Nigeria’s economy can’t escape hard times, says Osinbajo Committee

 

Nigeria’s economy can’t escape hard times, says Osinbajo Committee

 

Irrespective of whatever measures the government could adopt to refloat the economy, Nigeria’s economy is certainly in such hard times it never experienced in history, Nigeria’s Sustainability Committee, led by Vice President Yemi Osinbajo, has said.

The Committee submitted its 76-page report to President Muhammadu Buhari on Thursday.

President Buhari had on March 30 established the nine-member committee to develop a clear Economic Sustainability Plan in response to the health and economic challenges posed by the COVID-19 Pandemic and identify fiscal measures for enhancing distributable oil and gas revenue, increasing non-oil revenues and reducing non- essential spending, towards securing sufficient resources to fund the plan.

Mr Buhari also charged the committee to propose monetary policy measures in support of the Plan; provide a Fiscal/Monetary Stimulus Package, including support to private businesses (with emphasis on strategic sectors most affected by the pandemic) and vulnerable segments of the population; articulate specific measures to support the States and FCT; propose a clear-cut strategy to keep existing jobs and create opportunities for new ones; and identify measures that may require legislative support to deliver the Plan.

The committee wrote as follows in its report;

Nigeria is currently faced with perhaps the most challenging economic downturn in its history just as the global economy is also confronting its sharpest reversal in a generation. With every country dealing with varying degrees of the same problem, there are few places to turn for help.

For Nigeria, this is a multilayered quandary: a health crisis, a near-total shutdown of economic activities, capital flow reversals and a fast increasing unemployment rate, fuelled by layoffs in almost all sectors of the economy.

Nigeria’s status as an oil-dependent developing economy also puts us in a particularly difficult place. Government revenues have declined significantly, first, on account of the fall in crude oil prices to as low as $12 per barrel in April 2020, and then our inability at times to sell oil, despite its being priced below production cost, because of the shutdown in virtually every area of
manufacturing, services and commerce all over the world. Where this happens, it means that we get virtually no revenues from our oil.

There is also a glut in the global gas market, on account of which we are sometimes unable to sell our stock of Liquefied Natural Gas, potentially wiping out much of the dividends expected from NLNG.

In effect, our major sources of foreign exchange are gravely threatened and our external reserves get little or nothing by way of augmentation. Rather, they are being depleted for external payments and importation.

Non-oil revenue, largely made up of taxes, has also practically dried up. This is because, like several economies around the world, Nigeria is faced with paralysis of economic activities due to lockdown measures in the Federal Capital Territory and the key commercial and industrial centres of Lagos, Ogun and Kano States. In addition, several other State Governments took similar steps to slow the spread of COVID-19 in their respective territories. These have cumulatively resulted in supply chain disruptions, suspension of commercial activities and large-scale job losses.

The depletion of our dollar earnings have also depreciated the Naira, and pushed up prices, especially of imported goods. This is a cause for concern, coming at a time when the average household purchasing power is falling sharply on account of loss of income.

Businesses that depend on importation for raw materials or other inputs for manufacturing are hampered by the sharp drop, by as much as 90%, in foreign exchange earnings and shutdowns in exporting countries. So, rather than expect taxes (CIT, PAYE or VAT),

we should be prepared, at best, for companies reporting losses or seeking tax payment deferment, while government finds a way of shoring up businesses.

“In the face of these emerging challenges, the onslaught of COVID-19 has also meant radically increased demand for resources in the health sector, to provide for mounting personnel costs, hazard pay, emergency equipment, such as personal protective equipment, ventilators, oxygen tanks, testing facilities, isolation centres and drugs. This means, for the appropriate level of response, we would have to significantly increase our health- care expenditure.

Structural Vulnerabilities

Prior to COVID-19, apart from a major dependence on oil for public revenues and foreign exchange earnings, our economy was susceptible to inflationary pressures and characterized by a high debt service ratio, a weak infrastructural base and unsatisfactory human capital development indices. Although government has been making strenuous efforts to address these weaknesses, the current economic emergency threatens to reverse much of the achievements and push millions of our people below the poverty line.

The Challenge

The immediate challenge is that of business continuity, especially how we protect as many of our Micro, Small, and Medium Enterprises as is possible while keeping the economy competitive. We have a large informal workforce, usually daily wage-earning, consisting of street vendors, petty traders, artisans, roadside motor mechanics, etc., who have now been deprived of their income.

With 40% of the population being already classified as poor, i.e., earning less than N137,000 per annum, the COVID-19 crisis is set to multiply the misery, if left unchecked.

The Response

In response to this unprecedented challenge, President Muhammadu Buhari established the Economic Sustainability Committee (ESC). Among other things, the ESC was to:

(i) develop an economic sustainability plan, including a recommendation of an appropriate stimulus package;

(ii) devise measures to create more jobs while keeping safe the existing ones; and

(iii) identify fiscal and monetary measures to enhance oil and non-oil government revenues, in order to fund the plan.

The Scenarios

In determining the level of response or stimulus appropriate for this situation, the ESC found it necessary to consider carefully some probable scenarios. For example, in terms of expected revenues, the fluctuation in global oil prices presages serious economic challenges for the rest of 2020. This is because crude oil accounts for 50% of consolidated government revenues, 30% of banking sector credit and 90% of export earnings. In the circumstance, we cannot but expect large budgetary and payments gaps.

