The International Monetary Fund (IMF) has revised downward its forecast for global economic growth in 2020. Instead of the initial forecast of 3.3 per cent GDP growth rate, the global economy is now projected to shrink by -3 per cent, due to the acutely negative economic impacts of the Covid-19 pandemic. Based on the GDP data from Statista.com, the latest projection by the IMF means the global economy will lose a staggering $5.45 trillion in 2020.
For Nigeria, the growth outlook has also turned negative. IMF’s projection in February of two per cent GDP growth rate, which had accounted for lower oil prices, has now changed to -3.4 per cent. About N8.68 trillion, or $24.1 billion, would be wiped off the Nigerian economy by the end of the year as a direct effect of the novel coronavirus.
Nigeria’s 2020 economic outlook could become worse; it could also get better. The length of the global downturn, and the extent to which the pace of the recovery fuels the rebound of oil demand and prices, would largely determine Nigeria’s fate. A global best-case scenario still needs effective local interventions for Nigeria to avoid apocalyptic economic collapse.
The Nigerian authorities have rightly identified the areas they need to provide interventions during this pandemic: financial relief for the most vulnerable households and access to credit for businesses.
Without data, and in the absence of experience in providing credible needs-based social interventions, official claims of providing relief for the most vulnerable Nigerians have been dubious.
In his first national broadcast announcing lockdown of Abuja and Lagos and Ogun States, President Muhammadu Buhari spoke of government’s intervention in the credit market. Alongside such tenuous initiatives as TraderMoni, MarketMoni and FarmerMoni, he directed three national development finance institutions (DFIs), namely Bank of Industry, Bank of Agriculture and Nigerian Export-Import Bank, to provide a three-month moratorium on their loans funded by the Federal Government. The President also directed the DFIs to restructure the funding provided them by international and multilateral development banks.
Earlier, the Central Bank of Nigeria (CBN) had directed that the interest rate on its applicable intervention funds, which are managed by the DFIs, should be reduced from 9.5 per cent to 5 per cent. The CBN also mandated the DFIs to provide a one-year extension for the repayment of the existing facilities.
Whereas the President made no new funding pledges to the DFIs, the CBN announced ostensibly new N1 trillion in monetary stimulus, and two other funds for small businesses and the health sector.
Ironically, when the additional funding is available to the DFIs, the institutions would have less – instead of increased – administrative capacity to manage the funds, as their income would have been nearly cut in half by the interest rate reduction and because of the moratoriums on repayment of their loans.
In effect, the interventions announced by President Buhari and the CBN have the same and combined effect of weakening the DFIs. Surely, weaker institutions cannot possibly deliver stronger interventions during a time of crisis.
The weaker situation the DFIs now find themselves could not have been the intention of the fiscal and monetary policymakers. It must be the inevitable result of lack of design, or a poor effort at it. What the authorities got right, though, was that the DFIs have a strong role to play in staving off a credit crunch in the Nigerian financial system during and in the aftermath of economic crises.
The commercial banks can be expected to respond to the current crisis with characteristic risk aversion. With the current uncertainties on the depth and the duration of the Covid-19-induced economic downturn, commercial banks will prioritise the safety of their assets, instead of aggressive loan expansion. And by keeping the Monetary Policy Rate high, at 13.5 per cent, the CBN also makes it harder for businesses to take more risk. It would be tough for businesses to take pricy loans from the commercial banks to fund projects that now face multiple risks, including weaker effective demand.
But the DFIs are government vehicles, founded to achieve specific economic purposes. These include funding high-risk productive industries or ventures that are essential to broad-based economic growth. DFIs also help to limit the negative impacts of crises by providing countercyclical financing to smoothen the economic cycles.
Nigeria is well persuaded on these key roles of DFIs. Accordingly, we have created many of these institutions to provide interventional financing for agriculture, industry, non-oil exports, housing and small businesses. Crafting the mandate statements of the DFIs is perhaps the easiest of the tasks. The more difficult ones are ensuring the institutions are well-led, adequately funded, and that they deliver tangible results. As it is with this crisis response, however, the authorities often toy with the ability of the DFIs to succeed with their mandates.
This crisis presents another opportunity to reposition the national DFIs. The first step is to thoroughly assess and redress the current weaknesses and limitations in their ability to deliver effective interventions. As the country can no longer rely heavily on crude oil sales for foreign exchange revenue, this is the time to ramp up interventions for funding non-oil exports.
For those DFIs that have maturing external funding obligations, as alluded to by President Buhari, the government should actively support efforts to restructure their facilities. Without agreeing new terms with their creditors, the concerned DFIs could default on their loans, thereby shutting themselves and other Nigerian institutions out from external credit lines.
The CBN should provide more clarity on its new stimulus funding. The N1 trillion fund appears hastily announced. The allocation of the fund across the DFIs that will be involved in disbursing it should be provided as well as the criteria for eligibility by the prospective borrowers.
To promote accountability, CBN’s new variegated funds should be consolidated under a programme with clear measurable targets. And the timelines for the full disbursement of the funds should be provided. In the next few years, the public should have the records of the repayment of the facilities and the impacts they delivered.
This is not a time for some ineffective interventions. Because the initial containment measures by several countries were weak, Covid-19 has viciously brutalised public health. Inadequate financial interventions will make the economic impacts of the pandemic to be worse than it otherwise would have been.
Akintunde is the Managing Editor of Financial Nigeria magazine; and Director, Nigeria Development and Finance Forum