Subdued Hit from COVID-19, Subdued Rebound Too

By Gregory Kronsten

The impact of COVID-19 on output in Nigeria is likely to be less severe than on many comparable economies. The IMF’s World Economic Outlook in April saw GDP contraction of -3.4 per cent this year and a rebound of just 2.4 per cent in 2021. We might think that in the early days of COVID-19 (outside China) the Fund then lacked the materials to make credible projections. Yet earlier this month the World Bank’s Global Economic Prospects came up with a similar narrative (-3.2 per cent in 2020 and 1.7 per cent next year). For the record, FBNQuest Research’s projections are -3.1 per cent and 2.2 per cent respectively.

Official sources in Nigeria have a melancholier take. Earlier this week Sarah Alade, Economic Advisor to the President and Former Central Bank of Nigeria (CBN) Deputy Governor, was quoted as sharing a best-case scenario of -4.4 per cent this year and a worst of more than -8.0 per cent contraction. The governor has suggested, in contrast, that the damage could be less than indicated by the Fund. The point of interest is less the precise number than the underlying story.

We see several domestic and external reasons for Nigeria’s hit to be less strong than that of other emerging markets (EMs). The World Bank projects contraction of -7.1 per cent in South Africa this year, for example, while its central bank (SARB) forecasts -7.0 per cent.

Agriculture is the largest sector of the Nigerian economy and has a large subsistence component that is insulated from COVID-19. The Nigerian economy as a whole enjoys some protection from global headwinds with the obvious exception of the crude oil price. Manufacturing produces consumer goods for the domestic market, and the reach of global supply chains into Nigeria is limited. Unlike large EMs such as Brazil and Argentina, it is not an important trading nation. Nor is Nigeria a regional hub for air transport. Unlike South Africa and Kenya, it is not a tourist destination other than for its large diaspora in the holiday season.

These factors should limit the contraction of the economy. That said, all the forecasts mentioned for the year would still result in one of the worst GDP outturns ever for Nigeria. We should remember that the per head figure would be far worse, given the annual growth in the population of 2.8 per cent. A Lagos-based survey by REACH Technologies has indicated an average decline in incomes of about 30 per cent between March and end of May. Carried out on behalf of FBNQuest, the survey also found that respondents cut their spending on high-value items by about 22 per cent over the same period.

As the hit this year will be weaker than that on its peers, so will the rebound in 2021 be for the same reasons. Ideally Nigeria’s growth trajectory would be closer to its peers because it would then be more incorporated within the global village. The federal government does have the opportunity to make changes to increase that degree of incorporation. We note that the federal finance ministry has been quoted as saying that it has permanently exited gasoline subsidies. We saw an earlier statement to the same effect from the top brass in the Nigerian National Petroleum Corporation, which has been absorbing the cost below the operational in its accounts. Taking the two together, we are hopeful.

Gregory Kronsten, Head Macroeconomic and Fixed Income Research, FBNQuest