Healing a Traumatised Economy

Godwin Emefiele

Diversifying the revenue base of Nigeria’s economy and creating institutional structures to insulate it from external shocks is urgently required, writes Obinna Chima

The Nigerian economy is currently in dire straits with major economic indicators looking grim amidst increasing vulnerabilities.

The disruption caused by the COVID-19, which also contributed to the significant drop in the price of crude oil exposed the economy’s weak underbelly.

Crude oil represents about 95 per cent of Nigeria’s export revenue and a downturn in the market for the commodity always has a ripple effect on the economy.

Clearly, the situation which started as a health crisis has gradually transformed to an economic crisis and has necessitated response from fiscal and monetary policy authorities across the globe, including in Nigeria.

In Nigeria, the Central Bank which acted swiftly, almost when the first case broke out in the country, had unveiled a number of policy initiatives aimed at reducing the adverse impacts of the COVID-19 pandemic on the economy.

Precisely, the CBN Governor, Mr. Godwin Emefiele, had announced an extension of the moratorium on the apex bank’s interventions programmes, interest rate reduction, creation of a N50 billion targeted credit facility and credit support for the healthcare industry.

Others were strengthening the central bank’s Loan to Deposit Ratio (LDR) policy and regulatory forbearance.

The CBN governor announced a moratorium of one year on all principal repayments, effective March 1, 2020, as well as interest rate reduction on all applicable CBN intervention facilities from nine per cent to five per cent per annum for one-year effective March 1, 2020.

He said the total CBN intervention facilities through the Commercial Agricultural Credit Loan Scheme, the Anchor Borrowers’ Programme (ABP) and the Agric, Small and Medium Enterprise Scheme (AGSMEIS) among others are currently worth about N3 trillion and the new rate cut will apply to all facilities.

He further announced the creation of a N50 billion targeted credit facility through the NIRSAL Microfinance Bank for households and small- and medium-sized enterprises (SMEs) that have been particularly hard hit by Covid-19, including but not limited to hoteliers, airline service providers, health care merchants, among others.

The central bank also unveiled a N100 billion health sector credit facility for operators in the sector.

The health sector facility is expected to provide loans to pharmaceutical companies intending to expand/open their drug manufacturing plants in the country and would also accommodate hospital and healthcare practitioners who intend to expand/build the health facilities to first-class centres.

The CBN also granted all banks leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households most affected by the outbreak of COVID-19 particularly oil and gas, agriculture, and manufacturing.

In addition, the central bank has been working closely with the banks to ensure that the use of the current forbearance was targeted, transparent and temporary.

Also, as part of their response to the economic damaged caused by the pandemic, the federal government had set up a seven-man Economic Sustainability Committee headed by Vice President Yemi Osinbajo, to devise ways to protect jobs and also create new ones after the pandemic. The federal government also issued a set of palliatives to help medium, small and micro enterprises (MSMEs) wade through the current economic fallouts of the COVID-19 pandemic.

According to Osinbajo, the palliatives reflected the Buhari administration’s determination to support MSMEs and the priority the federal government placed on small businesses. He listed the measures to include e-Registration of MSMEs/products at 80 per cent discounted rate over a period of six months; Zero tariffs for the first 200 micro and small businesses to register on the e-platform and waiver on administrative charges for overdue late renewal of expired licenses of micro/small businesses products for a period of 90 days.

According to the VP, as businesses across the world confront the disruptions caused by the coronavirus pandemic, the federal government would continue to adopt and implement practical measures to ensure that the projected growth in the MSMEs sector was not seriously affected by the development.

Emefiele, in a recent 27-page speech had described the disruptions caused by the pandemic as an opportunity to re-echo “a persistent message the CBN has been sending for a long time.”

Healing the Economy

To the immediate past President, Chartered Institute of Bankers’ of Nigeria, Dr. Uche Olowu, diversifying the economy away from crude oil earnings would help boost investor confidence and rebuild the economy.

He said opportunities in the agricultural sector should be explored to improve the country’s capacity to export agric products. Olowu, said the country has so much to gain by investing in agriculture, which will boost foreign reserves.
Olowu added that access to credit is also a key factor that will lead to economic growth and development.

To an economist and lead consultant to ECOWAS, Prof. Ken Ife, the reason why the CBN has over the years been emphasising that we ‘produce what you eat and eat what you produce,’ was actually from a perspective of demand management. However, he stated that presently, the economy is facing a supply shock from China that transmitted to the United States, Europe and Africa. This, he said, meant that many of manufacturers in the country couldn’t get their raw materials, which also meant that many of the retailers couldn’t get their products to sell. So, that translated to demand shock and unemployment.

