The International Monetary Fund (IMF), in its April 2020 World Economic Outlook (WEO), said the global economy would experience its worst recession since the Great Depression, exceeding that seen during the financial crisis a decade ago.
The forecast is premised on Covid-19 induced economic shock, which is mainly characterised by disruptions to the global supply chain, on account of the mitigating measures put in place by various governments to contain the spread of the disease. The effects on the global economy have been unprecedented and, indeed, severe.
These include significant stock markets crashes, exchange rate volatilities, rising corporate and public debt, rising levels of unemployment, tightening financial conditions, capital flow reversals, and negative impacts on commodity prices, among others.
Global growth projection by the IMF shows that output growth forecast for 2020 was downgraded by 3.0 per cent in 2020, compared with an initial growth projection of 3.3 per cent.
According to World Bank forecasts, the global economy will shrink by 5.2 percent this year. That will represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870, the World Bank says in its June 2020 Global Economic Prospects (GEP).
Nigeria, the African region’s largest economy and most populous country in the region, is expected to shrink by 3.2 percent in 2020, the World Bank Group said in its June 2020 GEP. This year’s contraction in activity is set to be the severest in four decades and this is as a result of the unprecedented collapse in oil prices.
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The Nigerian economy managed to eke out a positive growth rate of 1.87 percent in Q1, 2020. This performance is expected to drop, especially in Q2, owing to low crude oil prices and the negative impact of COVID’19 on the economy, said Uche Uwaleke, a professor of finance and capital markets, chair, banking and finance department, Nasarawa State University Keffi, Nasarawa State.
Zainab Ahmed, minister of finance, budget and national planning, on March 27, 2020, raised alarm that Nigeria might go into recession if the coronavirus pandemic continued for the next couple of months.
According to a report by the monetary policy department of the CBN, recession is a business cycle contraction, and it refers to a general slowdown in economic activity for two consecutive quarters.
During recession, there is usually a decline in certain macroeconomic indicators such as GDP, employment, investment spending, capacity utilization, household income, business income, and inflation, with the attendant increase in the rate of unemployment. Technically, when an economy records two consecutive quarters of negative growth in real GDP, it can be said to be in recession.
Nigeria, effectively, slipped into a technical recession in the second quarter of 2016 and maintained negative growths in all quarters of that year, driven largely by the downside effects of global shocks, which led real GDP growth to plunge sharply from 6.2 percent in 2014 to 1.6 percent contraction in 2016.
The global shocks at the time included widespread and rising geopolitical tensions along critical trading routes in the world, crude oil prices, and normalization of monetary policy by the united states’ federal reserve system.
The CBN intervened with various policies which also included a bailout to sub-national governments who could not pay their workers for several months.
Other interventions were the introduction of an Investors and Exporters (I&E) FX, which allowed investors and exporters to purchase and sell foreign exchange at the prevailing market rate, a cycle of tightening which culminated in a July 2016 hike in the Monetary Policy Rate from 12 percent to 14 percent.
The bank introduced a demand management approach in order to conserve the nation’s reserves and support domestic production of items that can be produced in Nigeria, growth-enhancing fiscal policy and development finance intervention among other measures.
Consequently, after 5 consecutive quarters of negative growth beginning in the 1st quarter of 2016, a coordinated approach by the fiscal and monetary authorities supported a rebound in the nation’s economy during the second quarter of 2017.
However, analysts polled by BusinesesDay were of the view that the CBN can do more to avert the imminent Covid-19 induced recession, looking at reducing the Cash Reserve Ratio (CRR), review its FX control rules and promoting private investment.
In order to avert a technical recession, meaning two quarters of negative growth in GDP, the government should gradually lift movement restrictions and reopen the economy while making people aware of safety measures including use of face masks.
In line with what is common knowledge, Uwaleke said the government has to pump more money into the economy, especially in agriculture, health, education and critical infrastructure up to a minimum of 10 percent of GDP. He said what has been injected so far by way of stimulus packages including CBN interventions are still less than 5 percent of GDP.
To be able to do this, he said the government needs a lot of money. “Given that the CBN cannot print money owing to inflation and exchange rate concerns and considering that the government has borrowed so much to the extent that debt service to revenue Ratio in Q1 is reportedly over 90 percent, the government is advised to sell some of its assets to raise the required funds. For instance, the government can list the NNPC and NLNG on the Stock Exchange and then do an IPO to raise money while still maintaining controlling interest”.
On its part, the CBN has done a lot but can still complement this effort by reducing the Cash Reserve Requirement from the current 27.5 percent considered high by the banking sector to enable them make more credit.
The CBN has responded in several ways by supporting hospitals and pharmaceutical industry with low interest loans to immediately deal with the public health crises. The bank is also working with the private sector Coalition Against COVID (CACOVID) to support the Presidential Task Force o n C O V I D – 1 9 across its response, while mobilizing palliatives for the poor and vulnerable.
On March 16, the Central Bank of Nigeria announced new measures, including a one-year extension of a moratorium on principal repayments for CBN intervention facilities;
The reduction of the interest rate on intervention loans from 9 percent to 5 percent; strengthening of the loan to deposit ratio policy (i.e. stepped up enforcement of directive to extend more credit to the private sector); creation of N50 billion target credit facility for affected households and small and medium enterprises; granting regulatory forbearance to banks to restructure terms of facilities in affected sectors.
Others are improving FX supply to the CBN by directing oil companies and oil servicing companies to sell FX to the CBN rather than the Nigerian National Petroleum Corporation (NNPC); additional N100 billion intervention fund in healthcare loans to pharmaceutical companies and healthcare practitioners intending to expand/build capacity;
Identification of few key local pharmaceutical companies that will be granted funding facilities to support the procurement of raw materials and equipment required to boost local drug production.
N1 trillion in loans to boost local manufacturing and production across critical sectors, adoption of a unified exchange rate system for Inter-Bank and parallel market rates to ease pressure on forex earnings as oil prices continue to plummet.
CBN adopts the official rate of N360 to a dollar for International Money Transfer Operators rate to banks.
For on-lending facilities, financial institutions have been directed to engage international development partners and negotiate concessions to ease the pains of the borrowers, provision of credit assistance for the health industry to meet the potential increase in demand for health services and products “by facilitating borrowing conditions for pharmaceutical companies, hospitals and practitioners,” analysts at KPMG pointed out.
On the fiscal side, the Federal Government reduced the crude oil benchmark price from USD 57 to USD 30. The Central Bank pledged to pump NGN1.1 trillion (USD 3 billion) into critical sectors of the economy.
A three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans, commenced.
Similar moratorium to be given to all Federal Government funded loans issued by the Bank of Industry, Bank of Agriculture and the Nigeria Export-Import Bank.
“I do not think the current palliatives are enough measures to grow the economy and prevent it from entering into a recession. What I think will grow the economy is private investments strongly supported with government measures to protect such investments,” Ayodele Akinwunmi, relationship manager, corporate banking, FSDH Merchant Bank Limited, said. He said these measures would provide job opportunities for the people and stimulate economic growth.
Many companies are looking to restructure their operations to address challenges posed by the pandemic including securing their supply chains.
However, various rules around foreign exchange control are inhibiting their options and flexibility according to Taiwo Oyedele, head, tax and regulatory services, PwC.
“It will help if the CBN can review its exchange control rules with a view to simplifying and relaxing those that are constituting undue restrictions to investment and business efficiency,” he said. Such rules include certificate of capital importation and the list of items classified as ‘Not Eligible for Foreign Exchange’.