The revenue outlook for the rest of 2020 is depicted in Tables I-IV, showing scenarios for oil prices at $30 per barrel, $25 per barrel, if oil prices average $30 over the rest of the year, estimated oil revenues (with NNPC concurrently reducing JV costs by 20%) would amount to N88.4bn monthly. At the same time, if non-oil revenues are sustained at the lower level projected in the revised budget estimates, then average monthly allocations to FAAC for the rest of the year would only be about N485bn a month. This would be a
best-case scenario.

In the worst-case scenario of $14 per barrel, we will incur a net loss of oil production revenues amounting to about $11.8bn monthly. Non-oil revenue would similarly reflect the slowdown in economic activities. Monthly FAAC for the rest of the year, starting from May 2020, may, therefore, be no higher than N384bn.

Monthly FAAC for the rest of the year, starting from May 2020, may, therefore, be no higher than N384bn.

Neither the optimistic scenario nor the worst-case scenario is comforting if compared to the average FAAC disbursement for the first three months of 2020, which was N669.9bn. This means that at a $30 per barrel oil price, total monthly FAAC will be N184bn less every month, while if the price averages $14 per barrel, the FAAC total will reduce by N270.9bn a month. This will have serious implications for personnel costs, overheads and capital expenditures at Federal, State and Local Government levels, especially coming at a time when resources are needed to pay for compelling counter-cyclical and pro-poor policies.

The National Bureau of Statistics has modelled macro scenarios which show that economic growth could fall by as much as -4.40% to -8.91% depending on the severity of the outbreak COVID-19, length of lockdowns and quantum of stimulus deployed by government.

In an optimistic scenario, with an average price of $30 per barrel of crude oil in 2020 and a stimulus of up to N3.6tn, growth will still decline by -0.42% in 2020, possibly rising to 3.03% in 2021 and 5.17% by 2025. A lower stimulus of N2.3tn or 1.5% of GDP at the same oil price of $30 per barrel will result in a fall in output of -0.59% in 2020 and a resumption of growth to 2.54% in 2021.

A more cautious scenario of $20 per barrel with a N3.6tn stimulus will result in negative growth of -2.42% in 2020 recovering to 1.19% in 2021 and 3.32% in 2025. At the same price level, a N2.3tn stimulus will result in an annual growth rate of -2.82% in 2020. and 0.95% in 2021.

In the pessimistic scenario, if oil prices level out at $15 per barrel in 2020 due to a prolonged global recession or continued oil glut, then even with the stimulus of N3.6tn, the economy will decline by -3.01% in 2020 and only rise by 0.45% in 2021. At the same price level of $15 per barrel, a N2.3tn stimulus will still result in a sharp decline of -3.66% in 2020. These figures, as well as those for inflation, reserves and external balance, are shown in Table V.

In the optimistic scenario, and reflecting the stimulus, inflation is expected to rise to 15% by the end of this year and only fall to single digits by 2023 while the cautious and pessimistic scenario will show more moderate inflation reflecting a generalised slowdown in economic activity.

With regard to external financing, the overall balance is expected to deteriorate from -$2.1bn to -$16.2bn, leaving a financing gap of $14.1bn. Some of this can be met through concessional borrowing of about $7bn from international financial institutions, but that will still leave a financing gap of $7.1bn dollars (See Table VI). The external debt situation is also of concern. Nigeria is expected to pay $165m as interest on its bilateral official debts (mostly to China) and will likely get some relief following the G20 agreement in this regard. But a greater problem will arise from interest payments due on outstanding Eurobonds, which amount to $655.48m for the rest of 2020.

Averting a deep recession

In essence, we have to find ways to prevent or limit recession and avert the accompanying prospects of business failures, job losses, and increased poverty. The generally accepted approach today is to deploy a stimulus package, an increase in government spending, tax discounts, loan re-payment deferments or re-structuring, all with a view to increasing aggregate demand by beefing up investments and consumer spending. The question then is not whether
or not we should stimulate the economy but what size of stimulus package is capable of preventing a disastrous recession.

What we must do

It is clear that we must now take urgent steps to forestall a severe economic downturn and the largest unemployment situation yet in our history. Consequently, over the next twelve months, the Federal Government will work in close collaboration with State Governments and the private sector to stimulate the economy by preventing business collapse and ensuring liquidity; retaining and creating jobs using labour-intensive methods in key areas like agriculture, housing, digital business services and direct labour interventions.

We must also undertake growth-enhancing and job-creating infrastructural investments in roads, bridges, renewable energy, and communication technologies; and extend the protection of vulnerable groups – including women and persons living with disabilities – through pro-poor spending.

The Membership of the Committee consists of Vice President Osinbajo; Minister, Finance, Budget & National Planning, Zainab Ahmed; Minister of State, Budget and National Planning, Clement Agba; Minister, Industry Trade & Investment, Adeniyi Adebayo; Minister, Labour and Employment, Chris Ngige; Minister of State, Petroleum Resources, Timipre Sylva; Governor, Central Bank of Nigeria, Godwin Emefiele; Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari; and Permanent Secretary, Cabinet Office, Babatunde Lawal – Secretary

The committee later co-opted the Minister of Agriculture & Rural Development, Sabo Nanono; the Minister of Humanitarian Affairs, Disaster, Management & Social Affairs, Sadiya Faruk; Minister of Works & Housing; Babatunde Fashola; Minister, Aviation, Hadi Sirika; Minister, Communication & Digital Economy, Ali Isa Pantami; Minister, Education, Adamu Adamu; Minister of Health, Osagie Enahire; Minister of Interior, Rauf Aregbesola; Minister of Science and Technology, Ogbonnaya Onu, and Minister of Transportation, Rotimi Amaechi.