On March 26, Nigeria joined many other nations banning flights into the country and urging shelter-in-place, social isolation practices amid the coronavirus COVID-19 pandemic. President Buhari approved a N10 billion grant to the epicentre Lagos to fight the outbreak in the region and a N5 billion grant to support the Nigeria Centre for Disease Control. Exports of oil and gas will continue and more fiscal and monetary policy measures will be needed, said the president. Having left interest rates unchanged during its March meeting, the Central Bank of Nigeria (CBN) still has scope to reduce its key rates if inflationary pressures recede.
This raises the central question of what will happen to inflation levels. Food prices may rise sharply if measures are not taken to cap them under the current circumstances. Prices of pharmaceuticals, masks, and hand sanitiser in Europe were capped as part of governmental measures to control skyrocketing prices for these goods, for example.
Other goods which feed into price benchmarks are gasoline and electricity. These are expected to fall along with the price of oil and government coffers should see some relief from the fuel subsidy, which had risen on the back of higher oil prices earlier this year. Additionally, the naira is weakening and may fall further against other currencies if foreign reserves decline below $30 billion. A weaker naira would add to inflationary pressures.
All told, the coronavirus pandemic is expected to have an unprecedented impact on the Nigerian economy. The disease represents a major threat to the economy because of plummeting Oil prices and close trading ties with China. While China is in the recovery stage of its coronavirus outbreak, the country’s industrial growth fell by 13.5 percent in the first quarter.
As industry is one of the biggest consumers of oil with transportation being another, oil prices could fall further than the 60 per cent they already have since the beginning of the year. The International Monetary Fund (IMF) estimates that with each 10 per cent fall in oil prices, oil exporting countries like Nigeria will see a 0.6 per cent drop in GDP and an increase in fiscal deficits of 0.8 percent of GDP. Under the current circumstances, the federal government appears well aware after announcing a N10.6 trillion cut in the 2020 budget and a change in the benchmark oil price from $50 to $30 per barrel.
The emergency should be a wakeup call for Nigeria to reduce its dependence on the oil industry in order to weather future storms and black swan events. This was the direction taken by the CBN during its ‘Growth 2.0’ roundtable. Along with an initiative to depreciate the rate of foreign exchange sales to foreign portfolio investments (FPIs) to roughly N380.00, the reinvigorated drive towards diversification may help to stimulate interest in Nigeria’s financial instruments.
Nonetheless, the CBN may be forced to cut interest rates in the second half of the year if global conditions fail to improve. Fiscal measures may need support from an IMF loan after the fund expressed concerns over the global landscape and the impact of the coronavirus pandemic on African countries, extending emergency financing of up to $50 billion.
There is little doubt that aggressive monetary policy and strong fiscal responses must be put in place to cushion the damage inflicted by the coronavirus outbreak in Nigeria. Such steps would increase confidence for FPI’s to keep investing in Nigeria’s financial instruments and position the economy on the path to recovery after the pandemic is over.
Otunuga is a Senior Research Analyst at FXTM