By Amechi Ogbonna, Omodele Adigun; Uche Usim (Abuja) and Adewale Sanyaolu
President Muhammadu Buhari’s second term in office might well go down in history as one of the most challenging episodes in the annals of Nigerian political economy that generations unborn would find quite neuseating.
And that is basically because barely ten months into the journey of deconstructing the controversies that trailed his re-election in February 2019, the entire nation was engulfed in the Coronavirus conflagration that paralysed virtually all sectors of the country’s economy.
From the hospitality industry to transportation, education, oil/gas, aviation, agriculture, service and manufacturing sectors to mention a few, the consequences have been dire and humongous.
Beyond the infrastructural and logistic dislocations, the human toll in terms of fatalities and number infected by the COVID -19 pandemic left a sour taste in the mouth of millions of Nigerians.
Battling a pandemic with no cure and explicit genome as at the time it hit Nigeria in March 2020, made fear, isolation and anxiety the major defining characters of the early months of the crisis.
Although the Federal Government’s monetary and fiscal interventions meant to douse the economic tension of the moment came handy with the rollout of about N2.3trillion Economic Sustainability Plan through the Central Bank of Nigeria ( CBN), it became obvious the measures came short of mitigating the consequences when at the end of the second quarter that revenue projections of both the Federal and states governments headed south leading to negative GDP growth.
Overall, government’s intention for the bailout programme were targeted at job retention, by making available more working capital and other fiscal incentives to the real sector for purposes of job creation and to effectively oil the wheel of state bureaucracy.
For the Micro Small and Medium Enterprises usually regarded as the engine room of the nation’s economy, 2020 turned out a huge economic tragedy that needed no restating. In a position document issued recent, the Lagos Chamber of Commerce and Industry (LCCI) had lamented that the MSME subsector in that state lost a whopping N2.7 billion to the lockdown which many believe was a bit conservative estimation. This was even as thousands of other such enterprises including startups closed shop as a result of lack of patronage worsened by the Coronavirus lockdown across the country.
For instance, after their initial economic lockdown in Lagos, Abuja and Ogun states, Governor Babajide Sanwo Olu announced that his government reportedly lost about 25 percent of its anticipated receipts, which prompted a downward review of its 2020 appropriatin bill to close up the gaps created by the pandemic. In other states too, the various state governments also suffered various degrees of socio-economic dislocations with project implementation taking a hit. This was even as states and the government embarked on a number of reviews to accommodate revenue losses cause by the pandemic.
Indeed by the end of the second quarter of the year, all basic assumption upon which the various budgets were predicted had collapsed and had to be adjusted
There is also no doubting the fact that year 2020 will go down in the annals of Nigeria and the global economy at large, as one of the worst in the last century.
For over eight months, the Nigerian and global economy was on ventilator, as COVID-19 pestilence pounded the global supply chain through its forced lockdowns.
Land, air and sea borders were shut in a twist that robbed Nigeria of trillions of Naira in oil earnings, diaspora remittances and other legitimate statutory incomes that ought to have boosted its GDP.
In fact one of the greatest shocks to have hit the Nigerian economy in 2020 was the decision of the Buhari administration to close Nigerian land borders with neighbouring countries on August 20, 2019.
According to the Federal Government’s communication, the measure became necessary to frontally tackle protracted challenges of rice smuggling including arms and human trafficking, around those facilities.
However, the downside of the policy was the huge damage it did to regional trade which, according to the Chief Executive Officer of Financial Derivatives company Limited (FDC), Mr Bismark Rewane, contributes approximately 13.88 per cent to the nation’s GDP and accounts for 16.9 per cent of total employment as border communities, haulage operators and freight forwarders had bitter experiences as life became quite unbearable for many.
This was as some economic analysts had noted that informal trade remained a significant part of Africa’s regional trade, accounting up to 40 per cent. The region has a GDP size of $2.6 trillion, with Nigeria accounting for about 21.9per cent.
With talks about the ECO common currency and the AfCFTA commencing in January 2021, many believe that the re-opening of the land borders will boost West African regional trade and integration.
For an economy that depends largely on oil for revenue, the pandemic, with its concomitant effect on global oil demand and the economy that was just recovering from a previous recession, the effect was quite phenomenal. Little wonder why it ended up in a second recession in five years at the end of the 3rd quarter a negative growth of -6.2 per cent.
