Nigeria: Still a long road to economic recovery

By Charles Abuede

• As Covid-19 second wave, recession, stagflation hit economy
• But can Nigeria leverage weak currency, AfCFTA?

Nigeria, Africa’s largest economy by gross domestic products (GDP) and market size, is currently experiencing myriads of negative economic trends in the face of the coronavirus pandemic which at present is on the rise and inviting a second phase of national lockdown; a high inflation rate, which sits at its peak for the first time in 34 months; rising unemployment levels, poverty, and exchange rate; all of which are likely to worsen even in the face of output recovery, until structural factors such as infrastructure, power, insecurity, FX issues are addressed.

The Nigerian economy slipped into a recession in the third quarter of 2020 following a -3.62 per cent contraction in GDP, the second recession since 2016. Recessions in Nigeria have mostly been caused by a fall in the price of crude oil and the absence of large fiscal or monetary buffers in a structurally weak economy. However, this time, the problem with the Nigerian economy is beyond COVID-19 crisis. It is more of a structurally-weak economy that has been affected by externally-induced shocks.

The nation’s GDP contraction in 2020 was the deepest as economic growth reached its lowest point at the first contraction in Q2 2020 (-6.1 per cent). The depth of contraction narrowed in 2020 Q3 (-3.62 per cent). While at the height of the 2016 recession, 10 out of the 19 economic sectors contracted, in 2020Q2, only 13 sectors contracted.

Economic experts and analysts have, however, expressed high optimism that GDP may recover quickly relative to 2016, but that structural factors will slowdown recovery or worsen other socio-economic indicators.

Border closures, rising prices, COVID-19 pandemic

Prior to the recent directive by the Nigerian Presidency on the reopening of four of the country’s land borders after almost 15 months of closure due to illegal activities of smugglers, official data shows that inflation numbers still stand above its pre-Covid-19 levels. Analysts have also asserted that the inflation numbers will likely trend upwards going into 2021, stemming from the fact that the closure of the land borders have resulted in VAT increase by 50 per cent and structural challenges have driven up prices of goods and services.

Following from that also, is the fact that, for the fourth consecutive quarter, Nigeria experienced yet another negative trade balance of –N2.4 trillion in the third quarter of 2020, despite an increase in the value of total trade. As a share of total trade, exports accounted for 36 per cent while imports had a share of 64 per cent, according to National Bureau of Statistics (NBS) data.

Research analysts at FSDH Merchant Bank have calculated that Nigeria has lost over N11 trillion in outputs on account of disruptions caused by the Covid-19 and other major disruptions which have fed the high inflation and constricting in gross domestic product (GDP) that official statistics have confirmed.

“We estimate the loss in real output from COVID-19 and other disruptions in 2020 at N5.8 trillion. In nominal terms, this loss is estimated at N11.6 trillion. In addition to the direct output loss, there have also been significant job losses, income losses, erosion of monetary value, among others. COVID-19 and other disruptions have reversed the gains achieved since 2017,” the analysts said in a note.

They specifically stated that the impact of the 2020 recession on individuals and businesses is more severe because of its nature, noting that, “With COVID-19, businesses were forced to shut due to lockdown and social distancing. This had a toll on individuals’ income, corporate and government finances”.

How can trade improve with borders still shut? 

• Weak currency, low FX liquidity and AfCFTA next

The continued closure of some of the country’s land borders, increasing demand for imported goods,as well as weakened demand for exports are some factors that have expanded Nigeria’s trade deficit in Q3. But despite the challenges in the crude oil sector in 2020, crude oil still accounted for 81 per cent of total exports, while non-oil exports declined, accounting for seven per cent of exports in the quarter.

Given these statistics, Nigeria needs to urgently implement reforms that will improve the production and exports of non-oil goods and services. Clearly, from the data, Nigeria’s policies are still not strategically clear with regard to diversifying exports and divorcing its long-time marriage with crude oil.

Data shows that non-oil exports have fallen for the most part since the borders were shut. What have been the gains since the borders were shut? Are rice producers now able to compete, now that the government plans to reopen? Nigeria needs to seriously start the conversation about what will replace the fast-dwindling or insufficient oil dollar inflows in the next decade. What are we doing to improve non-oil exports and investment inflows to earn foreign exchange? How can we leverage on our weak currency and AfCFTA?

In conclusion, these realities grace the assertions that with the current upheavals, such as the coronavirus pandemic which is on the rise to disrupt activities of citizens and investors in this yuletide, the constriction in the gross domestic products, indicating the lowest level of economic growth in Q2 2020 and deepest in Q3 2020; and rising prices of commodities in the double digits,occasioned by the pandemic and border closures, as well as the increase in the unemployment numbers and limited availability of foreign exchange in the market, that have befallen the economy, there is no doubt that there is an existence of stagflation and deep recession in the economy.