In case you missed the headlines, all roads are leading to a coronavirus-induced global recession. According to estimates, China’s economy is experiencing its worst downturn since the 1970s. It shrank by 13% in the first two months of the year. The scene across the globe is an empty Piccadilly Circus in London, barely any cars moving in Rome and empty factory floors in Asia.
As for financial markets, the picture is red.
Negative records have been the norm. Oil prices hit a 17 year low, the Dow Jones - an index for the largest US companies - had its worst day since 1987, and manufacturing expectations dropped faster than ever in Germany and China.
The global situation is clear and it’s already had its impact on Nigerian trade and oil earnings. However, regardless of the global situation, matters get worse when the virus lands on a country’s soil. It’s not just about economic indicators anymore, business and consumer behaviour change drastically. Wherever COVID-19 has travelled, economic slowdown has followed.
Last week, Nigerian businesses and consumption were relatively normal but things changed quickly this week. With 51 cases and social distancing policies being announced, the economy is going to slow.
So how should the government keep the economy afloat? Well, let’s see what we can learn from the rest of the world.
Compared to last month, Google searches for “Trillion” have risen by 90%. Although not a usually popular number, the amount of ammunition being dispersed to calm the economic crisis has indeed reached twelve zeros. The total stimulus package released by the US, Germany, Britain, France and Italy comes to a total of $7.4 trillion or 23% of their GDP.
Leading the way is the US and its eccentric president who is showing no mercy. To give you an idea of the current rhetoric across the Atlantic, Steven Mnuchin, the US Treasury Secretary said “Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks.” This came after Trump told the media: “we’re going big.”
CONSUMERS AND BUSINESSES, THAT'S ALL YOU NEED TO REMEMBER
The US has agreed plans for a $2 trillion (10% of its GDP) recovery package to deal with the coronavirus. This will include $500 billion in loans to small businesses and another $500 billion for direct cash payments to American citizens - $1,000 per person for two months.
Many economists dream of this half-century old idea where there’s no beating around the bush and money is sent directly from the government to people’s wallets. The theory is that consumers, the backbone of the economy, will go to the shops with their free cash and spend their way out of the crisis.
Hong Kong has also approved $1,300 for its citizens.
Slightly closer to home, the UK released £350 billion (10% of its GDP) in loans and aid for businesses. The very first sentence of the BBC news report highlighted that pubs will be getting grants.
Pubs getting grants is very on brand for the British. But that’s the thing about policymaking; it has to be specific. There are 47,000 pubs in the UK and because of social distancing, usual pub-goers are not visiting. Without sales, many could be looking at going out of business. Something that the UK cannot afford from both an economic and cultural standpoint.
Central banks also got involved this week. Globally, there have been at least 26 interest rate reductions, the idea being that lower rates will allow both governments and large businesses to borrow more cheaply.
EMEFIELE REACTS, REACTS & REACTS
So there are enough policy choices floating around to choose from. Now, let’s look at how Nigeria has responded so far.
As oil prices dropped, the Federal Government initially came out and announced a revision to the budget was incoming. It then went behind closed doors to plan. On Thursday, they announced a cut of the ₦10.6 trillion 2020 budget by at least ₦1.5 trillion, and a change in the benchmark oil price from $50 to $30 per barrel.
Not quite the big stimulus package that we discussed above. However, the move still makes sense because, with oil prices so low, the Nigerian government is going to struggle to make revenue without its main source.
More recently, the House of Representatives proposed a Bill for an Act to provide for tax relief, suspension of import duty on selected medical goods, and deferral of residential mortgage obligations. The important thing here is that lawmakers are hoping to use tax breaks to incentivise companies from laying off staff. A step in the right direction but still no direct flow of money into the economy.
No worries though, in usual fashion, the Central Bank of Nigeria (CBN) came in to fill the gap. They came with three responses in the last week.
When oil prices fell to $30 per barrel, expectations and rumours began of a potential naira devaluation. This, including the fear of a potential dollar scarcity led to a rush for forex on the parallel market. As everyone tried to dump the naira for dollars, the value of the naira weakened, leading to an increase from $1 = ₦360 to $1 = ₦410.
Then came the CBN’s first response. It wasted no time. We all remember the struggle the last time one dollar was over ₦400.
In the late hours of Thursday night, the bank put out a statement to categorically deny any plans of a devaluation and then proceeded to pump some dollars into the system. The parallel exchange rate has now settled around $1 = ₦380.
Oil prices then tumbled further and Nigeria, after celebrating zero live coronavirus cases, got its third COVID-19 patient. Now, the CBN realised that it had to do more than release statements, action was required.
At this point, remember that the impact of the coronavirus is through its ability to freeze up consumers and businesses, and therefore slowing the economy.
To combat that, the CBN introduced six policies, which essentially eased borrowing conditions for small and medium-sized businesses currently under their many intervention funds. They reduced interest rates from 9% to 5% and extended the loan repayments by a year. The main beneficiaries are farmers under schemes such as the Anchor Borrowers Program and other SMEs in sectors such as textiles and the power.
