Nigeria: Are We Heading Towards A Recession Or Depression?, By Muhammad Hassan Liman

There is no denying the fact that the COVID-19 pandemic has shaken up the world and hoping that the world will open up in its entirety in June or July is overly and unrealistically optimistic. The shock wave of the pandemic is still being experienced throughout the world in different phases across different countries. Some countries are experiencing their peak periods earlier than others. However, the big question pertains to when the world would open up and countries would feel comfortable enough to allow others into their territories. This would be difficult to conjecture now due to the volatility of the virus. Despite the differences in the degree of spread of the virus across different countries and the uncertainty in the relaxation of border restrictions, there is no denying that the lockdown of more than two-thirds of countries of the world, affected many countries differently. However, while some countries, such as China, Ghana and a few others, have resumed some levels of activity so as to activate economic recovery, many others are yet to resume this due to the severity of the infection of the virus.

A recession is an economic crisis that lasts for at least two quarters (six months), however a depression might last for several years and it is generally more severe. The Great Depression of 1929-1939 shook the world to its core, and most especially the United States of America. Also, the 2008 financial crisis was termed the “Great Recession” because it only lasted for over 18 months. Presently, I will be examining the economic crisis brought about by the ongoing pandemic to figure out the condition of the Nigerian economy and where we are heading to.

The sign of an imminent financial crisis is the fall in the price of a country’s key commodity of exchange and source of revenue. Nigeria is a mono product economy, and that product is our crude oil. Anytime oil prices fall below the budgeted price, we usually experience a fall in economic activity in the country, and inflation kicks in as a result of forex disadvantage, while the devaluation of our foreign reserves becomes apparent, budget cuts kick in, alongside additional borrowing – which increases the volume of the country’s debt servicing, and the possible setting in of a recession. This was evident back in 2016, and 2008-2009 when the prices of oil fell to around $30 dollar per barrel. The Bonny light recorded one of its worst performances in history this year, going to a discounted low of around $10 per barrel.

This year, budget cuts of about N1.5 trillion is to be made by the federal government, which will cut through non-essential services and projects across the country, also the dollar has been trading against the naira at about N430, our foreign reserve has fallen to $33 billion from the $38 billion value it closed at in December 2019. However, our crude is now trading above $20 per barrel and how fast the oil prices can be normalised can serve as a glimmer of hope, in addition to the government’s effort to cut spending across board. However to digress a bit, the country is due for an aggressive diversification from oil revenue in the short and long term.

A contraction in GDP is generally a sign of an impending recession, implying that the economy is not growing. It is evident that the lockdown has made so many businesses to halt activities for over the duration of five weeks in places like the Federal Capital Territory (FCT), Lagos and Ogun States, followed by the rest of the country. So many publications and economists have already predicted that the Nigerian economy will shrink by more than 3 per cent in 2020.

The fall in corporate/business profits and performance is another factor to consider. Recently the airline business reported a loss of over N21 billion monthly due to the grounding of flights. And the coronavirus pandemic inherently brought along with it one major problem for businesses – supply chain issues. Three countries responsible for over 50 per cent of Nigeria’s imports – China, U.S.A and India – went into lockdown. This affected sales in some industries and also production in most industries. China accounts for over 80 per cent of the mobile phones and accessories imported into Nigeria, which could not be shipped in, and consequently affecting the inventory of the industry. This is in similitude with problems that many companies are facing, since we are an import reliant economy.

Most organisations have furloughed and/or laid off members of staff, which has caused a monumental level of unemployment within the country. The International Air Transport Association (IATA) has projected that Nigerian aviation industry will loose almost 22,200 jobs. The banking industry was planning to sack more than 50 per cent of its staff, as in the case in Access Bank Plc. which had planned to let go almost 75 per cent of its staff, until the Central Bank of Nigeria (CBN) intervened to halt the plans by all banks on the sacking of staff. In the manufacturing sector, the Purchases Managers Index (PMI) reported by CBN back in March slipped to 51.1 per cent from 58.3 per cent in the previous month. Output and new orders, employment, and other areas of operations all showed evidence of a decline in PMI. Businesses have however resumed but at a slow pace and with the gradual reopening of the economy, we might not see business activities resuming fully anytime soon.

The yield curve of long-term debt instruments, like the government bonds, usually carry a higher interest rate and higher yields than short-term instruments like the treasury bonds. This is because of the risks associated with interests in the longer term. There are times when the yield on short term instruments is higher than longer term loans, which mean the interest rate on a short instrument like the treasury bond will be higher, as a result of investors looking at the risk involved in lending in its entirety and the government encouraging lenders to invest. In 2016, government treasury bills were auctioned at an average of 16 per cent, which was at then more than the government’s 20-year bond of around 12.5 per cent. It’s also worthy of note to say that the short-term three-year bond was benchmarked at around 16 per cent, which was at the time higher than the 20-year bond. The government is currently planning to raise funds internally in the next few months in order to compensate for the shortcomings of the present budget, which is a common move. The interest rate at which the loans will be given out is an indication of how bad the economy is doing.

A fall in stock prices and analogous indices are not always the indicator of an impending recession. Sometimes, the fall might be temporal, which will be accompanied by a spike. However, a monumental fall in prices to a record low and a fall in major driving sectors of the market, are usually indicators of a looming recession. The market capitalisation lost over N1.87 trillion and the All Share Index (ASI) lost about 20.73 per cent off its points to drop to 26,867.79 at the end of March, marking the end result of the first quarter of the year 2020. Stocks in sectors like consumer goods, NSE banking index, NSE 30, NSE pensions, oil and gas and many other sectors all shed off percentages. The pandemic has certainly affected investor confidence in the market, as stocks are affected by investors’ ability to take risks till they are certain of returning prospects and business activities in companies constituting the markets. However, the performance of stocks will be influenced by actions taken in the opening up of countries in this second quarter. This will be hugely dependent on the resumption of activities within the country and also how far the recent rise in the prices of crude oil will go.

Consumer spending is usually high when the economy is doing well. However, with the recent contraction of the economy, both consumer to business (C2B) and business to business (B2B) transactions are taking hits, the month on month inflation rate is steadily rising at 12.26 per cent in March 2020, in comparison to the rate in January (12.13 per cent) and February (12.20 per cent). This will also hurt consumer confidence and spending power. With the uncertainty of when the whole pandemic issue will be resolved, consumer spending will make a very slow-paced return.

There is no denying the fact that the country is currently facing a financial crisis. However, a depression is least likely in the Nigerian situation, as experts predict that most countries will come out of the current crisis by 2021 and at most by 2022. On the optimistic side of things, if the government does the needful in bailing out industries, if oil prices keep rising in view of budget cuts, if the government further diversifies the economy and also implements the Orosanye report or at least a better modified version of it, then the recession might be short lived.

Muhammad Hassan Liman, a tax consultant and auditor, writes from Abuja.

Source: Premium Times

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