2020: Year of Uncertainty

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2020 will go down in history as a year that was filled with economic uncertainties, writes Obinna Chima

From the COVID-19 pandemic which led to the lockdown of major cities in the country as governments moved to halt the spread of the virus, the significant drop in the price of crude oil, Nigeria’s major revenue earner, among others, the outgoing year can best be described as a year of uncertainty in the world, especially for the Nigerian economy which has over the years been faced with anemic growth.

Clearly, the pandemic whose first case was recorded in the country around February, gradually transformed to an economic crisis and necessitated response from both the fiscal and monetary policy authorities.

Some of these included a review of the 2020 budget, shutting down of both domestic and international flights, introduction of palliatives, granting a moratorium on principal repayments for Central Bank of Nigeria’s intervention facilities; reduction of the interest rate on intervention loans from nine per cent to five per cent; as well as intervention by the coalition of private sector operators, CACOVID.

Nevertheless, the measures were not sufficient enough as the ravaging effects of the pandemic negatively affected most economic indicators in the country.

Gross Domestic Product

As stated previously, the effect of the lockdown that was necessitated by the pandemic took a toll on economic activities in the country. Owing to this, Nigeria’s real Gross Domestic Product (GDP) for the third quarter of 2020 showed the country had entered its second economic recession in five years. The GDP contracted by 3.62 per cent in the third quarter of the year, compared to a growth of – 6.10 per cent recorded in the second quarter of 2020. The National Bureau of Statistics (NBS) had explained that the GDP performance reflected residual effects of the restrictions to movement and economic activity implemented across the country early in the second quarter of 2020 in response to the COVID-19 pandemic.

During the review quarter, aggregate GDP stood at N39.09 trillion in nominal terms, compared to N34.34 trillion in the second quarter, while real GDP stood N17.82 trillion, compared to N15.89 trillion in the preceding quarter.

Growth in the third quarter of 2020 was boosted by the non-oil sector, which contributed 91.27 per cent to growth in real terms, higher than the 91.07 per cent in the second quarter, and 90.23 per cent in the third quarter of 2019.

On the other hand, the oil sector contributed 8.73 per cent to total real GDP in the third quarter of 2020, down from 8.93 per cent in the second quarter. Real growth of the oil sector contracted to 13.89 per cent (year-on-year) in the third quarter, indicating a sharp contraction of 20.38 per cent relative to the rate recorded in the third quarter of 2019.

The average daily oil production stood at 1.67 million barrels per day (mbpd), or 0.14mbpd lower than the production volume in the second quarter, and 0.37mbpd lower than the third quarter of 2019.

External Reserves

In the outgoing year, due to the outflows recorded by the country as a result of external vulnerabilities, Nigeria’s external reserves dipped by $3.627 billion from $38.536 billion it was at the beginning of 2020, to $34.909 billion as of December 22, 2020.

Nevertheless, the total amount of foreign exchange inflow into the economy in the third quarter of 2020 was $21.46 billion, according to data from the Central Bank of Nigeria (CBN). The CBN, in its third quarter economic report, however, stated that aggregate forex inflow to the economy declined by 2.2 per cent below $21.95 billion recorded in the preceding quarter.

Besides, compared with the respective levels in the preceding and corresponding quarter of 2019, forex outflow also fell by 14.42 per cent and 57.3 per cent respectively to $7.70 billion in the review period.

The development was attributed to the decline in outflow through the central bank and autonomous sources for most of the period in the review quarter. It had explained that the lull in economic activities led to lower demand for forex.

Purchasing Managers’ Index

Due to the restriction of economic activities, the performance of the purchasing managers’ index which is used to gauge the direction of the manufacturing sector, was impacted negatively.

For instance, while the Manufacturing PMI in January stood at 59.2 index points, indicating expansion in the manufacturing sector for the thirty-fourth consecutive month, it slowed down in the second quarter of the year as a result of the lockdown. Owing to this, the PMI report for December 2020, stood at 49.6 index points, indicating a contraction from the expansionary level recorded in the month of November 2020.

Inflation and Exchange Rate

The Consumer Price Index (CPI) which is used to gauge inflation in the country has been on an upward trend since January this year. From 12.13 per cent it was at the beginning of the year, inflation has risen to 14.89 per cent as of November 2020, with prediction of further inflationary pressure.

