Nigerian economy in the era of Corona

At the last count, – at the time of writing this essay – coronavirus has successfully established its presence in no fewer than 123 countries with a record of 119,300 certified cases out of which about 56% recovered and 3.6% died. Currently, there are about 48,493 cases of actively infected persons globally. Although most recorded deaths are from the aged and those with some severe medical conditions, it is still not in doubt that it possesses devastating capabilities. China, from where it originated, has about 36.8% of those that are currently actively infected. Other countries trailing behind China are Italy, South Korea, and Iran that have shares of 19.43%, 16.9% and 11.46% respectively. France, Germany and Spain have an average percentage of 3.5% each and constitute the next three after Iran. In Africa, there are cases of actively infected persons in Morocco, Nigeria, Egypt, Senegal, Burkina Faso, Togo, Cameroon, Democratic Republic of the Congo (DRC) and South Africa. So it is with us here, albeit at a low scale relative to its global prevalence. Already we are beginning to feel its devastating impacts in our businesses and the economy.

Last week one of our clients seeking to finance his business operations rejected the term sheet that we proposed to their organisation. Their reason was that recently the cost of producing its flagship product rose by 500% because of the unavailability of the critical inputs imported from China. Since the encounter with that particular client, we have also run into several similar cases. The differences in them are the referenced countries. There is one common denominator orchestrating the shrinkage in supply of these critical factors resources. The coronavirus outbreak has meted out disruptions in the amount of these vital cost elements and therefore consistent with economic theory, shrinking supply with demand remaining unchanged will all things being equal lead to price increases. Unfortunately, Nigeria’s production capabilities umbilically hinge on the raw material imports from many of the currently significantly coronavirus-exposed countries. Together with a large number of other countries that are hitherto not affected considerably, they promote self-quarantine measures for containing the possible spread of the coronavirus. These measures invariably orchestrate massive shutdowns of production facilities in China and the many other Asian countries.

Before the outbreak of coronavirus, foreign exchange supply appeared to the main challenge with the procurement of raw material from overseas. Now, it cannot be only that. Based on the World Bank data, 50% of the top 10 countries in terms of the number of actively infected persons also make up about 30% of the global suppliers of all the raw materials needed by our production facilities nationwide. The United States of America, China and Italy supply more than 25% of all the imported raw material inputs into our production processes. The same China and Italy also make up about 55% of all global coronavirus infected persons so far. Let us examine the particular case of Italy. In 2017, raw material imports from Italy was worth US$412 million. Imported minerals from the same country were worth US$409 million. Capital goods and machines imported from the same country, of which most of them were to enhance production activity were worth over US$600 million. These numbers give an idea of how umbilically attached we are to the imports of production factor resources from some of these countries. China is a particularly interesting case. It is also a very well-known partner for the sourcing of the raw materials for our industries. In 2018, we spent US$8.4 billion in imports from China. 55% of the spending was on capital goods while about 26% was on other intermediate products. It is therefore clear how much disruptions that this virus is causing to our capacity to produce and employ labour. There is no point rehashing that most other African countries maintain virtually the same kind of trade relationship that Nigeria has with China, the USA and most of the top 10 coronaviruses actively infected countries.

Many Nigerian manufacturers depend entirely on a single supply source for their inputs. In recent times Chinese raw material producers play this role, and because of their price competitiveness, they become the sole supply source. The implication of this overreliance on a single Chinese source of raw material has equally triggered a severe but unfolding supply chain crisis. Many companies in Nigeria are waiting for their Chinese partners to reopen for business and supply them the relevant raw materials to commence production. The absence of supply source diversification plans for many local manufacturers has created a supply chain crisis of immense dimensions. Therefore, there are about two possible options available to the domestic producers of goods and services that depend on single Chinese sources of raw materials for production. The first is the identification of substitute raw material sources that would not escalate the cost of production above that of competition. There are possible options offshore. The second option is to look inwards and identify potential developable substitutes to leverage in the short term until China and some other Asian countries overcome the scourge.

