Covid-19 is fast shutting down windows of economic opportunities Nigeria needs to implement its 2020 N10.6trillion budget to create a new lease of life for the citizens, there was palpable anxiety last week that the economy may be on its way back to another recession should the volatility recorded in the crude oil market last week continue over the next few months.
Already christened the “Black Monday” by global investment strategists, the 9th day of March 2020, would forever be remembered as one that sent panic waves across oil producing and consuming nations of the world after crude prices took the heaviest shock from the ravaging Coronavirus.
As at last Thursday, panic buying by foreign currency traders almost triggered another wanton depreciation of the naira sending it to a low of N375 to $1 from N355 where it had traded since last year. Traders who spoke to Daily Sun attributed the naira’s sudden loss of value in virtually all segments of the foreign exchange market to the heat of falling crude oil prices.
The naira suffered its biggest daily depreciation of N8.5 against the US dollar in the parallel market since 2017, as the exchange rate rose sharply to N367 per dollar from N355.
Alhaji Aminu Gwadabe, President of Association of Bureaux de Change Operators of Nigeria (ABCON) attributed the development to panic buying by speculators.
But to douse tension, the Central Bank of Nigeria (CBN) promptly issued a statement that it has no plans to devalue the nation’s currency as current market fundamentals do not support such action. It however read the riot to currency speculators that they would be dealt with in accordance to extant laws if caught sabotaging the foreign exchange market.
Meanwhile the Central Bank of Nigeria (CBN) last week ruled out the possibility of naira devaluation insisting that current market fundamentals do not support such a measure.
The bank in a statement signed by its Director of Corporate Communications, Mr Isaac Okoroafor, expressed displeasure over rumours and speculative activities of unscrupulous players in the foreign exchange market, borne out of the impression that the apex bank was on the verge of devaluing the naira.
Okoroafor described such rumours as false, unwarranted and calculated to serve the dubious and selfish ends of those peddling them.
The statement read in part “We therefore wish to state that we have 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;
The bank said 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 government of Nigeria that had benchmarked its budget at $57 per barrel, Black Monday was a day for sober reflection as Finance Minister, Zainab Ahmed, gave indications that the Executive may have to review the budget to reflect current realities.
The concern heightened as crude oil prices came crashing last Monday to around $30 per barrel below the $57 benchmark for the 2020 budget on the back of falling demand over the Coronavirus pandemic.
The crude price crash is an indication however the Nigeria’s N10.6trillion 2020 budget may be facing some major litmus test that could hurt both capital and recurrent spending over the next 12 months.
Although Nigeria’s Covid -Index case remained unchanged since an Italian that returned from Milan was diagnosed last month, both Federal Executive Council and the National Assembly appeared set to take critical measures for the possible review of the 2020 budget to focus more on priority projects.
In particular, the Senate which recently approved a $22.7billion borrowing programme for the Muhammadu Buhari administration was in quandary over falling crude price, with analysts how the government hopes to leverage global financial market for borrowings needed to finance a gaping fiscal deficit at a time major suppliers of credit are still leaking the wounds inflicted by Coronavirus.
At the close of business last week, global capital markets are believed to have lost over $15trillion prompting governments to begin moves to remedy the losses.
According to a Financial Times report, the US Federal Reserve said on Friday it would buy $37billion of Treasuries, accelerating a plan unveiled on Thursday that included the injection of trillions of dollars of short-term loans to address disruption to the government bond market.
Similarly, Securities watchdogs in Europe also moved to try to calm the markets. Italian and Spanish market regulators banned bets against 154 stocks in an attempt to lessen the tumult in their equities markets. The short selling bans were at present in effect for Friday’s trading session only. Economic disruption across Europe is mounting as the virus spreads.
As Markets reflected these extraordinary circumstances, the Stoxx Europe 600, which tracks the region’s largest companies, has dropped more than 30 per cent in less than a month, while government bonds have rallied as investors search for safe corners of the market.
