Coronavirus and echoes of 2016: Choking under burden of oil dependence

In August 2016, the Nigerian economy, after two consecutive quarters of declining growth, was declared to have slipped into a recession. The price of oil had fallen from highs of about $112 a barrel in 2014 to below $50 at that time. While many did not seem surprise by the declaration, because government depends on oil sales for about 70% of its revenues, four years after, the country continues to toe the same line, even with weakened buffers. FEMI ADEKOYA writes how the coronavirus pandemic exposes Nigeria’s failed diversification agenda.

President Muhammadu Buhari in 2015 said the 2016 National Budget being prepared by his administration would include fresh policies and measures to encourage the rapid diversification of the Nigerian economy away from its current over-dependence on the oil and gas sector.

According to the President, policies being evolved by his administration to boost domestic manufacturing and attract greater investment to Nigeria’s agricultural and mining sectors will be given full effect under the 2016 budget.

After recovering from the 2016 recession, many of the diversification efforts remain jeopardised by usual practice of bureaucracy, infrastructural challenges and increased oil exploration.

With the outbreak of the coronavirus pandemic earlier in the year, oil prices were seriously hit and caused panic for oil producing nations and global manufacturing hubs.

Indeed, the growing spread of the coronavirus globally has led to further travel restrictions. More airlines have also announced job cuts and grounding aircraft in response to the worsening pandemic, according to media reports.

“The escalating coronavirus pandemic, with countries around the world closing borders and locking down populations to contain its spread, has seen Friday’s false dawn end quickly today,” Jeffrey Halley, Senior Market Analyst at OANDA, said Monday.

Oil futures had opened higher Sunday evening after surging in aftermarket trading Friday, following US President Donald Trump’s announcement that the US would buy “large quantities” of crude to fill the Strategic Petroleum Reserve. The gains, however, were short-lived.

“With the nightmare scenario of an oil price war and a global recession upon us, oil has collapsed in early Asian trading,” Halley said.

Concerns of growing oil supply following the collapse of the OPEC+ talks also capped market optimism, with Russia and Saudi Arabia indicating that they will increase production following the expiry of the current OPEC+ deal.

For Nigeria, recession stories echo, having failed to do anything different in terms of diversification and building buffers, as the naira last week depreciated past N400 to a dollar at the forward market after oil prices dipped further.

According to analysts, a low oil price environment means a faster rate of decline in the foreign exchange reserves. They said Nigeria could suffer this fate if the Central Bank of Nigeria (CBN) continued its interventionist policy in the market to keep rates stable, or a weaker currency if the apex bank stops.

Similarly, the case for devaluation rests on a thin line between economics and politics. Although it takes six months of persistent negative (two consecutive quarters) records in Gross Domestic Product (GDP) for an economy to be declared recessed, the buffers to mitigate a recession remain weak.

Recession is a period of significant decline in activities across the economy- low industrial production and manufacturing, high inflation, rising unemployment, falling purchasing power, low fiscal spending, as well as poor consumer spending, among others.

The economy is currently characterised by the indices described above, as well as depleted excess crude account and dwindling foreign exchange reserves.

Specifically, Nigeria’s latest Excess Crude Account balance, according to a statement from the Office of Accountant General of the Federation, is $71.81m, while movement in reserves showed that the country’s reserves stood at $36.12 billion, down by $2.41 billion from $38.53 billion in which it opened the year.

Similarly, unemployment remains at an all-time high while the latest inflation rate hovers at 12.13 per cent. With the implementation of new VAT rate of 7.5% last month, as well as the proposed increase in electricity tariff in April, average disposable income is expected to further weaken, therefore, affecting purchasing power.

The Nigerian economy ended 2019 in what appears to be another major setback, as trade balance posted N579 billion deficit in the fourth quarter of last year, which, according to the latest foreign trade report released by the National Bureau of Statistics (NBS), is the first time the country recorded deficit trade balance in a quarter since 2016 when it witnessed recession.

Furthermore, the country’s ability to attract sustainable foreign direct investments remained weak, as the total value of capital importation into Nigeria stood at $3.8 billion in the fourth quarter of 2019, representing a decline of 32.42 per cent when compared to the third quarter of 2019, and a 77.67 per cent increase when compared to the fourth quarter of 2018.

In Q3 2019, Nigeria recorded a capital importation volume of $5.62 billion.If the free fall in oil prices continues and demand for foreign exchange rises, the country may be heading back to a recession.

A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Forward markets are used for trading a range of instruments, especially at the foreign exchange market.

