Ekpo: Economic Damage from COVID-19 May Linger for Two Years

Prof. Akpan Ekpo, who is the Founder, Foundation for Economic Research and Training and a former Director General, West African Institute for Financial and Economic Management, in this interview speaks on the effects of the COVID-19 pandemic on the Nigerian economy. Obinna Chima brings the excerpts:

With the challenge posed by the COVID-19, what is the fate of globalisation?

It is the end of one type of globalisation, which was almost coming to an end through Donald Trump. But now, it would be fast-tracked. That is, the economic aspect of globalisation. But it will be in the interest of all to find a global solution to this pandemic. Every country is now trying to be independent. In economic sense, what we are going to see might be worse than a depression because the entire global economy is in a coma.

What then would be the new form of globalisation you are talking about?

The new form is that the developed countries would have to provide assistance to Africa and other developing countries to stop this pandemic. So, it would be like a kind of global health solution which may going forward affect the countries positively. That is, a global solution in the short to medium term to halt this pandemic. That is because if we don’t halt it, it may come back to haunt us. For example, in the United States, experts said by September, there could be a rebound of this pandemic if not properly tackled. So, it is in their interest to stop it in the medium term. But globalisation as we know was almost coming to an end with what Trump was trying to do in terms of America being a world power and a global player. Although the vacuum that America was leaving, if you can remember, China and the rest were filling such vacuum. But, it was still not enough because America is a major player in the global system. So, the United States and some of these developed countries are part of the G7. So, if they decide to whip-off debts of African countries as well as that of some other low income countries, it will help. That means that the funds we should have used to service the debts or even for repayment, would now be used to procure medical facilities. Secondly, a lot of them can produce medical equipment needed to fight this pandemic and send to Africa as either aids or with huge discount. For example, China recently sent 1,000 ventilators to New York. So, those kind of things can either be in cash or in kind. So, that way, we would save the money we would have used in repaying debt. African countries have big problems.

Most countries in the continent don’t have fiscal buffers. So, the crisis would hit us severely more that the developing countries. For instance, look at Nigeria presently, many people are going to be affected and some would even lose their jobs and they would not be able to claim unemployment benefits. The federal government doesn’t even have the money to pay such because there is no fiscal buffer and the oil revenue has declined sharply. So, where will government get the revenue from? America is printing dollars to support its economy. In the next six months if you check their balance sheet, you can see how much dollars they printed, because dollar is a convertible currency globally. They can print dollars and send to any country they wish to intervene in. But, we cannot print naira to meet our external obligations. If you print naira, it can only be used within Nigeria and you try to avoid printing too much so that we don’t have too much money chasing after few goods. So, Nigeria and other African countries would be worse hit. They said they are giving poor people palliative, but that will not go anywhere in addressing the poverty situation in Nigeria. In my own view, 85 per cent of the population can be said to be poor. Then, health wise, almost all African countries don’t have adequate health facilities. You can see Europe and America with sophisticated health facilities, they have been overwhelmed. So, this pandemic would hit us hard if not properly contained. So, it is in their interest to make sure that it doesn’t spread down here much and I believe they are looking at it from that perspective. I understand that the International Monetary Fund (IMF) has a facility for African countries and they have just released some for Rwanda. Then, you are aware that they have talked about wiping off Paris Club debt and they have called for a meeting for that. The African Development Bank is also doing its best. That is also another way they need to help us.

You see, if this pandemic ends in six months time, the damage it has done may linger for up to two years. So, we are worse hit. Also, economically, except for the United States because of Trump, those other developed countries, such as Germany, UK, France, Italy, and even China, trade a lot with Africa. So, if we don’t have the resources to buy those goods and services from them, there would be problem. Then for Nigeria, my worry is not even recession, because it is imminent. In fact, I am estimating that by the fourth quarter of this year, our economy may fall into recession. My worry, however, is that we may have a currency crisis, which is even worse that a recession. This is because our revenue is declining sharply and our reserves are also declining. We can print naira for our spending within Nigeria, but we can’t print naira to meet our external obligation. Naira is not a convertible. But you can print and manage it within Nigeria. By managing it, I mean for instance, if somebody has a government contract and he needs naira, we can print naira and pay such person. But, there is a limit because if you over do it, you have too much money chasing after too few goods. So, you can only print naira to support people like contractors, whose contracts are naira denominated, hoping that, they too, all what they need is within Nigeria. Other countries do it. For America, if you look at their balance sheet after the last financial crisis, you will discover that they printed more dollars, just to reflate the economy, and they are doing it now again. The dollar is a store of value, not naira.

