On
March 26, Nigeria joined many other nations banning flights into the country
and urging shelter-in-place, social isolation practices amid the coronavirus
COVID-19 pandemic. President Buhari approved a 10-billion-Naira grant to the
epicentre Lagos to fight the outbreak in the region and a five-billion-Naira
grant to support the Nigeria Centre for Disease Control.
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Exports
of Oil and Gas will continue and more fiscal and monetary policy measures will
be needed, said the president. Having left interest rates unchanged during its
March meeting, the Central Bank of Nigeria (CBN) still has scope to reduce its
key rates if inflationary pressures recede.
This
raises the central question of what will happen to inflation levels. Food
prices may rise sharply if measures are not taken to cap them under the current
circumstances. Prices of pharmaceuticals, masks, and hand sanitiser in Europe
were capped as part of governmental measures to control skyrocketing prices for
these goods, for example.
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Other
goods which feed into price benchmarks are gasoline and electricity. These are
expected to fall along with the price of Oil and government coffers should see
some relief from the fuel subsidy, which had risen on the back of higher Oil
prices earlier this year. Additionally, the Naira is weakening and may fall
further against other currencies if foreign reserves decline below $30 billion.
A weaker Naira would add to inflationary pressures.
All
told, the coronavirus pandemic is expected to have an unprecedented impact on
the Nigerian economy. The disease represents a major threat to the economy
because of plummeting Oil prices and close trading ties with China. While China
is in the recovery stage of its coronavirus outbreak, the country’s industrial
growth fell by 13.5 percent in the first quarter.
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As
industry is one of the biggest consumers of Oil with transportation being
another, Oil prices could fall further than the 60 percent they already have
since the beginning of the year. The International Monetary Fund (IMF)
estimates that with each 10 percent fall in Oil prices, Oil exporting countries
like Nigeria will see a 0.6 percent drop in GDP and an increase in fiscal
deficits of 0.8 percent of GDP. Under the current circumstances, the federal
government appears well aware after announcing a 10.6-trillion-Naira cut in the
2020 budget and a change in the benchmark Oil price from $50 to $30 per barrel.
The
emergency should be a wakeup call for Nigeria to reduce its dependence on the
Oil industry in order to weather future storms and black swan events. This was
the direction taken by the CBN during its Growth 2.0 roundtable. Along with an initiative
to depreciate the rate of foreign exchange sales to foreign portfolio
investments (FPIs) to roughly N380.00, the reinvigorated drive towards
diversification may help to stimulate interest in Nigeria’s financial
instruments.
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Nonetheless,
the CBN may be forced to cut interest rates in the second half of the year if
global conditions fail to improve. Fiscal measures may need support from an IMF
loan after the fund expressed concerns over the global landscape and the impact
of the coronavirus pandemic on African countries, extending emergency financing
of up to $50 billion.
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