Covid-19: A Business Impact Series was published by KPMG Nigeria on March 30. It is mentioned that Nigeria will face a twin shock during this uncertain time: a Covid-19 pandemic induced domestic and oil price shocks. These will impact the economy through three channels: supply, demand, and financial.
According to some data in the article, the Nigerian economy has been potentially vulnerable, given the fact that about 25% of its total imports are from China, 22% are from The U.S.A. and 19% are combined from Netherland, Belgium, and Germany. Having a total percentage of those figures, over 60% of its imports are coming from those five countries.
Therefore, the alarm on supply shock has been raised since the first wave of Covid-19 started in China in early 2020 and spread to European and the U.S.
The second shock comes from the oil-price slump. As we may know, Nigeria’s economy still highly relies on the oil sector, given the fact that around 80% of its exports are from crude oil. As a price-taker country, Nigeria “takes it as it comes” when the oil price plunges by 35% to record low in the last 40 months. This condition will adversely affect the economy as the influx of foreign exchange (forex) will slow.
Additionally, the Nigerian government imposed a containment policy (as has become common around the world) for a certain period to curb the spread of Covid-19 across the country. This will lead to more pressure on domestic demand.
The second shock will also dampen the ERGP (i.e. Economic Recovery and Growth Plan) initiative that aimed to switch from oil-based to non-oil based economy. The low influx of forex will force the banks to reduce dollar spending limits to secure national reserves. As a consequence, the local currency (Naira) has fallen by 7% against the US Dollar in just one month.
Import reduction will take place in the economy as one of the austerity measures. Accordingly, manufacture and agricultural sectors will face uncertainty to expand due to the restriction on raw materials and machinery importation.
This is a gentle reminder not to put “all your eggs in one basket”. First, being highly reliant on certain countries in trade will not create resilience. In this case, Nigeria needs to start creating more opportunities to cooperate with other countries that can share comparative advantages.
Second, being highly dependent on oil does not necessarily make a country resource cursed. In this regard, Nigeria can start to look for a long-term partnership to support its ERGP initiative. Therefore, a comprehensive Free Trade Agreement (FTA) might be able to be one of the best long-term solutions.
My present duty is to promote mutual trade between Indonesia and Nigeria; we can recall the spirit of mutual Preferential Trade Agreement (PTA) that has been proposed since 2017. This PTA can be an important milestone to the next level of a comprehensive FTA between the two countries. Some factual reasons are: Indonesia is the tenth the largest oil importing country from Nigeria; the average annual total trade between both countries were up to US$ 2 million in the last five years, the largest in the Economic Community of West African States.
Nigeria enjoys a trade surplus (with Indonesia) at an annual average of US$ 1.5 million in the last five years; and Indonesia has been more intense to cooperate with African countries, including Nigeria since the Indonesian Africa Forum, took place in Bali in 2018.
Both countries can mutually trade to meet domestic demand. The PTA will eventually increase national welfare by more than US$ 10 million of which 99% of the welfare will be transmitted to Nigerian consumers. Beyond that, the PTA will be enriched with the spirit of the historical Asian African conference as well as the framework of South-South cooperation that promotes mutual benefit.
Besides, investment relations can be promoted. As it is, the PTA can go the extra mile to break the resource curse as well as be an enormous solution to support the ERGP initiative.
The so-called twin shock has been in place until these uncertain times. Nigeria, like all nations of the world, is managing its resources to withstand the current economic turbulence.
Bagus Wicaksena
Bagus Wicaksena is head of the Indonesian Trade Promotion Centre in Lagos
