The Impact Of COVID-19 And Decline Of Oil Price On The Nigerian Economy By Abubakar Garba Mukhtar
POLITICS DIGEST– The economy of Nigeria is a middle income, mixed economy and emerging market, with expanding manufacturing, financial, service, communications, technology and entertainment sectors. It is ranked as the 27th-largest economy in the world in terms of nominal GDP, and the 24th -largest in terms of purchasing power parity. This placed Nigeria as the economic giant of Africa.
The economy of Nigeria is dominated by crude oil, which accounts for about 10% of the country’s GDP, 70% of government revenue and more than 80% of the country’s total export earnings, according to OPEC. … The industrial sector makes up 25.7% of the GDP and employs 12% of the workforce.
Since the outbreak of the novel Corona virus (Covid-19) pandemic in the province of Wuhan of the Republic of China the virus has gone viral and widespread all over the globe becoming one of the powerful enemy and it affect different aspect of human lives including that of the sector of the economy in the world. Economy is like Object In motion, that need need to be touched with an economic policies for it to be worked widely and effectively implemented.
The spread of the disease coming in to Nigeria has caused setbacks and challenges to the Nigerian economy having been realizing the fact that the mainstay of the Nigerian economy is Crude oil, because crude oil provide Nigeria with almost 80% of its foreign exchange earning and serves as its major source of revenue by almost 70%.
Before the pandemic, the Nigerian economy had been suffering with weak recovery from the 2014 oil price shock with the Gross Domestic Product (GDP) growth diminishing around 2.3 percent in 2019. In February, the international Monetary Fund (IMF) revised the 2020 GDP growth rate from 2.5 percent to 2 percent as a result of relatively low oil prices and limited fiscal space. Also looking at the country’s debt profile has been a source of concern for policymakers, economists and financial experts projected that the most recent estimate of the country’s debt service- to- revenue ratio (Debt-GDP Ratio) would stood at 60% which is likely to worsen amid the decline in revenue associated with falling oil prices. These constraining factors will increase the economic impact of the COVID-19 outbreak in which the government may find difficult to deal with the economic scenario.
Therefore, after the outbreak of the disease and the recent price war trading ( Russia And Saudi Arabia) in the world has cause changes in the crude oil price determination in the global oil market causing the collapse of the oil market, and this was as result of the lockdown measures put in place to contain the spread of COVID-19 represent an unprecedented shock to global oil demand. This consequently lead to the fall of the oil Price in the world which Nigeria had been seriously affected negatively.
Nigeria as one of the major oil exporting country in the world have experienced low amount of export revenue because the rate at which Nigeria generate export revenue from the sales of crude oil is now very meagre compare to previous times before the outbreak of the covid 19 pandemic. This have subsequently affect Nigeria’s financial expenditures. One very clear example was the recent intense pressure which Nigeria was put to have reviewed it proposed budget which pegged at oil benchmark of $30 per barrel unlike the initial $57 benchmark used for the 2020 budget cycle. Nigeria, on March 18th reduced N1.5 trillion ($4.17 billion) on nonessential capital spending due to the drastic fall in the price of crude oil in the international market caused by the outbreak of COVID-19. This subsequently affect the overall aggregate demand in the economy as there would be no more income projection in the economy because of the lack government spendings.
Households consumption pattern have reduce to the extent that the average propensity to consume is very low because of the restrictions of movement of people and goods, stay at home and the lockdown policy measures put in place by the government which affect income generating capacity of the people. Not only that, informal sectors that engage in output production have been adversely affected such that they were unable to produce output that will meet the ever increasing demand of the Households.
Investment by firms have also been negative because research hve shown that investment by firms recorded worst performance, Nigeria Stock Exchange have recorded its worst performance since 2008 global financial crisis and this makes investors to lost confidence in further investment and decided to have hold off their investment decision due to the uncertainties that comes from the outbreak and the duration the disease will last.
Closure of land borders, closure of Airport from an international flight and the restriction of the movement of people, goods and services have affect the supply chain of Nigeria with the other countries of the world, Nigeria’s oil export which forms its major global supply chain has been disrupted. This was part of the reason why CBN have recently devalue the domestic currency on essential and nonessential good.
Possible Policy Recommendations To Stimulate The Economy.
The quick response policies that need to be implemented to revamp the economy from the shock of the oil prices amid the pandemic of the Covid-19 are Monetary And Fiscal Policy.
The Central Bank Of Nigeria (CBN) have already earmarked N50 billion as credit facility to households and small and medium enterprise affected by the pandemic. N100 billion loan to health sectors and Nm 9%-5% and have adjusted uniform exchange rate from 306-360 in order to reduce more pressure on foreign exchange reserve.
Other Possible way forward is to ensure that government through its tax revenue collecting agencies to waive or reduce tax collection inform of Corporate Tax, Income Tax, Capital Gain Tax in oder to ease the burden of the tax as the pandemic now affect both income and profit of the individual and businesses.
Tax revenue collecting agencies of Federal government and state government respectively should stop or delays tax collection from the sectors that have suffered more from the incidence of the pandemic in order to enable them recover from the steep decline of their demand.
Government should reduce the cost of its governance especially payment of an unnecessary allowances to all political appointees that in one way or the other add no value to the economy and the government should waive expenses on all white elephant projects that are not productive in the economy in order to save more from the government treasury.
Also there is need for the government to go back to its drawing board to strategize and re-strategize in order to call for the diversification of the economy. The government can as well look into other sectors of the economy. Investing on other sectors of the economy will go a long way to reduce the burden of the revenue generation placed on the oil sector and this will further expand the revenues base of the government from the oil base revenue to non oil revenue base.
Having a failure to go on the policies that needs to be widely and effectively implemented in order to contain the spread and the escalation of the pandemic the resultant effects might even be more worst than the current existing realities of the pandemic; poverty, unemployment, hunger and social vices would become the other of the days.
AG Mukhtar is an economic analyst, he writes from Kano and can be reached via [email protected]