The bank also included healthcare and any coronavirus impacted businesses to its intervention fund privileges. Lastly, it announced ₦50 billion in credit to support businesses and work with banks to continue lending to the “real” sectors. For context, in 2018, during normal times, the CBN loaned out ₦118bn to farmers.
THE THREE-DAY REALISATION
Nonetheless, three days after these policies were announced, Emefiele woke up to oil prices below $25 and eight coronavirus cases in the country. It must have been a serious realisation because the CBN announced a ₦1.1 trillion ($2.7 billion) stimulus to support “critical sectors of the economy.” ₦100 billion is going in the form of credit to the healthcare sector, while the remaining ₦1 trillion is going to the ever famous manufacturing sector.
If you have been following the newsletter for the past month, this is the moment where you can boast of knowing the significance of the current story plot.
As we have been discussing recently, the manufacturing sector is vital in crisis times because of its reliance on dollars to import foreign parts.
Manufacturing goods account for 70% of Nigeria’s imports. And so whenever oil prices drop and there is a scarcity of dollars, the sector struggles to get enough forex for its imports.
To avoid the sector coming to a halt and pulling the country down with it, the CBN is responding quickly. Part of the stimulus is to help the sector and others switch to domestically produced goods. Aka Buy Naija.
MOVE WITH YOUR CHEST
Oil is still below $30 per barrel and the number of cases currently stands at 46. One can safely assume that number will rise. Essentially, expect to see patterns in Europe, specifically behaviours such as social distancing, stockpiling, and remote work. Even this newsletter was produced from a team that abandoned its Lekki office and went fully remote yesterday.
The change in consumer and business behaviour will hit the Nigerian economy.
As previously mentioned, policy responses have to be targeted or specific to the problem. For COVID-19, this means a deliberate policy response for Nigerian consumers who make up 77% of our economy and high employment sectors like agriculture, manufacturing, and trade (retail & wholesale) which make up 70% of Nigerian jobs. This is where money should be flowing.
The CBN is making attempts but the Federal Government needs to come out with its chest and inject money directly towards firms and workers. Apart from the impact of oil prices, a situation where movement is restricted will grind the economy to close to a halt.
The story is as follows:
As social distancing begins, economic activity from transport to hospitality will slow. Consumers stay at home and reduce spending, which will lead to a reduction in business output.
Retail stores will close. And businesses will begin reducing workers hours or laying off staff. It is at this point that the crisis can go from bad to worse. Consider that the 2016 recession was just an oil price shock. This time it's a worse oil shock and slowed consumption.
To avoid a worse scenario, the government must provide enough support (in loans for example) to enable businesses to keep workers on their payroll. A situation where people lose jobs would not only be bad for welfare but will make it harder for the economy to restart when the virus is eradicated.
The US government estimated that unemployment would rise from 3% to 20% without significant spending. That’s 32 million Americans out of work. All of a sudden, sending $1,000 cash to the population doesn’t seem like an overreaction.
Nigeria’s head should be in a similar place. Cash transfers to the very vulnerable and loans to the rest of the economy. Budget cuts and even devaluing the currency (a welcomed move rumoured to be incoming) won’t be enough.
The devaluation which international investors and organisations have been calling for will put us in a better position to borrow money and that’s exactly what we should do. Ghana, a country never scared to ask the IMF or World Bank for support, has already put in it’s request, and Nigeria should follow suit.
CONVENTIONAL WAYS OUT THE WINDOW
These are very different times and the world is adjusting. On Wednesday, the Bank of England governor said it is willing to supply an unlimited quantity of money into the economy to help fight the effects of the coronavirus.
Putting together both the response from their governments and central banks, the UK and US have released an amount of liquidity equivalent to 10% of their economies. For Nigeria, that would mean spending around ₦15 trillion - more than the 2020 budget - as a response to the virus.
Of course, Nigeria doesn’t have the luxury of borrowing large amounts at low rates without anyone batting an eye. The last year has been spent debating on Nigeria having a debt or revenue crisis. The answer is both. Debt servicing is more than 50% of our revenues. So caution is advised on the nature of our borrowing.
Afterall China, which is also worried about its debt, hasn't come out with a big-spending package. It’s focus is on dealing with the virus first and then providing liquidity where needed - currently at $80bn in loans.
And That’s a major point; if the virus can be stopped in good time, then the negative economic impact and a resulting stimulus package could be avoided.
Similarly, if we borrow and spend without containing the virus in a few months, the economy will remain in the red and the repayment of loans will be difficult.
But in the more likely event where the virus arrests the economy for a short period, the government should bridge that gap with credit to avoid a deep recession.
In the 2016 crisis, growth slowed from an average of 7% to 2% and we haven’t been able to return to high growth levels since - leading to negative GDP per capita growth. Every year we are getting poorer as the economy isn't keeping up with the population.
In summary, Nigeria cannot afford another 2016. Otherwise, debt will be the least of our problems when we have a population over 300 million and there’s no economy to feed it.