“Can you imagine that if we didn’t take the action we took on rice and we were having to import those huge volume of rice, how would Nigeria have faced the prospect that they are going to refuse to be selling rice to Nigeria?” he wondered.

In assessing the N50 billion fund that was introduced by the CBN to cushion the effects of the pandemic on households and firm, the economist, said what was important about the intervention was how important it was to what he described as the order of battle.
“The order of battle was the supply shock, restriction of supply and the impact on demand, unemployment and the impact on aggregate demand. Now, when there is a lockdown, the impact is more unemployment, a contraction in demand and what you don’t want to happen is to have a collapse in aggregate demand.

“So, the first thing you do, which the central bank did was to provide liquidity to the banks so to ensure that you don’t convert health crisis into a financial crisis. The second thing that are also doing is to reach households. If you disaggregate the GDP, in terms of consumption, 85 per cent of its composition is household consumption. So, if you restrict consumption, you are going to have collapse of aggregate demand, which might not only lead to recession, but also depression. Then, the MSMEs account for 48 per cent of our GDP and employ 92 per cent of Nigerians,” he added.

On his part, the Chief Executive Officer, BIC Consultancy Services, Dr. Boniface Chizea, said the pandemic has made the world, “shed all pretenses to globalisation, as all countries of the world, without exception, have their sights and attention focused inwards with all manner of restrictions on exports of various goods and services to logically cater for crises on the home front.”

In his contribution, the Managing Director of the Financial Derivatives Company Limited and a member of President Muhammadu Buhari’s Economic Advisory Council, Mr. Bismarck Rewane, said the present challenge provides an opportunity to reset the economy so as to unlock its potential Gross Domestic Product (GDP), which he put at $1.5 trillion.
He pointed out that the impact of the economic contraction would be severe on the country because of lack of buffers.

The economist stressed that the slump in crude oil prices presently hurting Nigeria was not necessarily because of the country’s dependency on oil revenue, but because it lacks buffers and that it policy makers did not anticipate the impact of exogenous shocks on the country.

“Now, this is an opportunity, and I think the federal government is fully aware of this, this is the time to press the reset button. What do I mean by that?

“I mean it is time to alter the levers of control of this economy to ensure that we use this opportunity to deal with the rent-seeking, crony capitalism structure that exists and allow for an economy that would respond to market forces and therefore unlock the investment potential and entrepreneur instinct in Nigeria, so as to unleash rapid growth and bring this economy to its full potential which is over $1.5 trillion. Right now, our GDP is about $400 billion,” he explained.

According to Rewane, the COVID-19 pandemic brought about a demand and supply shock simultaneously.

“There was supply shock because China was shut down and there was a demand shock because people were confined to their homes,” he explained.

On his part, the Director-General, West African Institute of Financial and Economic Management (WAIFEM), Dr. Baba Musa, said the biggest opportunity for both policymakers in the country and operators of business is to look inwards.

According to Musa, over the years, the mantra has been to diversify the economy, but despite that, there has been heavy reliance on oil as a major source of revenue.

“But if you look at most of the developed economies, most of them are driven by the taxes they collect. So, in our tax system, there is still a lot of room for improvement. Nigeria’s tax to Gross Domestic Product (GDP) is far below Africa and even West African average.

“So, what is required is that now all those loopholes in terms of revenue collection, we need to block them.”

He said the pandemic has also brought to the fore the need to increase investment in the health sector.

“What the government requires immediately is how to pool revenue to finance its expenditure in 2020 and 2021. So, the immediate priority now is for us to look inwards.

Already, the government has an agriculture agenda and there is also the Anchor Borrowers’ Programme; we need to ramp them up in such a way that the country becomes a net exporter.

“Then, after that, in the medium term, the Dangote Refineries, the modular refineries would also be encouraged to come on stream, because this is the right time for them to be operational. But what is important is that we need to look inwards,” he added.

The Founder, Foundation for Economic Research, Prof. Akpan Ekpo, advised that going forward, the federal government should always prepare what he termed a non-oil budget, in order to be able to avoid external shocks.

“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 the revenue 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 the oil price does well, it becomes like a windfall. Let us demystify the oil sector because oil may finish one day,” he said.

Therefore, the consensus is that the pandemic provides an opportunity for policymakers in the country to work towards healing the traumatised economy.