Nigeria is broke and the economy is mired down on quicksand. Since coming into office in 2015, the Buhari administration has spent trillions of naira on projects after programmes with no thought to enlarging the savings pool. Rather, the government has continuously and uninterruptedly dipped its fingers into the nation’s meagre savings and depleted the excess crude account from the nearly $3 billion it met in 2015 to just a little over $70 million. In early April, President Muhammadu Buhari ordered that the sum of $150 million be withdrawn from the stabilization fund of the Nigerian Sovereign Investment Authority (NSIA) to help address emerging fiscal risks which the COVID-19 pandemic had caused and to support the June 2020 Federation Accounts and Allocation Committee (FAAC) disbursement.
The morbidly ill-designed and poorly implemented Keynesian expenditure strategy by the Nigerian government that emphasised tokenism, including giveaways over substance has failed after all to save the economy. It was a prophecy foretold. Growth has been anaemic over the last five years, averaging less than 1 per cent since 2015; well below levels needed to drive meaningful development. In 2018, Nigeria overtook India as having the most people globally living in extreme poverty.
The latest report from the National Bureau of Statistics (NBS), about poverty and inequality from September 2018 to October 2019 is even more depressing. It shows 40 per cent of people in the country live below its poverty line of N137,430 ($381.75), a year, which represents 82.9 million people and highlighting the low levels of wealth in Africa’s biggest economy.
Low confidence in the economic policies of President Muhammadu Buhari has seen foreign and local investments, including portfolio investments in the country fall drastically by more than 65 per cent since early 2015. It has been projected by the government that the country’s GDP will further contract by 3.4 per cent, as against the earlier optimistic projection of a 2.9 per cent growth, as dwindling oil revenues and the pandemic forced the country to cut the budget plans for a second time to assume a lower petroleum price of $20 per barrel.
In the middle of last month, the International Monetary Fund (IMF) on Tuesday projected that Nigeria was headed for a recession, its worst in three decades as it expected the economy to contract by 3.4 per cent in 2020, implying a recessionary slide on the modest 2.27 per cent real growth recorded by the country in 2019. Supporting the projections of the World Bank, which predicted an imminent recession in sub-Saharan Africa in its latest Africa’s Pulse report, the IMF, in the World Economic Outlook, projected that economies in the region would contract by 1.6 per cent in 2020.
Hit by crashing oil prices and lockdowns to curb the spread of the virus, the Nigeria government has been forced to rethink the underlying assumptions around its budget. The COVID-19 outbreak has magnified existing vulnerabilities, leading to a historic contraction in real GDP growth and to large external and fiscal financing needs.
As the IMF noted in April, “The near-term economic impact of COVID-19 is expected to be severe, while already high downside risks have increased. Even before the COVID-19 outbreak, Nigeria’s economy was facing headwinds from rising external vulnerabilities and falling per capita GDP levels. The pandemic, along with the sharp fall in oil prices has magnified the vulnerabilities, leading to a historic decline in growth and large financing needs”.
So, the centre has been forced to tighten expenditure as it seeks to cope with the strain of the economy coming to a near-standstill as a result of the persistent volatility in the oil market that has seen global Brent crude price futures to as low as $11 last month. Nigeria has been grappling with a significant drop in oil prices and a collapse in global fuel demand caused by lockdown measures aimed at containing COVID-19. The Director of the Budget Office, Mr. Ben Akabueze projected that oil and gas revenues would drop by over 80 per cent this year.
Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed announced last week that the federal government was considering lowering the oil price benchmark in the 2020 Budget from $57 to $20 to reflect obvious income realities.
“We are in the process of an amendment that is bringing down the revenue indicator to $20 per barrel,” the Minister proclaimed at a web conference on Citizens’ Dialogue Session on Government Fiscal Policy Decisions on the fall in Oil Prices and the COVID-19 pandemic. She added that Nigeria was having trouble selling some of its oil cargoes and would have to cut production to below what it originally expected in the budget.
N312.820 billion, representing 15 per cent of its N10.59 trillion budget passed in December 2019, is being sheared off the budget as the federal government further reviewed its proposed production volumes from 2.18 million barrels per day to 1.70 million barrels. The country, as part of an agreement with OPEC and other producing nations, agreed to trim output to help balance the global market.
In addition, the federal government has also decided not to hold bidding rounds for major oilfields until crude prices recover while some upstream projects will be completed much later than originally planned as a result of the crash in the price of crude oil.
A significant modification in the overall numbers of the budget was virtually unavoidable as a consequence of the coronavirus pandemic. Among the many casualties of COVID-19, was the oil and gas industry that has taken a massive beating as prices spiralled uncontrollably down the hill. This has negatively affected the country’s current account deficit which stood at $9.17 billion in September 2019 when the average crude oil price was $65 per barrel of crude. It is projected that when the latest figures are released by the central bank, the deficit would widen to as much as $15 billion.
What this all means is that the Nigerian economy is critically in need of cash inflow to meet infrastructure and recurrent needs and it has turned principally to global financial institutions to fund its budget.
At the end of April, IMF approved $3.4 billion in emergency funding to Nigeria, the single biggest disbursement for any country yet with the coronavirus pandemic. The Rapid Financing Instrument (RFI), was approved by the IMF on April 28, 2020, is to help Nigeria mitigate the devastating impact of the coronavirus pandemic and also to sort out balance of payment issues.
The Fund’s Managing Director, Kristalina Georgieva, said, “We have already disbursed the money to Nigeria. In emergency assistance, once the board approves, we disburse within days to the country and it goes to the Central Bank in dollars before it’s converted to naira for the Federal Government’s use.
“The conditions are quite favourable. The repayment period is five years, up to two and a half years is a grace period and the interest on the loan is 1 percent”.
In a statement, IMF Deputy Managing Director, Mitsuhiro Furusawa, added that the pandemic and the plunge in oil prices were severely impacting Nigeria, and that the funds will provide much-needed liquidity to respond to urgent balance of payments needs. He also called for the country to expedite the unification of its exchange rate, a major source of corrupt patronage for those close to the levers of power in the country.
While the IMF financial support to Nigeria will help limit the decline in international reserves and provide financing to the budget for targeted and temporary spending increases aimed at containing and mitigating the economic impact of the pandemic and of the sharp fall in international oil prices, it is pertinent that the Nigerian government understands that when the impact of the COVID-19 shock withers, the government’ commitment to medium-term macroeconomic stability remains crucial to support the recovery and ensure debt remains sustainable.
The options open to the government to access critical funds are limited. It cannot afford to increase the already arduous tax burden neither can it afford to expand the rectilinear tax base that depends heavily on corporate income tax by the oil majors.
This suggests that the federal government will likely prioritise its attempt to raiseN3.45 trillion at in additional concessionary funding from the World Bank, AfDB. Extremely weak foreign direct and foreign portfolio investment inflows make this highly inevitable in such a subdued economic environment.
Thus, faced with an odorously unventilated coffer, Nigeria will have to rely on financial assistance and loans in the short term to meet its budgetary obligations.
The Buhari administration’s refusal to save for the rainy day but spend and spend and spend, is finally catching up with the economy.
Credit: This Day