Nigeria’s Economic Future
The COVID-19 pandemic is causing real damage to businesses in Nigeria and the economic outlook seems bleak. The CBN has adjusted the dollar exchange rate to N360 for $1, and the price of crude per barrel has consistently fallen below the 2020 budget assumption. All these indicators do not look good and the repercussions will cascade throughout the economy, affecting businesses and individuals. In spite of it all, there are certain pre-emptive actions individuals and businesses can take to at least dampen the effects of these three red flags.
Nigeria is one of the 13 member nations of the Organization of Petroleum Exporting Countries (OPEC) and crude oil is a major revenue for the government. However, due to Russia turning down OPEC’s proposal to maintain 3 million barrels per day for the rest of the year, there has been a breakdown in the alliance between the member nations resulting in an estimated $500 million loss in daily revenue.
This led to a price war between the major players, which has seen crude oil prices fall by over 50% in the first quarter of 2020. The Nigerian economy has begun to feel the strain of this stark price drop as it is far below the 2020 budget estimates. In simple terms, the expected revenue inflow into the Nigerian economy has dropped by over 50% with the price currently hovering around $20 per barrel.
As a result, the government will need to re-strategize on its approach to revenue generation to cushion the effects. If adequate pre-emptive and supportive measures are not taken, economic sectors waiting earnestly for government allocations will suffer. Areas such as capital projects, payment of public servants’ salaries and state allocations will begin to wither due to inadequate funding.
The COVID-19 pandemic has wreaked havoc across the economies of over 210 countries globally. Due to how it spreads, affected countries have imposed lockdowns that restrict the movement of people and products. While the lockdown helps curb the spread of the virus, it has also slowed down economic activities in the affected nations like Nigeria. Businesses in Lagos, for example, have been forced to have their employees work from home. Those that are unable to adapt may fold up, while most businesses that manage to stay open will still have productivity dips.
The current reality of employees working from home may cause a “productivity disaster” according to Stanford economist, Nicholas Bloom. He states that the presence of children, unsuitable working spaces, lack of privacy and an absence of choice can eventually lead to a plummet in productivity of employees across the globe. Despite the best efforts of some companies to adopt virtual tools to maintain high-performance standards, productivity is only half the problem.
With the increased rate of globalization, more companies operate internationally at varying degrees and major business deals have been put on hold across the globe. Some companies import raw materials to facilitate production, while others have key business meetings in foreign countries. With the imposed lockdowns and travel bans in affected countries, some international business operations have halted. In addition, forex prices are rising in the parallel markets, which will increase the operating costs of several local businesses.
In effect, we may see companies begin to lay off employees as a result of increased expenses, productivity drops, and an inability to meet salary demands due to the lockdown and halting of business activities. The construction and manufacturing industries may be the most affected if they are unable to source for raw materials locally.
In March 2020, the Central Bank of Nigeria adjusted the official dollar exchange rate from N307/$1 to N360/$1 indicating a 15% increase in the cost of the US Dollar. Likewise, the parallel market rates were set at a maximum of N380/$1. Additionally, Nigeria’s foreign reserves has fallen to $37.4 billion due to the drop in the price of Brent and the COVID-19 outbreak. No one knows when the pandemic will end which has left the Nigerian, and global economies in shock.
Analysts, money managers and economists have speculated that by 2021 the Naira may be devalued by an estimated 10-20%.5 If these speculations are true, Nigerians will face an increase in the prices of common goods and services while experiencing a drop in the value of the currency. For example, a meal that costs N1,000 today may cost N1,200 by 2021.
The first thing people can do in these uncertain times is to guard current savings and be prudent. Spend only on essentials like food, water and electricity while minimizing impulse and unnecessary purchases. If possible, track and plan your spending to ensure more discipline. This will help grow your savings.
Next, you should consider generating multiple streams of income. If you have started investing, you are on the right track. You should look at various investment options like buying stocks poised to bounce back after the pandemic has ended, purchasing land and other fixed assets that can help grow your income. Investments are always a good way to ensure your money is working for you.
Executives should acknowledge the flaws of a rigid business model and embrace flexibility. Adapt appropriately to the current “work-from-home” situation to minimize the downsides highlighted in the article. If you adapt appropriately and notice an uptick in employee productivity, you can continue this work-from-home model even after the pandemic to reduce overhead costs.
Admittedly, these solutions might not work for all business. However, a myriad of opportunities exists to generate foreign income for businesses that fall in this category. Broaden the virtual scope of your business to cater to foreign markets which can generate foreign revenues at marginal costs.
In addition, consider repositioning your business to stay afloat. Currently, tastes and consumer preferences have changed. Priorities that once favoured your business offerings may have altered. Do some research, understand where your customers are, and reposition to serve the new needs in the market. For example, tailors can adjust from making clothes to making bespoke face masks for their customers.
The key is to adapt. If you cannot reposition your business, try redesigning your current product/service offerings to attract new markets. A gym, for example, can deliver some of its equipment to houses of paying members instead of having the equipment just sitting there through the pandemic. In addition, online gym classes can be coordinated to ensure that you are still serving your customers.
Finally, be compassionate. Understand that your employees are also going through this rough patch with you. Exhaust all other options before resorting to layoffs. Be transparent about the current business realities with your employees, let them know how things truly are. You might be surprised to find support from them in these trying times.
Despite the uncertainties of the Nigerian economy, there are several ways individuals and businesses can take preventive measures to mitigate against the harsh realities. Take the time to understand the stock market, investment options, portfolio dynamics, property and forex markets. Above all, have a healthy and positive mindset. We will all get through this together. See you on the other side.
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