that the country’s total public debt will hit N38tn by December 2021.

Power sector

According to the Financial Derivatives Company Limited, the average power output sent out from the national grid in Q3 was 4,342MWh/h, 7.1 per cent above the average of 4,054MWh/h recorded in the first half of October. Gas (27,535MWh/h) was the dominant constraint to power generation especially in Alaoji NIPP and Ihovbor NIPP plants. Total constraints in the period averaged 2,396MWh/h, resulting in a total revenue loss of N17.25billion (N207bn annualized).

The electricity Discos have commenced  implementation of the revised electricity tariffs. Consumers are divided into five categories (B and A-E) across various states like Lagos, Abuja and Ka-duna. The divisions are based solely on electricity consumption and hours of electricity supplied. In addition, the FG has resumed the distribution of six million free meters, estimated to impact over 30 million consumers nationwide within the next 18-24 months. Meanwhile, approximately 60 per cent of Nigerians are still on estimated billing.

Exchange rate

For months, calls have been mounting on the Central Bank of Nigeria (CBN) to devalue the naira due to a build-up of pressure on the external reserves and a gloomy outlook for oil and foreign investments. This is believed to be putting pressure on the central bank, constraining its ability to sustain the defence of the naira.

In 2020, the CBN devalued/adjusted the naira on three occasions to ameliorate the pressure. At the end of November 2020, the dollar to naira rate in the parallel market stood at N495/US$ from N361/US$ at the beginning of the year.

Drawing from experience during the last recession, limited availability of FX as well as FX rationing could have unintended consequences on broad economic aggregates such as GDP, inflation, external reserves and foreign investments. The pressure on the foreign exchange marke, according to experts, persisted in 2020Q3 owing to slow down in the global oil prices and continued pressure on external reserves.

2020 budget and sharp fiscal adjustments

Fiscal authorities revised the 2020 budget in the wake of the COVID-19 pandemic which had caused an oil price shock and weakened prospects for non-oil revenue. The oil price assumption was reduced by 50.9 per cent to $28.00/bbl. while oil production was cut 17.4 per cent to 1.8mb/d following output cuts agreement reached to support oil prices.

Meanwhile, the CBN devalued the official exchange rate by 15.3 per cent to ₦360.00/$1.00, reflecting the deterioration in external accounts and falling external reserves. The revision made to the assumptions translated to projected revenues of ₦5.4trillion, which is 36.3per cent weaker than initial expectations. Projected oil revenue has been revised downwards by 60.3per cent to ₦1.1trillion while non-oil revenue was reduced by 10.0per cent to ₦1.6trillion.

Stock market

The equities market kicked off the year amid stronger optimism propelled in part by the unattractive fixed income yield environment and the hunt for high dividend-yielding stocks by investors. However, the outbreak of the COVID-19 pandemic and the economic fallout swiftly put an end to the early optimism, with the resulting fear and uncertainty dictating market sentiment for the rest of the first half. As the pandemic continued to spread with Nigeria recording its first case, stocks lost 9.1per cent and 18.8per cent in February and March due to lockdown and elevated external risks.

Indeed, huge stock market losses were recorded at different periods during the first and second quarters of this year, as Covid-19 turned out to be a double whammy of health and economic crisis. But following the easing of travel and quarantine restrictions, the Nigerian equities market somewhat appeared to be on a recovery in Q3.

Records from the NSE show that the Nigerian stock market closed on a positive note in the first half of November. It gained 14.76per cent to close at 35,037.46 points on November 13th relative to its close of 30,530.69 points on October 30th. In the same vein, market capitalization rose by 14.72per cent  to N18.31trillion from N15.96trillion on October 30th. The market has gained 30.53per cent year to date(YTD). During the 10 trading days of the review period, the market gained in 7 days and lost in three days.

Generally speaking, market participants said foreign participation in the capital market was weakened in the year. In addition to constrained inflow of foreign exchange, there is a surge in foreign outflows.

Mirroing 2021

According to Emefiele, “with sustained implementation of our intervention measures, we do expect that the Nigerian economy could emerge from the recession by the first quarter of 2021. We also expect that growth in 2021 would attain 2.0 percent. However, downside risks remain, as restoration of full economic activities, particularly in service related sectors, remains uncertain until a COVID vaccine is produced and made available to millions of people across the world.”

There are expectations of heightened currency pressures in the coming weeks owing to declining external reserves and the sustained forex supply shortfall. This would be compounded by the increase in forex demand as international flights and trading activities pick up.

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