Also, during the year, the central bank adjusted the exchange rate at the official market window as well as other forex windows under its regulation. For instance, the official rate was devalued from N306 to a dollar to N360 to a dollar, while the rate for the Investors and Exporters window, among others was adjusted to around N380 to a dollar.

However, the naira has continue to trade around N460 to a dollar due to the activities of forex speculators.

Given the increasing importance of Diaspora remittances, the Central Bank of Nigeria recently unveiled a new policy that grants unfettered access to foreign exchange rom Diaspora and other money transfer remittances. The new CBN policy allows beneficiaries of Diaspora remittances through International Money Transfer Operators (IMTOs) to henceforth receive such inflows in the original foreign currency through the designated bank of their choice. The regulation was part of efforts to liberalise, simplify and improve the receipt and administration of Diaspora remittances into Nigeria. With the new policy, recipients of remittances may have the option of receiving such funds in foreign currency cash (US Dollars) or into their ordinary domiciliary account.

“These changes are necessary to deepen the foreign exchange market, provide more liquidity and create more transparency in the administration of Diaspora remittances into Nigeria,” the apex bank had stated.

Analysts’ Expectations

Moody’s Investors Service predicted that Nigeria’s economic growth would be severely strained by the double whammy of COVID-19 and the volatility of the oil price in the international market.

According to the rating agency, the country’s credit profile reflects the country’s increasing exposure to fiscal and external shocks because of its weak government finances, which are constrained by an extremely narrow revenue base that hinders fiscal consolidation.

It said additional credit challenges stemmed from the political risks around the conflict with Boko Haram, potential attacks on oil infrastructure in the Niger Delta and growing income inequality.

Moody’s stated that the COVID-19 pandemic and the associated global downturn severely hurt economies in Africa, with the regional economy contracting for the first time in decades.

The rating agency explained that given containment and prevention measures that constrained the functioning of important economic sectors such as trade, coupled with global spillovers (particularly the sharp drop in international oil prices) that significantly weakened both domestic and external demand, the shock to the economy was most severe in the second quarter of 2020 when it contracted by 6.1 per cent.
The Lagos Chamber of Commerce and Industry (LCCI) also projected that the Nigerian economy will grow by one per cent in 2021.

The Director General, LCCI, Dr. Muda Yusuf, also called on the federal government to implement structural reforms in order to stop the perpetuation of the current recession and foster economic resilience in 2021.
He also stated that recovery from current recession would depend on the performance of oil prices in the international market and local crude oil production level in 2021.

The chamber stated that the growth outlook for Year 2021 would take full course most likely in the second quarter of 2021, due to the base effect of the second quarter 2020, when output contracted steeply by 6.1 per cent.

Yusuf said: “We expect the pace of recovery to remain subdued within the region of one percent in year 2021 in the absence of shocks. In our view, Nigeria’s recovery prospects depend largely on oil price and production level as GDP performance in recent quarters has significantly mirrored trends in both variables.”

On his part, the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, predicted that double-digit inflation in the country will remain and average at 16 per cent in 2021.

He also predicted the Central Bank of Nigeria will focus its monetary policy objectives on the attainment of price stability in 2021.

However, he warned that the pursuit of multiple objectives could undermine the effectiveness of the CBN’s monetary policy in 2021.

Rewane noted that a change in the interest rate policy would be likely in the in-coming year and, “will increase debt servicing costs.”

“Nigeria is already in a liquidity trap. The CBN will have no choice but to raise interest rates as it prioritse price stability over economic recovery. The timing of an interest rate increase will be a function of money supply growth, federal government’s overdraft, galloping inflation and exchange rate pressures,” he said.

The FDC boss also predicted that Nigeria’s oil production would increase by 500,000bpd as OPEC agreed to ease output cuts from January 2021, to reach an average oil production of 1.65 (mbpd) from1.61 mbpd in 2020.

He said that the federal government, which is already confronted with wider fiscal deficit of N5.19 trillion in 2020, amid lower revenues, would attempt to spend its way out of the recession by significantly boosting domestic revenue mobilisation by broadening the excise base, increase the price of petrol and the raise the VAT rate gradually to the ECOWAS average of 15 per cent by 2025.