KNACKERED SOCIO-ECONOMIC GROWTH DUE TO COVID-19 IMPACT- FOLORUNSHO ABIODUN (FOLLYOMOYABEJI)
Recession is coming, and it may be Nigeria’s worst in 30 years. Even more than the last one in 2015. This means by the time the lockdown is lifted, Africa’s largest economy may be facing a recession that could last until 2021 (Ruth Olorunbi).
According to Cheta Nwanze, the COVID-19 pandemic triggered a public health crisis in Nigeria, a situation that was quickly followed by economic instability. The drastic drop in oil price, Nigeria’s major source of foreign exchange, only complicated the situation.
While other countries like the US responded to the crisis by doling out trillions of dollars as palliatives, Nigeria offered very little as relief for its citizens. The country was also further plagued by worsening inflation rates, and civil unrest/security challenges. The International Monetary Fund (IMF) had since predicted a global recession, expected to exceed 3.8%.
As earlier stated, The economic downturn in Nigeria was triggered by a combination of declining oil price and spillovers from the Covid-19 outbreak, which not only led to a fall in the demand for oil products but also stopped economic activities from taking place when social distancing policies were enforced. By International Monetary Fund (IMF)’s estimation, Nigeria’s economy is expected to shrink by 3.4% this year and the nation of over 200 million people could face a recession lasting until 2021.
Oluwasegun Olakoyenikan, a young Correspondent from Benin City, Nigeria, gave his observation on how the lack of sound economic policy is a major reason for the country’s current recession. The current economic situation in Nigeria is primarily caused by insufficient foreign exchange (forex) in the Central Bank of Nigeria (CBN) to fund imports. This with its enormous effects on the economy caused the recession. Prior to the drop in the global crude oil prices in 2015, Nigeria’s economy relied heavily on crude oil earnings, with steady inflows of Foreign Portfolio Investment (FPI), and Foreign Direct Investment (FDI).
In a report by NBS, Nigeria received 95% of its export earnings and 70% of government revenue from the oil sector. When the global crude oil prices dropped, the forex reserves also dropped due to over-reliance on the sector, but the nation failed to devalue its currency which led to the shortage of forex earnings to fund imports. This, however, made investors struggle to get forex for their imports. Given that the nation could not explore other investment opportunities for the production sustainability of the economy, the FPI and FDI investors got frustrated over the shortage of foreign exchange to pay for raw materials and machines, so they eventually left the market.
When that happened, the value of production, which is the major function of GDP, began to fall. The investors who decided to stay had to pay significantly more for these imports because of the high cost of production materials. No doubt, the ripple effects of this which include, 2-digit inflation rate – cost-push inflation – which has developed immunity against the central bank’s monetary policy rates and soaring unemployment rate is evident in Nigeria’s economy today. Since then, the economy has witnessed a hiccup in its production capacity, thereby causing a steady drop in GDP. The economy recorded negative growth in the first quarter of 2016, which led the economy into recession for the first time since a full-year recession in 1987.
Apparently, the reason for the recession was not of the fall in oil prices or poor saving culture as many perceived, but by the lack of sound economic policy to create alternative foreign exchange earnings such as the non-oil exports.
Cheta Nwanze (the lead partner at SBM Intelligence) who was part of a set of vibrant panelists that spoke during Nairametrics second-quarter 2020 economic outlook said “As the global recession looms, sectors of the Nigerian economy that are expected to be hit the hardest are: the banking industry, construction, travel and leisure, entertainment, automotive, luxury goods, oil and gas, trade, and transportation”.
At the worst-case scenario, he noted that if the world does not find a vaccine in the next 15 months, Nigeria economy would be in a sorry state by 2021.
Please note, this post reflects the views of the writer alone.
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