Also during the year, the crash in global crude oil demand triggered mass shutdowns, layoffs and redundancies in several companies across the country with grave implications for corporate sustainability and profitability.
Prior to the 2016 recession, Nigeria’s economy grew at 6.3per cent, a growth trajectory that was later cut to about 2.2 per cent before the COVID-19 pandemic.
Similarly, inflation rate which closed at a single digit of about 9 per cent in 2014, and about 12 per cent in 2019 suddely shot up to 14.8 per cent in November 2020.
Beyond the government’s monetary and fiscal policy measures implemented during the year under review, the coronavirus pandemic and huge damage it unleashed on the national economic infrastructure caused by the EndSARS protests must have played critical roles in instigating the regime of galloping inflation and widening unemployment that tended to stultify some of the basic assumptions upon which the 2020 budget was predicted.
The first quarter of 2020 was greeted by a combination of health crisis, declining growth of Gross Domestic Products (GDP), reversal of capital flows, financial handicap and, for some countries, a sharp drop in commodity prices, as the effects of the coronavirus pandemic jolted the global economy.
Monthly subvention shared by the three tiers of government also dipped remarkably, a development that forced the government to go on a borrowing spree.
In a media briefing on May 12, Governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele, admitted Nigeria was sailing against a storm with the public health and economic emergencies of unprecedented proportions, driven primarily by the 55 per cent drop in crude oil prices between January and May, 2020.
“This unparalleled shock requires that the federal and state governments along with the organised private sector, work together to address these challenges in order to preserve lives, restore economic activities and reset the economy of our dear country.”
Amid these challenges, a Professor of Capital Markets, Uche Uwaleke, believes Nigeria’s capital market fared better in 2020 compared to 2019. He noted that in the primary segment of the bond market was actively enabled by Federal Government’s bonds which were oversubscribed in most instances as an indication of strong investor’ appetite.
“Regarding the equities market, athough the primary segment was relatively inactive, the secondary market segment proved to be quite bullish especially in the last quarter of 2020 to the extent that year to date return rose in excess of 40 percent way higher than 2019 performance”, he told Daily Sun.
According to Uwaleke, the major challenge to the capital market witnessed this year was the COVID-19 pandemic and the fall in crude oil price which negatively affected stock returns especially in the first and second quarters of 2020.
“Little wonder the worst performing month of the year was in March when the NSE All Share Index lost over 18 percent.
Also, the severe contraction in real GDP in the second quarter, coupled with rising inflation and forex pressure, was a drag on primary issues in the stock market”, he added.
In its Macroeconomic Review and 2021 Outlook for Nigeria, analysts at FSDH Research, the research arm of FSDH Merchant Bank noted that the problem with the Nigerian economy is beyond COVID-19 but more of a structurally-weak economy affected by externally-induced shocks.
More so, the COVID-19 induced lockdowns, supply chain disruptions, foreign exchange (FX) accessibility issues and sustained border closure worsened the decline in the last two quarters (Q3’20: -12.1% YoY, Q2’20: -16.6% YoY), consequently setting trade activities back to 2012 levels. Notably, the recent contractions have shrunk the sector’s contribution to GDP to 13.9 per cent (2015: 16.9%; 2019: 16.0%). According to a herd of economists, but for the contraction in the sector, GDP would have declined by only 1.8per cent in the third quarter.
Declines in other manufacturing and some services sub-sectors compounded the adverse impacts of trade weakness on the economy, even though telecoms and construction sectors provided some support to aggregate output. Telecoms sustained its impressive growth momentum (+17.4% YoY) as movement restrictions accelerated the adoption of virtual communication, while construction (+2.84% YoY) appeared to have benefited from limited rainfall and greater government focus on the sector.
On the performance of the banking sector in 2020, Uwaleke said that the sector fared relatively well when compared to other sectors of the economy despite the negative impact of COVID-19.
“This much is confirmed by the National Bureau of Statistics numbers which show that Financial Institutions especially the banks, together with the Information/Communication sector, have remained in the positive territory with respect to real GDP growth, year on year, thereby helping to moderate the current economic recession.