There is also a temporary halt on the growing influx of Chinese people into Nigeria and the rest of Africa. By 2017 at least 67% of all Chinese people coming to Africa were Nigeria bound. A small fraction of this group makes long-term direct investments while many proceed to other destinations. However, this gradual implantation of Chinese investors has witnessed some temporary halt due to the coronavirus outbreak. The aviation and shipping sector is witnessing this short-term effect which may last longer than we expected it to be. More than 30 airlines in over 40 countries have also suspended direct flights to China. Worse still, many of the airlines that suspended flights to China are equally extending the initially estimated flight resumption dates. Even African-based airlines such as the Ethiopian airline, Kenyan airways, royale air Maroc, and RwandAir have suspended flights to China. Turkish Airlines also suspended flights to Nigeria among several other countries to contain the spread of coronavirus. A former vice president of Nigeria, Alhaji Atiku Abubakar, also called on the federal government to ban all flights to China and Italy. On the flip side, China equally advised its citizens to defer their trips overseas until the containment of the outbreak. The summary is that in the short-term and pending the resolution of the coronavirus challenge, Nigeria and several other countries will continue to lose significant income and transaction opportunities that air transport typically facilitates. The outbreak of the virus and the ensuing massive flight suspensions shuts down albeit temporarily severely affects the connections of people and markets in China, many Asian countries and Italy.

Similarly, Italy, Germany, Spain and the United States which hold the second, third, fourth and fifth positions in the hierarchy of 10 coronavirus actively infected countries also make up the list of significant dollar remitting countries. Diaspora remittances constitute a considerable share of our foreign exchange earnings. Based on evidence from a 2014 study by IDRC/CDAR, approximate 44% of these remittances are used in Nigeria to subsidise household consumption while 15% and 12% go into the financing of household education and healthcare respectively. Approximately one-third of these remittances are from the United States alone. Notwithstanding that the level coronavirus infestation in the United States is relatively low compared to its population, if not contained, it may threaten the 30% contribution of remittances inflow from the country. Italy, which is the second most severely attacked country contributes no fewer than 5% share of diaspora remittances into the country. Germany and Spain contribute 3% and 4% respectively. It will not be out of place to expect that in the short-term, there will be substantial reductions in the size of the transfers from these countries. This will, however, vary depending on the proportion of the infected persons to the countries overall population. For instance, we do not expect that such disruptions may be noticeable in the case of the United States diaspora remittances.

Crude oil prices have also fallen precipitously since the outbreak of the coronavirus in January and have hit a US$50 low at the beginning of March. With factories and other production facilities becoming idle in several high oil purchasing countries, it was only in the natural course of reaction that the price of crude oil will drop. The long-term guesses seem to have favoured price reductions. More so, the coronavirus has already taken off a significant chunk of economic activities in the transport logistics and industrial production sectors at a global scale. The first is the drop in oil demand directly by transporters (air, land, and sea) whose operations suffered a huge hit. The second category is the economic agents who depend on these transporters for generating the interconnectedness required to create economic activities. These activities rely substantially on oil to run efficiently. Plants and machinery rely considerably on oil. The minimisation of the connectedness and outright disconnection of hitherto connected business partners will inevitably result in deficient levels of operations expected to correlate positively with crude oil demand.

What does the future hold for our economy in this time of the Corona? Many analysts believe that the virus will continue to spread unabated for at least the next 18 months. However, it is equally unlikely that a medical push back will not have been unleashed before the next six months. China, the United States, Italy and many other currently severely exposed countries are unlikely to fold their hands and watch many of their citizens, as well as their sources of livelihood, become sacrifices to the gods of Corona. That notwithstanding we still need to prod our minds on the steps to ward-off the calamity should there be a failure to discover a vaccine or a medical treatment for the problem. It is at a time like this that our raw material research institute should prove to Nigerians why they should still be in existence and funded with taxpayers money. It is also a time for us to reconsider the worthwhileness of the initiatives that we are implementing for achieving a truly diversified economy.