The outbreak of the novel Corona virus COVID-19 is taking a heavy toll on economies across the world, Nigeria inclusive. Last week, Fitch Ratings cut its baseline global growth forecast for 2020 to just 1.3% from 2.5% earlier forecast in their December 2019 Global Economic Outlook.
As reality begins to dawn in Nigeria on the potential implications of this pandemic on Nigeria’s socio-economic growth and development in the mid to long term, here are five (5) key developments that entrepreneurs leading small and growing businesses need to be aware of.
- Nigeria’s dwindling foreign exchange reserves: Oil is Nigeria’s major foreign exchange (FX) earner accounting for over 90% of our FX earnings. COVID-19 has forced a slowdown in major economic activities across the world which has negatively affected the need and consumption of petroleum products, resulting in excess supply of crude oil. Brent Crude is currently at around $26/27 per barrel, compared to almost $69 in January 2020. This will impact Nigeria’s FX reserves, which was $36.68 billion in February 2020, down from $38.60 at the beginning of the year. This has also resulted in the Central Bank of Nigeria (CBN) further tightening FX controls towards managing demand and its intervention in the market. Businesses will find it more difficult and expensive to source FX to meet operating requirements.
- Reduced Consumption: As part of efforts to reduce the spread of COVID-19, major institutions and governments at the federal and state levels have made announcements restricting movements of the populace. The Federal Ministry of Education announced the closure of schools nationwide and state governments such as Lagos and Ogun have placed restrictions and in some cases outright shutdown and bans on public gatherings including religious congregations. These follow similar restrictions around the world where countries such as China, the United States and Ghana are testing social distancing strategies which have been shown to significantly slow down the spread of the virus. The attendant effect of this is significant reduction in economic activity.
- The Naira has been “adjusted”: For about 4 years now, Nigeria has operated a system of multiple exchange rates in a bid to control demand for foreign exchange. The system, which has been criticised by the International Monetary Fund, has kept the official rate at about 307 Naira per Dollar. According to Business Day[2], this had allowed the CBN to supply cheap foreign exchange to government departments and select companies, including fuel importers and with the economic pressure over the last couple of days, analysts had predicted that devaluation was unavoidable. On Friday, March 20, the CBN changed the rate at the investor and exporter’s (I&E) window to 380 Naira per Dollar from 366 Naira per dollar in a move that is being called a technical devaluation. Businesses, particularly those within the manufacturing space dependent on imported inputs, raw materials, tools and equipment would have to pay more to get them. This will lead to rising production costs which they may be unable to pass on to the consumers who are also suffering from lower purchasing power.
- How does Nigeria finance its growth and development? This week, Mrs. Zainab Ahmad, the Minister of Budget and Planning announced that the Government is planning to review the 2020 budget downward from 10.59 trillion Naira to 9.09 trillion Naira. As at the time of writing this piece, oil prices had crashed to a four year low as outlined above. Given that the 2020 Budget which was signed to law in December 2019 had benchmarked crude prices at $57 price per barrel, our revenue expectations have taken a significant hit and the government has adjusted the benchmark to $30 per barrel to adjust for current realities including the earlier mentioned reduction in global oil demand. Plans to raise 3.3 billion dollars via a Eurobond issuance have also been put on hold, which has also impinged the governments’ spending plans. Given that government remains the largest spender in the Nigerian economy, this slash to the budget will have a negative impact on this multiplier effect on the wider economy and for MSMEs.
- Breakdown in Supply Chains: The production activity of Chinese manufacturing plans fell significantly in February and is expected to remain depressed for months as the country works to recover from the impact of COVID-19. A significant number of Nigerian businesses heavily rely on input materials, parts, tools and equipment from factories in China. Technology, consumer products including fashion and packaging businesses are expected to be significantly impacted by this.
The impact of the COVID-19 pandemic might present a grim outlook but it could also hold disguised opportunities for businesses who are able to assess their business health, re-position themselves and leverage opportunities despite the challenges. Find out tips to surviving this phase in the write-up – COVID-19: Survival Guide for Nigerian MSMEs
References
[1] https://www.cnbc.com/2020/03/17/opec-iea-warn-some-nations-could-lose-up-to-85percent-of-oil-and-gas-income.html
[2] https://businessday.ng/lead-story/article/after-years-of-fighting-the-truth-nigeria-embraces-fx-reforms/