Heading Off Recession Fears

CBN Governor, Mr. Godwin Emefiele

Obinna Chima writes on measures by the Central Bank of Nigeria to help the country avert a looming economic recession

“If we ease the lockdown as quickly as possible, get the businesses back as quickly as possible, those, who may have suffered total disruptions in their business, we would make funds available to them, in the health sector, the SMEs, in the manufacturing sector, if we are able to make funds available to them as quickly as possible and at concessionary rates and also give those who have existing loans in the banking sector an opportunity to restructure their loans, push forward their repayments, then it would be easy for us to get businesses back alive so as to increase production and save the country from recession.”

The above were the words of the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, while responding to questions from journalists at the last Monetary Policy Committee meeting.
Clearly, the global economy is faced with the unfortunate drop in the price of crude oil and the COVID-19 pandemic. The unfortunate situation has also led to a health crisis of unprecedented proportion as well as economic crisis as never seen before, even worse than the Great Depression of 1929.

The International Monetary Fund, the World Bank, the African Development Bank, as well as other notable institutions have predicted that the global economy would slip into recession. The United States, Europe, developed economies, developing economies and frontier markets, are all affected by the pandemic, to the extent that in some economies, such as the United States, first quarter growth was negative by almost 4.9 per cent even as China suffered massive drop from double-digit growth to very low single-digit growth.
Nigeria is not exempted even though its first quarter growth surprising came down from 2.5 per cent during the fourth quarter of 2019, to 1.87 per cent in the first quarter of 2020.

The National Bureau of Statistics (NBS) had modelled macro scenarios which showed that economic growth could contract as much 4.40 per cent to 8.91 per cent depending on the severity of the outbreak of the pandemic and the quantum of stimulus deployed by government.
In an optimistic scenario, with an average price of $30 per barrel of crude oil in 2020 and a stimulus of up to N3.6 trillion, growth would still contract by 0.42 per cent in 2020, possibly rising to 3.03 per cent in 2021 and 5.17 per cent by 2025, the statistics body was quoted to have estimated in the Economic Sustainability Plan released recently.

However, a lower stimulus of N2.3 trillion or 1.5 per cent of GDP at the same oil price of $30 per barrel would result in a fall in output of -0.59 per cent in 2020 and a resumption of growth to 2.54 per cent in 2021, it added.

A more cautious scenario of $20 per barrel with N3.6 trillion stimulus would result in negative growth of 2.42 per cent in 2020 recovering to 1.19 per cent in 2021 and 3.32 per cent in 2025. At the same price level, a N2.3 trillion stimulus would result in an annual negative growth rate of 2.82 per cent in 2020 and 0.95 per cent in 2021. But the government projected that in the pessimistic scenario, if oil prices level out at $15 per barrel in 2020 due to a prolonged global recession or continued oil glut, then even with the stimulus of N3.6 trillion, the economy would decline by 3.01 per cent in 2020 and only rise by 0.45 per cent in 2021.
“For the country to prevent or limit recession, and avert the accompanying prospects of business failures, job losses, and increased poverty.

“The generally accepted approach today is to deploy a stimulus package, an increase in government spending, tax discounts, loan re-payment deferments or re-structuring, all with a view to increasing aggregate demand by beefing up investments and consumer spending,” the Committee estimated in the plan.
Also, Emefiele believes that as policymakers country take actions and move fast out of the situation, get businesses back again, get the health sector back again, get our farmers to get back to the farm to conduct their planting and farming activities, it would be able to avert a recession.

According to Emefiele, the central bank had as at May this year, disbursed a total of N107.45 billion out of its numerous intervention funds that were put in place to cushion the impact of the Covid-19 on households and businesses.

He emphasised the need for the federal government to gradually work towards reopening of the economy in line with the recommendation of the Presidential Task Force on COVID-19 and advice received from medical experts.

He added that efforts must be directed at saving not only lives but also livelihoods.
To the CBN governor, the financial wellbeing of the citizens is vital in stimulating economic activities. According to him, reopening the economy would enable the resumption of economic activities necessary to stimulate growth, hasten the pace of recovery and restore livelihoods, particularly to the vulnerable.

He based his optimism in the measures so far implemented to reduce the impact of COVID-19 on the economy as well as recent improvement in crude oil prices and reduced pressure on the government’s reserves.

Emefiele’s view was supported by experts at McKinsey & Company, a global management consultancy services company, which advised Nigeria and other African countries to find, “smart approaches to reopen economies in a calibrated way that brings key industries back into operation, while ensuring safe ways of working.”

The firm stressed that the COVID-19 crisis would likely persist for some time.
Therefore, it advised that policy makers in Nigeria and other countries in the region must adopt measures to reopen their economies in order to save livelihoods while saving lives.
“A prolonged global slowdown, combined with continued lockdowns in Africa could plunge the continent into its first economic recession in 25 years while threatening the jobs or incomes of 150 million Africans, one-third of the entire workforce is at serious risk of resurgence in infections.