To put the icing on the cake, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) Alhaji Mele Kyari, at a briefing last week in Abuja told Nigerians to prepare for tougher days ahead as the low hanging fruits are fast drying up for a country that earns more than 50 percent of its revenue from crude oil export.
However, Nigeria’s Organised Private Sector (OPS) in response to the tumbling oil price warned that the problem may send Nigeria’s economy back to another round of recession if the tide fails to turn.
Both the Nigeria Employers Consultative Association (NECA) and the Lagos Chamber of Commerce and Industry, (LCCI) argued the tumbling oil price portends grave danger for the Nigerian economy.
The Director-General of NECA, Dr. Timothy Olawale, for instance said that it was worrisome that the global oil price has tumbled below the $57 on which the 2020 National Budget was premised.
“The scale of the reduction is eliciting unpleasant memories of 2014 and 2015 oil price downturn that largely pushed the country into recession in 2016,” he said.
Olawale noted that the fluctuation in oil price was already threatening the National budget and government revenue projections for 2020, with consequential negative implication for the proposed capital projects and other critical expense heads.
The implication is that a lower oil price will affect the FOREX supply to the country and stability of the Naira. That also has implications for the ability of the Central Bank to meet FX demands of end users in the long term.”
The Director General of NECA, Timothy Olawale, said it would be difficult for Nigeria to come out of the present oil slide unscathed.
“There’s no hiding the fact that it would definitely land us back into recession. We can’t survive it as our budget for 2020 was based on 57 dollars per barrel,” he said.
He reasoned that members of the OPS are already feeling the impact of the low turn of the economy, lamenting that not even the loans can save the economy.
He warned that there would be devastating implications for the level of fiscal deficit in the budget as budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted.
The NECA Director General noted that several events and conferences in Nigeria and around the world have been cancelled as a result of the Coronavirus scare and for most of these events, huge sum of money and resources have been committed to their planning and logistics, translating into huge losses to promoters.
He reiterated the need for government to provide leadership and direction by diversifying the economy.
He said, “it is high time we insulate our economy from the perennial global shock in oil prices. The nation cannot hinge its destiny on the price of a commodity in which it has no control on its pricing.
“It is time to deliberately create a roadmap for a rapid diversifying of the economy away from oil. We need actions; the government needs to create avenues for more economic activities to happen like diversifying its tax revenue beyond oil.
“You can’t expect to generate more non-oil tax without having an increase in economic activity, led by the private sector . Obviously the significant plunge in oil prices will adversely affect our tax revenue as well as our external reserves often used to stabilise the FOREX market.
“So immediate concerns will be potential impact on forex, which might make devaluation more likely. If the scarcity of FOREX is mismanaged, it would adversely affect key sectors such as manufacturing and trading that are more dependent on imports.
The NECA boss urged the Federal Government to show clear fiscal discipline by cutting down costs and executing projects that will impact the economy positively as a result of plunging oil price in the international market.
He however warned that the fall in oil prices should not be a license to further mortgage the future of the nation with borrowing as the Budget is already struggling under the weight of debt servicing obligation.
“While it is too early to predict if this initial slump in prices will be sustained long enough to have serious repercussions on the economy, but if it stays this low for a long while, it could plunge our fragile economy into a contraction (negative growth rate), which when sustained for three consecutive quarters, pushes us into a recession.”
He charged the Federal Government to do all within its to ensure the economy does not recede back into recession.
For his part, Director General of LCCI, Muda Yusuf, said the crude price shock was one of the major vulnerabilities of the nation’s economy, warning that the macroeconomic fundamentals would suffer profound dislocations if the slump is sustained. According to the LCCI boss, the consequences will be wide ranging and systemic, adding that the situation calls for an emergency policy response. He expressed hope that the scope of the response would be around fiscal space which cut across monetary, forex, trade and energy policy reforms. Yusuf said, “Oil price budget benchmark for 2020 budget was $57 per barrel and the sharp drop in revenue could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers.
“It is instructive that the Finance Minister is contemplating a review of the underlying assumptions of the 2020 budget, and rightly so.”