Nigeria: Recession looms as impact of coronavirus ravages economy

A report by Renaissance Capital (Rencap) has singled out Nigeria and Angola, two of Africa’s largest oil producers as two possible economies that may face recession by the end of 2020 following the effect of the oil price war between Saudi Arabia and Russia as well as the global health pandemic caused by the Covid-19 virus.

Recall that the Minister for Finance, Budget and National Planning, Zainab Ahmed, did warned that Nigeria might go into another round of recession if the Coronavirus disease persists beyond the next 6 months.

According to Ahmed, “We are hopeful that this pandemic will be limited in time,” the minister said during the interview on Friday.”

She added that, “If it is an average of three months, we should be able to close the year with positive growth. But if it goes longer than that – six months, one year – we will go into recession.”

Ahmed pointed out that the Federal and the State governments would struggle in terms of revenue, as long as the crude oil price is as low as $30 or below $30 per barrel.

The minister said that as a result of the low crude oil prices, government was looking for alternative sources of funding in the form of budget support to boost the economy towards the trying times.

According to Rencap, the fall in oil prices below $30 will negatively impact Nigeria’s export earnings. Nigeria has been talking about diversifying away from oil but it has been slow to effect this pivot. It is once again vulnerable.

The collapse in oil prices could be devastating for Nigeria because oil accounts for 90% export revenue and 60% of the federal government’s revenue. This is exacerbated by the global demand shock caused by COVID-19, which largely explains why Nigeria is sitting on 30 or more unsold April-loading cargoes of crude oil.

Apart from a likely recession, the fall in oil prices is also likely to trigger multiple devaluations for the economy. Just recently the CBN devalued the currency from N307 to N360 while BDC exchange rate went from N360/$1 to N380/$1. The analysts predicted there will be more devaluations and that the exchange rate could fall further to N450/$1.

The analysts also predicted the Nigerian economy will once again fall into a recession as the impact of the crash in oil prices reverberates across the economy. Nigeria relies heavily on oil to drive economic growth thus, just like it happened in 2016, oil prices are likely to trigger another bout of recession in the country.

While Nigeria remains out of recession and has experienced paltry but stable growth in recent quarters, some sectors of the economy still remain in recession. If another recession does happen in 2020, it could be as crushing if not worse than what was experienced in 2016.

The consumer was still in recession – as indicated by its proxy, wholesale and retail trade, which has contracted in the last three quarters. It is in part due to the fragility of the economy coupled with the double hit from the lower oil price and COVID-19 that we are significantly cutting our growth forecast for Nigeria to –0.4% and 1% in 2020 and 2021, respectively, from 2.3% in 2020 and 2021 previously.

Nigeria fell to a crushing recession in 2016 also triggered by a fall in oil prices. Unlike that episode, the violence at the creeks also distributed oil production worsening Nigeria’s situation. This time around, the Coronavirus pandemic is dealing a similar double blow on the economy making it likely that we could face another recession.