The outbreak of Coronavirus pandemic which has led to countries across the globe, including Nigeria, shutting down, has hit economies hard. But for Nigeria and other oil dependent economies, it’s been near nightmare scenario. Global oil price which plunged to less than than half the budget benchmark of $57 per barrel at some point, remains unsteady and low, even though it rallied to $41.76 per barrel on Friday. And for Africa’s most populous nation which still relies on the commodity for nearly 95 percent of its foreign exchange earnings, the drop has meant deep trouble for the economy, trouble further compounded by the inevitable drop in remittances.
Fortnight ago, the Senate approved N10.8 trillion revised 2020 budget. Out of which a lion share of N4.9 trillion goes into recurrent expenditure, as much as N2.9 trillion for debt service, and N422 billion for statutory transfers. The revised budget is based on an anticipated oil price of $30 per barrel, down from the $57 per barrel initially projected before the virus hit.
In May, the government noted that the country’s GDP could contract by 3.5 percent year on year in 2020, even as it said estimated net oil and gas revenue available for Federation Account Allocation Committee (FAAC) distribution was expected to fall by 80 percent to only N1.1 trillion from the initial projected N5.5 trillion.
But the government’s projection, analysts say is too optimistic. For economic Mr. Bismark Rewane, CEO of Financial Derivatives Company, “the economy will contract by 7.5 percent best case scenario, and as much as 15 percent.”
Already the drop in revenue has begun to tell on FAAC. On Wednesday, the committee shared N547.309 billion to the three tiers of government for the month of May, down substantially from previous months. And it could yet be morning on creation day.
“The point is that the government needs all the help it can get now,” said Dr. Bongo Adi, senior lecturer, Lagos Business School. “This is not the time to pontificate about what should have been done and what has not been done. It is a time to come together and survive.”
Nigeria’s tax revenue in ‘better days’ averaged N4 trillion, this will take a hit too, on account of the virus. And with oil expected to contribute less than N2 trillion, the government has to resort to borrowing half of the N10.8 trillion budgeted out of which only N2.4 trillion is voted for capital projects.
It’s been a borrowing spree, albeit without much means of paying back. In March, the senate approved President Muhammadu Buhari’s $22.7 billion loan request, which is destined to hike the country’s total debt stock to N33 trillion, the sum of its total annual budget for three years and push debt to GDP ratio to over 21 percent. But while the debt to GDP ratio remains within the IMF limit, the actual debt service to revenue ratio has spiked to 99 percent.
Yet, in April, another N850 loan request was approved. And early this month another $5.5 billion, additions that will further spike the country’s debt stock.
In a statement last week, former vice president, Alhaji Atiku Abubakar raised alarm that the country was already spending 99 percent of revenue to service debt, noting that Nigeria was on the edge of the precipice.
“Nothing has shocked me in my entire life in public service as the revelation from Nigeria’s First Quarter 2020 financial reports in the Medium Term Expenditure Framework and Fiscal Strategy from the Federal Ministry of Finance, Budget, and National Planning, which shows, alarmingly, that whereas Nigeria spent a total sum of ₦943.12 billion in debt servicing, the Federal Government’s retained revenue for the same period was only ₦950.56 billion. This means that Nigeria’s debt to revenue ratio is now 99%,” Atiku said.
“No one should be deceived. This is a crisis! Debt servicing does not equate to debt repayment. The reality is that Nigeria is paying only the minimum payment to cover our interest charges. The principal remains untouched and is possibly growing.
“We are at a precipice. If our revenue figures do not go up, and go up quickly, Nigeria risks a situation where our revenue cannot even sustain our debt servicing obligations. Meaning that we may become insolvent and our creditors may foreclose on us, as has occurred in Sri Lanka and the Maldives.”
The former vice president’s claim was, however, rebutted by the Minister of Information, Alhaji Lai Mohammed who argued that the debt service provisions in the annual budgets include principal repayments, interest payments and all other applicable charges, adding that “the statement that debt servicing does not equate to debt repayment is not only wrong, but ill-informed.”
But the recently released Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) by the Federal Ministry of Finance, Budget, and National Planning which shows that in Q1 2020, Nigeria incurred a total sum of N943.12 billion in debt service while the federal government retained revenue was put at N950.56 billion actually validated the federal government’s claims.
