Senior Research Analyst at FXTM
As
headwinds from the coronavirus pandemic storm lambaste the world economy, the
outlook for Nigeria appears cloudier for the second half of the year.
The
next few months are critical for the country’s fragile economic recovery and
the main question is whether Nigeria will sink or swim in the coronavirus storm. On the positive
side, the Federal Government announced the second four-week phase of lockdown
easing, hopefully leading to some breathing room for the economy. However, the
infection rate is still growing at over 25,500 confirmed cases and over 580
deaths.
Damage from the
storm
Opinions
differ on just how much water Nigeria’s economy is taking on as the cracks
appear in its hull. The IMF expects
the economy to contract by minus 5.4 percent, while the finance minister sees
the contraction at minus 8.9 percent. The World Bank is more positive, putting
the damage at minus 3.2 percent this year.
Is patching the
leaks enough?
The Central Bank of Nigeria (CBN) cut
interest rates and the government unleashed fiscal measures, raising another
question - will this be enough to fix the leaks? External and domestic risks
range from shaky Oil prices, slowing global growth, US-China trade uncertainty
and Nigeria’s heavy reliance on Oil revenues. Headwinds in the Oil industry may
blow even harder given the recorded COVID-19
cases in some offshore sites.
The
results so far bear out the volatile outlook. Total revenue from crude Oil and
natural gas declined by 31 percent in March, likely knocking onto GDP growth
for the first half. These developments put the country’s $5.9 billion economic
stimulus plan in the hot seat. The priority is certainly to jumpstart growth
against the current odds. Monetary policy options are becoming thin on the
ground, though, and it remains uncertain whether the CBN has enough room to cut
interest rates from 12.5 percent given how inflation jumped for the ninth
straight month to 12.4 percent in May.
The
crux of the economy is consumption, which accounts for roughly 70 percent of
GDP. It may be that the CBN will find other unconventional methods to boost
consumption and steer Nigeria away from a recession.
At the
time of writing, however, the difficulties are significant and risks to the
economy remain high as the effects of the coronavirus pandemic prove to be
immune to monetary policy. Whether we like it or not, COVID-19 will remain a
major theme in the markets as Asia, Europe and the US report an increasing
number of new cases.
Adding
to the risks is the growing possibility of a new round of lockdowns as fears
intensify over a second wave of coronavirus infections pressuring the world
economy again. Another wave could have devastating consequences, putting quick
recoveries beyond the capacity of central banks and governments and initiating
years of slow progress.
If a
second wave is avoided, the key question will be whether Nigeria has done
enough to mitigate the impacts of COVID-19 and navigate around a rocky
recession.
In my
opinion, the situation remains unpredictable. A positive way forward could be
through economic adaptation measures such as promoting local tourism, building
up the technology sector, and tax incentives for consumers, retailers and
similar sectors to encourage spending amid an already-loosened credit
environment.
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