By ADEBAYO OBAJEMU
That the Nigerian economy is braced for a shock at the moment is not in any doubt to many discerning watchers, Business Hallmark findings at the weekend authoritatively affirm.
However, what is being interrogated in business circles, board rooms and analysis centres across the land are factors like the potential depth of the challenge and what both the country and individuals need to do to mitigate, and hopefully contain its impacts.
Again, while it is apparent that the associated outbreak of the Coronavirus pandemic has its place in the overall crisis, some commentators say that even that would not have been as debilitating if the other deeper, structural challenges of the economy had been addressed through the years.
But even beyond the arguments over the search for the origins of, and answers to the current economic challenge however, there is an agreement that the sheer magnitude of the problem may indeed run quite deep.
Underscoring this is the fact that, beginning with the trading floors of the Nigerian Stock Exchange, the overall mood within the national economy has broadly remained bearish. Evidence of this is that, almost at the close of trading on Friday, the trend-setting All Share Index, ASI had dropped by as much as 38.16 percent. For a market that has almost recurrently but equally lately come under very heavy pressure on account of dislocations in the internal and external economy, it is clear that these are indeed not the best of times for the Nigerian investor, who has seen the real value of his equities, massively battered in what has come to be the seemingly recurring year on year shocks and convulsions that have left many in a confounding state of perpetual daze.
And that is not all. Again, whilst the Capital Market was reeling from its own shocks, the convulsions in the global oil field were equally deepening with the Russians, the Saudis, the Americans, OPEC and other very well-heeled players in the slippery and treacherous precincts of the global energy market jostling for prime advantage and settling old and new scores. Within this climate, Nigeria’s prime sweet crude product, the Bonny Light could only manage to command a much-reduced price marker of $35.61 per barrel. While this still fits in within the $7-$18 per barrel production costs estimates band for oil exploration and drilling in the country, it is however already also constituting a planning and execution nightmare for the 2020 Federal Budget as it is around the half-way mark of the projected budget benchmark rate of $57 per barrel.
Related to this is a challenge of dwindled demand for Nigeria’s prime product offerings. Given the impact of the Coronavirus pandemic on notably China, which was unarguably one of Nigeria’s biggest crude oil export destinations, there had also come a corresponding decrease in sales. As at the time of going to press, reports were that the country’s agents were still caught up in a frantic search for buyers for well over half of its product output that is to be delivered to the market as part of its April 2020 sales tranche. On a good, normal day, that would have since been a done deal. But then these are clearly not the best of times.
As to the third critical component of the budget process, namely the naira to the dollar exchange rate, it depreciated to as much as N440 to the dollar at a point within the outgoing week, a far departure from the projected exchange point of N360/$1.
However, following a series of interventions from the Central Bank of Nigeria, which reiterated its commitment to continuing to defend the naira against all external shocks, including oil price drops, and the imposition of fines on about 100 Bureau de Change that had been reportedly involved in speculative infractions, the rates of exchange came down to N375 to the dollar just before the weekend.
While the CBN intervention has seemingly saved the day at the moment, the facts of the matter are that there are still many lingering concern points. One is the inability of the apex bank’s intervention to restore price stability in the forex market to the previously existing N357-N361 window. And then there is the bigger issue of the nation’s very depleted Excess Crude Account reserves. From where would the apex bank find the resources to continue to defend the naira, commentators worry?
One such new thinking that is coming from the apex bank apparently is to tap on counsel from members of the Economic Team and the financial sector to bring in new funding outlets into the nation’s budget financing mix. Arising from a consultative session last week, the apex bank volunteered the information that such new thinking was now going to go mainstream:
“Participants from the financial sector agreed to create a special purpose vehicle working with the federal government, and key development finance agencies. The well-structured SPV will be used to mobilise close to N1.5 trillion in funds from banks, pension funds and other financial institutions, to fund road, power, and port infrastructure. Six key road projects and the seaport projects would be identified for funding.
“The framework for this SPV is currently being worked on and will be ready for implementation by October 2020. When implemented the SPV will help to reduce the burden of government financing of infrastructure projects and enable the government to focus on funding other priority areas. It will also reduce the cost of transporting goods across the country for farmers, SMEs and manufacturers. More importantly, it will help improve our ability to attain double-digit growth,’ the statement from the apex bank after the meeting indicated.
Indeed, underscoring the long-known fact that the crisis of the economy was indeed structural, Africa’s richest man, Aliko Dangote in the course of the same week lamented the continuing emphasis on import over excise revenue even by the Nigerian Customs Service, NCS. He called for more and renewed focus on developing and boosting our national production capacity.
‘We can diversify the economy through agriculture and manufacturing. Manufacturing creates a lot of jobs, creates a middle class and transforms families. These are the areas we need to focus on. But how do you diversify into manufacturing and make it an inclusive growth? You need to do more of backward integration or import substitution. Our economy is great because we have a local market.
“The economy of Asia is focused on exports. But we have a domestic market with about 200 million people apart from the ECOWAS market. Our import last year was almost $47 billion. It is not sustainable. We cannot have 200 million people growing at an average of 2.7 per cent and we are importing most of the things we consume.”
For the scholar and public commentator, Bongo Adi, the saddest part of the current experience is that it has already enveloped us. But we necessarily do not have to be drowned by it.
‘The bad day is already upon us, that’s just the sad part of it. Oil price is down, and that’s not an isolated event. There is value dissipation and quality dissipation. Because of the Coronavirus, a lot of demand has been taken off the market. That means that supply has outgrown demand. Finding buyers for our crude has become difficult. On top of this, you have the price war going on between Russia and Saudi Arabia, which has brought down the price.’
Despite this, however, Adi says that we can still achieve some traction if we concertedly step on the pedal and proceed to do the things that must be done at this point.
:The first thing to do is to address that issue of the bulk of what is used to subsidise petroleum. I don’t know how many trillions of naira they have said has been spent on subsidy for the past few months, but I think it’s time for the government to fully deregulate the downstream oil sector. Remove the subsidy, given that oil price is down now, which means that the price should also go down. Consumers would be better off for it, and that would compensate for the inflationary pressure coming from the speculation in the foreign exchange market.
Now, what government needs to do, and the CBN has started doing it, is to start sending out some kind of assurances that our external reserves are not yet in jeopardy and that we are still capable of weathering the storm for the next two to three months.
There is liquidity in the system, the challenge of the CBN has been how to mop up that liquidity. We are not in a bad situation as we were in 2015, leading to the recession. So, recession is still far off the curve for us at this point in time. But again, it would require some deft management.’
But is perception not everything. And do many Nigerians, not at the moment believe that the barrel may presently have tanked? Adi agrees:
“The challenge here is to put in mechanisms to checkmate the spread of rumours. Nigerians have not much to worry about, so long as the spread of rumours is curtailed. The good thing is that the bad things that happened in our economy over the last two years, with the government introducing unorthodox monetary policy had led so many investors to drop our assets. So, we did adjust to a new equilibrium. We are at that level where we have adjusted,’ the senior lecturer at the Lagos Business School remarked.