The Impact of COVID-19 on the Nigerian Economy
With this essay, I analyse the impacts of Covid-19 pandemic on the Nigerian economy and proffer solutions to mitigate these impacts and strengthen the economy later on. Although a crisis that started off in the public health sector, Covid-19 has yielded negative effects to world economies. Countries have closed their factories, industries, and borders thereby causing a big strain on international trade. This is more serious for a country like Nigeria whose vulnerabilities to the Covid-19 shock is amplified by her overwhelming reliance on global economies for capital flows, fiscal deficit funding, and foreign exchange inflows to sustain her economic activities. In 2019, Nigeria’s imports from China alone cost 4.3 trillion naira which constituted 25% of total imports. Also, overall imported manufactured goods from different countries amounted to 70% of Nigeria’s total imports. These are worrying figures which indicate how catastrophic a disruption of global supply chain and reduced economic activity may deeply shake Nigeria. Further, the outbreak of Covid-19 and the different policies implemented by countries has greatly reduced their demand for crude oil. From Spain to India, and France to Canada, Covid-19 has taken a negative toll on the economies of all major buyers of Nigeria’s crude oil. The ripple effect of this is excess supply – too much crude oil with very few buyers or none. This necessitates the need for Nigeria to slash her oil price and sell at very discounted and unprofitable prices. Commenting on this, Group Managing Director of the Nigerian National Petroleum Corporation (“NNPC”), Mele Kolo Kyari, noted that NNPC has had difficulties in selling her crude oil and liquefied natural gas, with about 50 cargoes of crude oil and 11 cargoes of natural gas stranded at the international oil market, and hence, the commission had to discount oil price by $5 per barrel, in order to clear up the stored up barrels. Similarly, a decline in the sale of crude oil pressurizes the naira and the country’s foreign reserves. Nigeria’s plan for 2020 was to sell a barrel of oil at $57. However, due to the Covid-19 strain on the oil market, this benchmark – as confirmed by the Finance Minister, Ahmed Zainab – has now been reviewed from $57 to $30 – almost a 50% slash in price. According to the Minister, COVID-19 has put increasing pressure on the Naira and foreign reserves as the crude oil sales receipts decline. Also, with companies adjusting to new economic realities and the current movement restrictive policies, Nigeria is potentially faced with an increment in her unemployment rate. In the face of harsh economic conditions, some firms will shut down operations fully while some others will merge. Many small businesses will fold, as they are not capable of withstanding a crisis of this scale. The ripple effect of this is that workers will be laid off and the numbers of financially active citizens will plummet.
This is more serious for a country like Nigeria whose vulnerabilities to the Covid-19 shock is amplified by her overwhelming reliance on global economies for capital flows, fiscal deficit funding, and foreign exchange inflows to sustain her economic activities
Consequently, an underperforming labour market will invariably affect economic activities. In fact, African Union estimated that 20 million jobs will be lost across vulnerable African countries – and Nigeria is one – during and post Covid-19 era. Invariably, a weak economy becomes unfavourable for foreign direct investment (FDI). When there is reduced economic activity in a country coupled with pandemic uncertainties, investors will pull back their resources, as there are no feasible options of returns on investment. This is currently the case with South Africa – an even better economy than Nigeria. On the 27th March 2020, A Credit Rating agency downgraded the Sovereign Credit rating of South Africa to a junk status. In simpler terms, this implies that South Africa is currently unfavourable for investments. For a country like Nigeria that was still battling poor economic outlook before the pandemic, a plunge in FDI may contribute towards a dramatic economic downturn. Hence, to sustain and strengthen the economy during and post Covid-19, a number of things are needed. For companies not to become insolvent, the current insolvency laws should be modified. The modification should extend the demand period from the current 21 days to 6 months or more. By delaying the rights of creditors to commence winding-up actions, this modification will provide these potentially insolvent – but viable businesses – a reasonable time to manoeuvre the new economic realities. This coupled with the 50% income tax rebate afforded to employers by the Economic Stimulus Bill will help stabilize companies and businesses while incentivising employers to retain their employees. For the oil and gas sector, it is expedient to lift off the economic burden on the sector. The government needs to cut down recurrent expenditures which accounts for about 70% of the budget and which is largely funded by oil sales. Also, since the foreign reserve is no longer sufficient, the government now has to look into removing the subsidy program and reinvesting the money being used to subsidize. We can also start floating the naira for its actual market value in order to retain the subsidy money. Notably, the removal of the subsidy program should, in the long run, be complemented by revamping the four national refineries. Ultimately, however, diversification of the economy across all sectors is now more than necessary. All these will help us stabilize the economy and the labour market against the full-fledged effects of the twin pandemic. Diversification will gradually help us deal with being an export based economy. This, coupled with other steps above will – especially post Covid-19 – make the economy attractive to foreign direct investments. With all these, we will be able to mitigate the impacts of the pandemic, while positioning for growth post pandemic era.
My name is Habeeb Asudemade, a final year law student at University of Ibadan, with demonstrated interests in Law, Leadership, Policy-making, and Community Service. I am a 2019 Nigeria Higher Education Foundation (NHEF) scholar who is passionate about sustainable economic policies and has debated several policies and economy instruments at different national and international fronts. As a writer, my writings cut across law, education, economy, and start-ups.