Apart from borrowing from the multilateral institutions, do you think the government should still go ahead with its plan to issue Eurobond?

They should not go ahead with it. This is because if you look at the crisis, those people they are expecting to invest in the Eurobond would not be willing to invest, because everybody is being cautious. What we would have done, which is what I have been saying for years is that anytime we have high crude oil price, we should always see it as a windfall, save a lot of it and target it for spending on infrastructure. I worked with Anthony Ani when he was Minister of Finance and we planned to do a non-oil budget. If you look at the Nigerian economy, oil contributes only 10 per cent to Gross Domestic Product (GDP), while the non-oil sector contributes 90 per cent. So, we can actually do a non-oil budget. If we had been doing it for years, we would have gotten used to it, so that if oil price does well, it becomes like a windfall. Let us demystify the oil sector because oil may finish one day. Recently, when the Minister of Finance said they used $30 crude oil benchmark. Someone called me from the ministry and I told the person that I am aware of the model they used in arriving at that price. But I advised them that for that model not to collapse, they should use $15 per barrel as the benchmark price and not $30 per barrel. I did a quick calculation based on estimated average and I said so that the model would not collapse, that they should use $15 per barrel estimate, so that if it gets to $22 or even $30 per barrel, then we would be luck. But, they went and used $30 per barrel and we have seen price fluctuate since then. I told them that if I have my way I would even use $10 per barrel. The Nigerian economy story is the oil story. So, we are in for a very rough time, to be honest.

If you are to advise the federal government, what do you think should be the way out?

I will tell them to focus on the expenditure side of the budget and cut expenditure drastically. For example, the cost of governance is very high. They government should also reverse the increase in the Value Added Tax (VAT), that was effected this year. You can’t be talking about raising revenue now because things are bad and people don’t have jobs and more people would lose their jobs after this pandemic. So, the government needs to do what is called expenditure switching. For example, if you are to spend $200 million to buy maybe five fighter planes in the war against Boko Haram, you can reduce the number to maybe two or three, and use the balance to provide for your citizens as a way to cushion the impact of the coronavirus and improve on the health facilities. So, the expenditure side is very important. Secondly, the Central Bank should be able to print money to finance infrastructural projects and then manage it properly. Now, in Nigeria, the Navy, Army and Air Force, they all have specialized units, let’s use the men in those units to begin the construction of health facilities. If there is a war, the Army can put up 50 hospital beds in three hours. Now, is the time to use them. Then, in the rural communities and slums, go and provide boreholes. When they say wash your hands regularly, you need to have water before you can do that. There are so many places in the country where the people don’t have water. So, the government needs to provide water in the slums, rural and even urban centres so that people can wash their hands.

So, for me, increasing revenue is no longer the issue, because who would you tax? They even need to look at reducing company tax so that firms would not close down. Another thing we need to look at from the expenditure side, members of our House of Representatives and Senate, we know that they are overpaid, the so called two-months salaries they said they are forfeiting is not enough. The best thing is to freeze their basic salaries for six months and only pay staff of the National Assembly. Freeze their salaries, but you can pay them their allowances.

But so far, are you satisfied with measures taken by the federal government?

Yes, they have done well, but they should do more. And then, they should approach the AfDB to borrow as they have indicated. We need money now more than ever to do lots of things. The government needs to see how it can support the vulnerable and the low income earners to survive. Our challenge is that we don’t have data, otherwise, there are certain class of citizens that the government needs to be paying in the next six months, so that they can use that money to survive. In Europe, Norway, Sweden, they all have different approach to all the welfare of their citizens. Also, all those plans recapitalise the microfinance banks, and other plans for recapitalisation in the financial sector should be suspended for another six months are one year, because the impact of the disruption that this pandemic will cause will longer for more than two years. This is worse than a financial crisis. Human beings are dying. I won’t deny the fact that the government has done its best, but it needs to do more. Also, state governments should play their role. Lagos State looks well prepared, so other states need to be prepared as well. Another problem is that we are not doing enough testing, that is why still have the low number we have here.

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