Monetary Policy Intervention
Since the outbreak of the virus in the country, the CBN has adopted an expansionary monetary policy stance in order to save jobs and livelihoods. The first step was for the bank to unveil palliative measures to cushion impact of the virus on economy. These measures included the extension of moratorium on all CBN intervention facilities; interest rate reduction; creation of a of N50 Billion Targeted Credit Facility through the NIRSAL Microfinance Bank for households and small- and medium-sized enterprises (SMEs); Credit Support for Healthcare Industry; regulatory forbearance; as well as the strengthening of its loan-to-deposit ratio policy. The scheme, which is financed from the CBN’s N220 Micro, Small and Medium Enterprises Development Fund (MSMEDF), earmarked a maximum facility of up to N25 million for MSMEs while households can access up to N3 million based on the activity, cashflow and industry/segment size of a beneficiary.

In addition, the CBN also announced that the N100 billion credit support facility would be funded from the Real Sector Support Facility – Differentiated Cash Reserves Requirement (RSSF-DCCR). It listed eligible participants under the scheme to include healthcare product manufacturers, including pharmaceutical drugs and medical equipment; healthcare service providers/medical facilities – hospitals/clinics, diagnostic centres, laboratories, fitness and wellness centres, rehabilitation centres, dialysis centres, blood banks, etc.

Some of the eligible activities to be covered under the scheme include manufacturing of pharmaceutical drugs and medical equipment; establishment, expansion and upgrade of basic and specialised healthcare facilities; for medical and pharmaceutical suppliers.
Also, the CBN released guidelines for its Healthcare Sector Research and Development Intervention Scheme (HSRDIS) and fixed the maximum limit eligible for development/manufacturing activities at N500 million. Under the initiative, maximum grant limit for research was pegged at N50 million. It is to finance research and development (R&D) in new and improved drugs, vaccines and diagnostics of infectious diseases in the country.

The scheme is to be funded from the CBN’s developmental component of its N220 billion Micro, Small and Medium Enterprise Development Fund (MSMEDF) and disbursement shall be made to beneficiaries in tranches subject to approved milestones achieved.
The Bank stated that the HSRDIS was designed to trigger intense national R&D activities to develop a Nigerian vaccine as well as drugs and herbal medicines against the spread of COVID-19 and any other communicable or non-communicable diseases through the provision of grants to biotechnological and pharmaceutical companies, institutions, researchers, and research institutes for the research and development of drugs, herbal medicines and vaccines for the control, prevention and treatment of infectious diseases.

The central bank listed activities eligible for consideration under the scheme to include: Research and development of candidate drugs, herbal medicines and vaccines validated by relevant health authorities for the control, prevention and treatment of infectious diseases; manufacturing of drugs, herbal medicines and vaccines validated by relevant health authorities for the control, prevention and treatment of infectious diseases; red biotechnological R&D in new health technology for the control, prevention and treatment of infectious diseases; research partnership between academia and industry into the development drugs and vaccines for the control, prevention and treatment of infectious diseases; and research and development into validated phytomedicines for the control, prevention and treatment of infectious diseases.

Furthermore, the CBN’s Monetary Policy Committee (MPC) reduced the Monetary Policy Rate (MPR) by 100 basis points, from 13.5 per cent to 12.5 per cent.
The cut, which came 14 months after the MPR was last adjusted, signalled the committee’s resolve to pursue an accommodative monetary policy stance that will inject liquidity into the Nigerian economy despite the persisting currency and inflationary pressures. It was also expected to translate to a reduction in the cost of credit and positively impact productivity.

Reimaging Nigeria, Others’ Economy
McKinsey & Company presented nine big ideas to reimaging African society, business and government. It listed the suggestions to include the acceleration of Africa’s digital transformation, placing a renewed focus on serving the needs of vulnerable urban populations, and transforming African healthcare systems with a focus on resilience and equity.

“African business can be reimagined by driving sector competitiveness through innovation and consolidation, reshaping Africa’s manufacturing sector with a bold focus on supply chain self-reliance and catalysing the formalisation of African economies,” it added.
The report also laid out a three-step plan for the safe reopening of economies, based on an analysis of reopening strategies globally and in Africa, starting with defining a tiered set of local response measures, followed by steps to triage certain regions or sub-regions and then to continuously monitor progress.

It stated that the first step should be to define a tiered set of local response measures, from the least restrictive to the most restrictive, to be applied to regions across the country.
Each tier would include measures to protect both the general population and high-risk populations (the elderly and people who are immuno-compromised) and would also specify which sectors can open and operate, it added.

Depending on a country’s geographic diversity, a number of tiers can be established.
“The second step is to “triage” regions or sub-regions across the country to determine which tier each of these geographic areas would fall into. The triage process would be dynamic and would incorporate new data as they emerge.

“The third and ongoing step is to monitor progress continuously. Once regions are triaged and measures are implemented, continuous assessments will be required to ensure that these measures are being adhered to.”

According to Mckinsey, even as governments and businesses respond to the immediate crisis and execute reopening strategies, leadership and foresight would also be required to shape the path to the ‘next normal,’ adding that the COVID-19 crisis provides impetus to reimagine fundamental aspects of African societies, businesses, and government.