When consumer spending and business activity slowed as a result of the coronavirus pandemic, Nigeria’s government, like others across the world, deployed policies to provide a more stable economic environment.
They hiked spending and provided tax relief to boost economic output (fiscal policy). In Nigeria's case, the government is offering a 50% tax refund to companies that do not retrench staff until the end of the year. The monetary authorities also increased available loans and reduced the cost of borrowing to make funds easier for individuals and businesses to access (monetary policy). And as always there were moves made on the exchange rate as well (exchange rate and balance of payments policy).
The overall aim is to ensure that on a macro level, economic output is eventually restored to the pre-pandemic level. On a micro level, the goal is to protect individuals and businesses from the effect of the pandemic.
Given the importance of the task at hand, it becomes imperative to question the adequacy of our economic responses in achieving its objectives.
Contextualising Nigeria’s fiscal policies
At the end of June, the Federal Government (FG) had approved a ₦2.3 trillion stimulus plan to boost significant sectors of the economy. There is a 12-month timeline for its implementation.
The scheme includes many key infrastructure projects and is a step in the right direction. It provides support to the three groups that bear most of the brunt from the crisis - healthcare industry, small and medium-scale businesses (SMEs), and the vulnerable. But, the size of the stimulus package pales in comparison to countries of similar size.
While Nigeria’s stimulus package is 1.6% of its GDP, Morocco, Namibia, and Senegal have deployed packages valued at 2.7%, 4.3%, and 7% of their GDP respectively.
There is room for the government to do more.
For instance, the ₦20,000 ($52) provided to families registered in the National Social Register of poor and vulnerable households would go to only 11 million Nigerians. This is a sharp contrast to the 84.7 million Nigerians living below the poverty line.
Most people in the country have taken a hit. With two-thirds of Nigerians experiencing a drop in their income, there has been a sharp decline in the demand for non-essential commodities. This implies that many businesses - particularly SMEs - not producing “essential” commodities may close shop before December. At this point, even the government's 50% tax relief plan becomes pointless.
The federal government says the ₦2.3 trillion stimulus would result in an economic decline of 0.59%. But this position is overly optimistic considering the current recession projections of -5.4% by the IMF. However, since the low oil price has significantly depleted the country’s revenue source, producing a bigger stimulus through more debt is a tough choice.
Probing Nigeria’s monetary policy response to Covid-19
On monetary policy, the CBN has cut down the interest rate at which it lends to commercial banks from 13.5% to 12.5%. The apex bank extended the payment of its intervention loans by one year and reduced the interest rate on these loans from 9% to 5%.
The nine CBN intervention funds that exist cover primarily the agriculture, manufacturing and creative sectors. The CBN’s efforts will enable these sectors to de-prioritise debt servicing and provide them with funds to weather the crisis.
However, the extent to which these efforts trickle down to the average Nigerian is debatable.
First, the reduction in the Monetary Policy Rate (MPR) does not automatically reduce the rates imposed on loans by commercial banks.
Second, Nigeran businesses, regardless of the sector, are still being required by commercial banks to service their loans. This implies that businesses in hard-hit sectors such as tourism, aviation, and hospitality could be using the funds they get from the government, to service existing debt with commercial banks, leaving less money for essential needs such as paying workers.
Meanwhile, a host of sectors that have been hit by the pandemic are left behind, i.e. no direct intervention. From the oil and gas industry to bars, nightclubs, restaurants and the event planning industry, these businesses continue to service their loans from commercial banks and as a result may have folded up by the time the pandemic is over.
The banks have, however, begun to restructure some of these loans. According to the CBN governor, loans worth ₦7.8 trillion; 41% of all loans granted by commercial banks would have more favourable terms to the borrower.
Assessing the exchange rate intervention
The decline in oil price is strongly associated with the reduced supply of foreign exchange. Unfortunately, there is an increased demand for hard currency as foreign investors are averse towards the risky naira-denominated assets.
The CBN thus had to devalue the naira from ₦360 to ₦380: US$1 with the black market rate reaching ₦470:$1. The high and rising exchange rate implies that Nigerian businesses would need more naira to import raw materials and intermediate goods, while individuals require more to pay fees and health bills, with no expected increase in profits or salaries.
While the task before the government is daunting, more would need to be done to ensure that the economy is protected and recovers quickly after the pandemic.
For starters, increasing the size of the stimulus package to provide immediate tax relief for all registered businesses and cash transfers to more vulnerable Nigerians is of utmost importance.
Although the low level of financial inclusion - 40% of Nigeria's adult population are financially excluded - implies that the most vulnerable are unbanked and hard to reach electronically, they can be identified based on local knowledge of the vulnerable in a community.
In addition, a hold off on debt servicing by commercial banks is crucial particularly for the hardest-hit sectors. Mauritius, for instance, is allowing households to suspend servicing loans from commercial banks for six months with the Bank of Mauritius shouldering the interest payments for households with the lowest income.
Ultimately, how well these policies perform will determine the future of our economy, and by extension, our livelihoods.
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