Analysts had tipped the naira to depreciate by 10 to 20 percent in the parallel market by 2021 as the impact of falling crude oil prices and foreign exchange reserves persist.

Local and foreign analysts predicted that a decline by 10 percent would take the naira to about N400 to dollar, while a 20 per cent drop would see it at around N450 to dollar.

According to Bloomberg survey of investors, the local currency may be marked down by up to 20 percent in 2021. According to the survey, the drop in foreign reserves and lower oil prices will probably force the CBN to devalue the naira. The hitherto continued stability of the naira against the dollar has continued to spark speculations, with many analysts predicting that the local currency will sooner or later be devalued.

In his reaction, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, attributed the fall in the naira to many speculative forces in the market, noting that the trend would continue, except the CBN intervenes.

“There are fears of anticipated depreciation. There is a need for reassurance as even the reserves continue to depreciate. Technically, recession happens when there are contractions within two quarters. The windows to manage the crisis are few. The Nigerian National Petroleum Corporation (NNPC) confirmed that there are no buyers for the oil cargoes and these are creating issues for the economy”, he added.

The Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, also raised the alarm of a looming tough time and urged Nigerians to prepare for it in a few months’ time, following the crash in the prices of crude oil due to the outbreak of coronavirus.

He explained that about 12 Liquefied Petroleum Gas (LPG) cargoes got stranded globally because they had no hub due to abrupt collapse in demand associated specifically with coronavirus.

“It has also hit other sectors from the production stage which is the liquid crude. As at today with the Nigerian crude, we have 50 cargoes that have not found landing; it means the traders have purchased them but they don’t know how to take them”, he added.

But the CBN said that there was no plan to devalue the naira.

In a statement titled “Market fundamentals do not support naira devaluation at this time”, the apex bank said: “The Central Bank of Nigeria (CBN) wishes to note with displeasure, the rumours and speculative activities of unscrupulous players in the foreign exchange market, borne out of the impression that the CBN is on the verge of devaluing the aira, and triggering panic in the FX Market. These rumours are false, unwarranted and calculated to serve their dubious and selfish ends.”

It said that it had begun a robust and coordinated investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and related agencies to uncover the unscrupulous persons and FX dealers “who are creating this panic, and the full weight of our rules and regulations will be meted out to them, including, but not limited to, being charged for economic sabotage.”

It added: “ For nearly four years, the CBN has successfully maintained relative stability in all segments of the foreign exchange market, which has enabled investors, households and other economic agents to plan and to conduct their genuine foreign exchange transactions with relative ease. “The introduction of several foreign exchange management measures side-by-side with complementary interventions in food production and manufacturing has drastically reduced food importation, which hitherto constituted a large chunk of the pressure on the foreign exchange market.

“Although the outbreak of the Coronavirus led to global economic slowdown, fall in the price of crude oil, and less inflow of dollars into Nigeria, the associated public health concerns have also led to factory closures in China, substantial drop in imports, widespread travel restrictions around the world, and cancellation of many conferences, sporting events, business travels, and FX orders;

“The size of Nigeria’s foreign exchange reserves remains robust and comfortable, given the current realities of Nigeria’s genuine and legitimate FX demand. As such, the CBN remains able and willing to meet all genuine demand for foreign exchange for legitimate transactions.

“For the avoidance of doubt, the CBN is also working with the fiscal authorities to properly and accurately dimension the immediate and expected impacts of the Coronavirus in order to respond comprehensively and at the same time, ensure a sound and stable financial system conducive for job creation and inclusive growth.

“In light of current circumstances and macroeconomic fundamentals, the CBN has not devalued the naira. Consequently, the CBN will invoke the full weight of applicable sanctions on any persons and authorized dealers found to be involved in such disruptive and speculative market behaviour.”

The Economic Commission for Africa (ECA) also warned that the coronavirus pandemic could seriously dent Africa’s already stagnant economic growth.

Speaking on its fears, the UN body said in a statement that this would manifest with oil-exporting nations losing up to US$ $65 billion in revenues as crude oil prices continue to tumble.

According to ECA Executive Secretary, Vera Songwe, COVID-19 was inevitably impacting Africa’s trade having already strongly hit Africa’s major trading partner, China.

She said, although a few COVID-19 cases had been reported in some 15 countries so far, the crisis was set to deal African economies a severe blow.

“Africa may lose half of its GDP with growth falling from 3.2 per cent to about 2 per cent due to a number of reasons.