The coronavirus is eating away at the global economy, and reports show that the world is likely in recession. UN analysts estimate that the world economy will shrink by $80 trillion to $2 trillion, a decline of nearly 3%, and the UN analyst estimates that it will shrink by another $3 trillion.
But these figures are difficult to measure accurately, and given the duration of the outbreak and the way people and businesses respond to current policies, there are certain effects that should be understood. Like most countries, Nigeria is being hit on two fronts, but it is difficult to measure those numbers accurately.
The price of oil has been hard, falling from $59 a barrel to $28 a month, lower than any other oil producer in the world, owing to lower supply. With oil production accounting for 31% of household income by 2020, this continued fall in oil prices and lack of demand are likely to lead to a sustained decline in Nigeria's gross domestic product (GDP) and economic growth.
If oil prices do not stabilize fast enough, critical expenditures like roads could be affected. The finance minister has already announced that the budget for the next financial year will be cut by 10% due to lower oil prices. Because Nigerians will have to import goods and services, they will have less dollars than are normally generated by oil sales.
The dollar rate for foreign investors has also changed from N360 to N380, and the value of Nigeria's foreign-exchange reserves, the country's main source of foreign-exchange, has fallen from $45 billion last summer to $35 billion today. This is particularly worrying given that the foreign exchange reserve system accounts for more than 90% of the country's total foreign reserves. The devaluation and realignment, as the CBN calls it, is praised by experts as bringing Nigeria's "different" exchange rates closer together.
But the move will also have a negative impact on Nigeria's fixed-income markets, as it will reduce the supply of dollars needed to meet foreign-exchange demand. The Nigerian government wants to extract more naira from its currently low dollar sales. As the naira depreciates against the dollar, foreign investors are less likely to hold the currency - stocks and bonds - or sell their assets.
The stock market has already suffered a setback as a result of the virus: shares in the country's largest stock exchange, the Lagos Stock Exchange (LSE), have fallen more than 20% since the beginning of October.
Spending by individuals and businesses has fallen, as companies lose capital and investors lose money, while companies have lost capital. Uncertainty is a sign that shocks to financial markets are having an impact on the real economy.
Restrictions on global trade in goods and services between the United States, Canada, Australia and New Zealand to Nigeria and to and from Nigeria will prove to be restrictions.
Non-essential goods will be less in demand because of the uncertainty associated with the pandemic. Nigerian companies must cease production, and production itself will reduce the supply of goods and services to other parts of the world, such as the United States.
The CBN hopes to head off the economic impact of the pandemic by providing money to the country's two largest banks, the Bank of Nigeria and the Federal Reserve. But how do economic policymakers respond to such a dramatic change in the supply of goods and services in a country with high unemployment?
The CBN hopes the money can be used to keep vital sectors such as oil and gas, agriculture and mining afloat.
The question is whether the CBN's loans will be enough to prevent the economy from grinding to a halt and staff being laid off. The federal government has not yet announced any major plans, but companies are likely to need more subsidies. In particular, it wants the manufacturing and pharmaceutical sectors to boost local production and reduce their dependence on imports.
If the crisis persists, the CBN could find that borrowing too much could be tricky, and it seems highly likely that many of the loans will ultimately be bailout repayments.
Given that the informal sector accounts for 41% of Nigeria's economic output, how many people can stay at home and still be productive? Even in the formal economy, workers who are able to work remotely, such as those who work remotely or from home, will not be able to work outside the home. The policy of work - at home - would apply not to grocers and artisans, but to the rest of the workforce.
The uncertainty that leads consumers to cut non-essential spending and close factories and service providers, leading to a decline in goods and services produced, could be fatal. Stopping this movement will lead to a rise in unemployment, a fall in the number of jobs and a fall in productivity. Most recessions are caused by demand, supply, and financial shocks, but the COVID-19 pandemic solves all three in one package.
If the federal government comes into play, it may be able to minimise the damage, but CBN has already taken the steps it failed to do during the last crisis.
The coronavirus is a public health emergency, regardless of how business and economic policymakers react. Unless the Government takes preventive action, our economy will continue to sputter.
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