The
COVID-19 pandemic circumstances have combined with low Oil demand and prices to
brew up a perfect storm. Buffeted by the strong headwinds, Nigeria’s
second-quarter GDP shrank by 6.1 per cent, the biggest drop since 2004.
Government
revenues which rely on Oil sales shrank along with the demand for crude Oil.
Besides that, low Oil prices may pressure foreign exchange earnings and
reserves, as 90 per cent of Nigeria’s currency earnings stem from sales of
crude Oil.
Country remains
exposed to external risks
The
second-quarter contraction highlights Nigeria’s exposure to external risks
around the Oil markets, redoubling the urgency behind the state’s
diversification efforts.
The World Bank expects Nigeria to face the
worst economic recession since the 1980s because of the collapse in Oil prices.
It projects the economy to shrink by 3.2 per cent for the full-year 2020 on the
condition that Nigeria contains COVID-19 by the third quarter. If not, the
contraction will be worse, according to the World Bank.
The International Monetary Fund (IMF) is
more pessimistic about Nigeria’s economic outlook. It sees GDP shrinking by 5.4
per cent this year, the biggest decrease in 40 years. Goldman Sachs puts the
full-year GDP contraction at a five per cent GDP contraction, closer to the
IMF’s than to the World Bank. The coronavirus lockdown weighed on the economy,
as domestic and international activity caved in at the same time.
Domestic risks must not be
overlooked
The
economic contraction presents significant risks around consumer spending and
investor confidence. The pandemic also triggered a higher threat of poverty.
The World Bank sees the poverty rate rising to 42.5 per cent from its previous
estimate of 40 per cent in 2020.
Along
with the human cost, a rise in the poverty rate can affect macroeconomic
stability and pose setbacks to economic benchmarks like inflation,
unemployment, consumer spending and fiscal spending. These macroeconomic
statistics are already highly sensitive to further risks, like a second wave of
COVID-19 or another Oil price collapse.
Unemployment
stood at 27.1 per cent in the second quarter. The inflation rate rose to 12.8
per cent in July, the highest since March 2018, meaning a reduction of
purchasing power. These benchmarks are likely to remain sources of concern in
the second half of the year. US Dollar scarcity remains another threat to
growth, with Naira weakness and ongoing foreign exchange restrictions likely
punishing the non-Oil sector.
What role will OPEC play?
Adding
to the macro-economic challenges around COVID-19, Nigeria will have to reduce
Oil production in August and September to comply fully with OPEC’s supply cuts.
Coming on top of lower Oil prices, reduced production means decreased
government revenues and foreign exchange earnings. An accompanying knock-on
effect on GDP is likely.
In
conclusion, Nigeria is likely heading for a technical recession. If the country
contains COVID-19 and pro-actively prepares for more localised outbreaks, the
World Bank believes this may support GDP and limit the economic damages. Over
the last three months, COVID-19 cases have risen to 52,227 cases with 38,945
recoveries. The number of deaths stands at 1002, at the time of writing. When
compared to South Africa’s 607,045 cases, Nigeria is in a better public health
position. If the authorities limit the spread of coronavirus and continue to
manage the situation effectively, Nigeria’s economy has better chances of
recovering in line with a global recovery in the medium term.
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