Nigeria’s Minister of Finance, Zainab Ahmed, has validated a prediction by the International Monetary Fund (IMF) that the country’s economy will go into another recession – four years after the last one – with a predicted negative growth of over 4%.
Why this matters: For the economy to shrink by 4% is a huge deal. At the height of Nigeria’s last recession in 2016 which aggravated conditions of poverty, unemployment, and loss of productivity, the economy tumbled by 2.4%. The current situation based on these projections is expected to double that.
The Big Picture: Nigeria’s economic woes are part of a global economy shrinkage that’s expected to last until 2022 as the world snaps back from the devastating effects of COVID-19.
- The global impact aside, Nigeria’s case, alongside other petro-states, has some peculiarities due to complete reliance on oil as a source of export revenue and the crippling effects of COVID-19 on the oil market.
- Despite accounting for less than 10% of Nigeria’s GDP, oil contributes 90% of the country’s foreign exchange.
- There are positive signs that low oil prices could rebound as more countries relax restrictions and begin moves to open up their economy.
- But there are no doubts about the fact that oil is headed for an unstable future and petro-states are better served to explore complementary sources of revenue.
What’s next: The Finance Minister, Zainab Ahmed, expressed optimism that planned stimulus packages could help cushion the effects of the recession on the economy.
- An emergency economic stimulus Bill passed by the House of Representatives is expected to provide temporary relief through tax rebate, deferral on mortgage payments, and import waivers. But as this piece argues, the House Bill does not pay attention to details and will likely be sufficient.
- Funding for the stimulus is expected to come from external borrowing sourced from foreign institutions to support Nigeria’s revised budget.
- Further, Zainab Ahmed says a $1.5bn cash windfall from the World Bank through an Emergency Locust Response Programme (ELRP) would go to state governments that are already struggling badly. The fund is meant to provide assistance for rural households.
One-step deeper: One way to guard against oil price volatility that leaves Nigeria scampering for foreign exchange at intervals is to develop other areas of export.
- Although the predominant argument is for the country to diversify its economy, economists have argued that the economy itself is already diversified. The argument is backed by data that shows that Agriculture, Trade, and Manufacturing all account for a larger share of Nigeria’s GDP.
- The failure of oil to drive the country’s GDP has been attributed to its limited and restrictive nature of operations.
- Oil’s unmatched influence is in the export sector where it accounts for 90% of all business done. A reason for this is the poor productivity of other sectors, including Agriculture, Nigeria’s biggest employer of labor according to the World Bank.