“The truth of the matter is that we are in trouble. The debt situation is worrisome. But at the same time, our sovereign rating is not worse than that of Turkey for instance. So, it should not be a reason why we should hang ourselves,” Adi noted.
“It’s all down to lack of creativity in government. But at the same time, I can’t blame any government. Every country is struggling. Many countries are borrowing money from everywhere. We are running out of gas, we are running out of fuel. Even you as an individual if you don’t have food in the house and your debt is at the highest level, will you just give up and die? You still borrow. So, we would rather continue to borrow than die.”
Last month, Finance Minister, Zainab Ahmed while speaking after National Economic Summit, noted that the country was inevitably heading into a recession on account of the impact of the new virus, and that part of why the economy was being opened up is to avoid the country slipping into a depression.
“On the economy, Covid-19 has resulted in the collapse in oil prices. This will impact negatively, and the impact has already started showing on the federation’s revenues and on the foreign exchange earnings. Net oil and gas revenue and influx to the federation account in the first quarter of 2020 amounted to N940.91billion. This represented a shortfall of N125. 52billion or 31% of the pro-rated amount that is supposed to have been realized by the end of that first quarter,” she said.
“The crisis will only multiply this misery. The economic growth in Nigeria, that is the GDP, could in the worst case scenario, contract by as much as –8.94 percent in 2020. But in the best case, which is the case we are working on, it could be a contraction of –4.4 percent if there is no fiscal stimulus. But with the fiscal stimulus plan that we are working on, this contraction can be mitigated and we might end up with a negative –0.59 percent.”
“This is a very difficult time because the challenges we have now are double. There is health challenge, there is an economic challenge. Even as we are addressing the current health challenge, we still have to look at how we can support the economy so that the economy does not fall into a depression,” she said.
However, foreign remittances’ decline presents another source of worry. The Covid-19 shutdowns have also, inevitably hit another critical source of foreign exchange inflow to the economy – remittances. In a report last week, the Central Bank of Nigeria (CBN) said Nigeria’s total direct Diaspora remittances dropped by 50.47 percent to $1.02billion from $2.05billion between January and February 2020.
Over the past few years, Nigerians abroad have constituted a major source of foreign exchange for the country, accounting for nearly as much dollar inflow as crude oil, and indeed more lately. For instance, in 2018, direct remittances into the country stood at $17.57 billion, while total revenue receipts from oil came to $18billion. And in 2019, it rose to $19.2 billion. Indeed, the remittances, which had continued to rise even as Foreign Direct Investments plunged over the past few years, have largely accounted for Nigeria’s ability to remain a stable economy and maintain a relatively valuable currency despite recent struggles of crude oil.
Last year, PricewaterhouseCoopers (PwC) in a report, said migrant remittances to Nigeria could grow to $25.5bn, US$29.8bn and US$34.8bn in 2019, 2021 and 2023 respectively. And that over a 15-year period, it expects total remittance flows to Nigeria to grow by almost double in size from $18.37 billion in 2009 to US$34.89 billion in 2023.
And speaking about the critical role remittances have since assumed in the country’s economy, Mr. Ike Chioke, Group Managing Director of Afrinvest told BusinessHallmark that, “For years, we have accepted that 90 percent of Nigeria’s foreign currency income comes from oil which was $18billion in 2018. It is clear now that if it was only that $18billion that we were all relying on, then this place would have been worse than Afghanistan,
“The reason we are surviving is that there is another $18 billion that came in from Nigerians living abroad. That additional cash injection has become our social security safety net. My paper indicated that about 70 percent of Diaspora remittances is consumed on education, healthcare, weddings, chieftaincy, burial ceremonies, etc. While the remaining 30 percent is invested often in real estate; often these are non-income yielding homes located in rural towns and villages.”
But this critical injection into Nigeria’s struggling economy is inevitably now threatened by Coronavirus as CBN’s latest figures suggest. And combined with the fact of struggling oil price, analysts say the country’s government needs all the help it can get.
“It is expected that remittances will fall, there is nothing surprising about that,” Adi said. “You see what is happening across the globe. The US, UK and other economies have been on lock down. And there are millions of people losing jobs.