“It is equally corroborated by the CBN which confirms, through its November MPC communique, that financial soundness indicators for banks in 2020 actually improved with Non Performing Loans a little above the CBN 5 percent threshold while Capital Adequacy ratios and liquidity ratios are above the CBN benchmarks of 15 percent and 30 percent respectively. Of note too is the fact that according to the CBN, aggregate credit to the real sector has been on the increase since 2020.
“The performance of the banks this year was bolstered by the surge in online transactions in the wake of the pandemic leading to many banks recording increases in non-interest income according to their 9-months unaudited financial statements.
In 2020, the CBN devalued/adjusted the naira on three occasions to reduce the pressure on the local currency. At the end of November 2020, the dollar to naira rate in the parallel market stood at N495/US$ from N361/US$ at the beginning of the year.
The pressure on the foreign exchange market, according to experts, persisted in 2020 Q3 owing to slow down in the global oil prices and continued pressure on external reserves.
Non-Performing (NPL) ratios in the banking industry has remained low at 5.7 per cent. The capital adequacy ratio of the banking industry, at 15.5 percent, remains above the prudential requirement per cent (regulatory). In addition, return on earnings in the banking sector was over 21percent as at October 2020.
Another sector which emerged as a significant source of resilience in mitigating the impact of the COVID-19 pandemic on the economy, was the Information and Communications Technology (ICT). The growth of startups in the fintech and health care space rose in response to the pandemic.
The Central Bank recently issued Payment Service Banks licenses to three firms as part of efforts to drive financial inclusion and ensure that majority of Nigerian citizens are banked. The Payment Service Banks, along with Mobile Money Operators and Banks are expected to leverage ICT channels in improving penetration of digital finance.
In the agriculture space, available records from the national accounts show that the agriculture sector grew by 2.2 per cent when compared year by year (y/y) in Q1 2020, compared with 2.5per cent recorded in the previous quarter. Crop production accounted for 88 per cent of agriculture GDP and grew by 2.4 y/y. However, CBN records show that growth in agriculture (+1.4% YoY) has materially slowed (average of 2.2 percent in the last eight quarters vs prior 5-year mean of 3.5%) despite prolonged monetary and fiscal support.
Regarding debt, Nigerian states and the Federal Debt Stock data as at March 31, 2020 reflected that the country’s total public debt portfolio stood at N28.63 trillion. Further disaggregation of Nigeria’s total public debt showed that N9.99 trillion or 34.89 percent of the debt stock was external while N18.64trillion or 65.11 per cent of the debt was domestic.
States and the Federal Debt Stock data as at 30th June 2020 reflected that the country’s total public debt portfolio stood at N31.01trillion.
The Minister of Finance, Budget and National Planning, Zainab Ahmed, recently said that the country’s total public debt will hit N38 trillion by December 2021.
Fitch, Moody downgraded Nigerian banks
Two rating agencies, Fitch and Moody downgraded Nigerian banks in February, and July respectively.Fitch Ratings revised the Outlook on four Nigerian banks to Negative from Stable and affirmed the Long-Term Issuer Default Ratings (IDRs) of 10 banks and financial institutions. Last July, Moody on its part, cited foreign currency shortages as the reason to lower the banks’ ratings.It explains: Nigeria’s banks’ dollar deposit inflows are dwindling because of low oil revenue, volatile foreign investment inflows and reduced remittances from abroad.
Moody’s rated banks have bolstered their dollar deposit bases and liquid assets since 2016, but scenario analysis highlights vulnerabilities.
Nigeria’s banks are facing foreign currency shortages because of low oil prices, volatile foreign inflows and lower remittances amid the pandemic, threatening to renew foreign currency liquidity pressures that blighted them during a previous oil crisis in 2016-2017. “Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016,” said Peter Mushangwe, Analyst at Moody’s. “Our moderate scenario where foreign-currency deposits decline by 20 per cent, while loans remain constant, would increase rated banks’ funding gap to NGN1.5 trillion [$3.8 billion], and to NGN1.9 trillion [$5.0 billion] under our severe-case scenario of 35 per cent foreign-currency deposit contraction, creating acute funding challenges.”
External reserves drops to $34.85bn
The country’s foreign reserves plummeted further to $34.85 billion on December 14, as the Central Bank of Nigeria (CBN) continues its interventions across the various foreign exchange (FX) windows despite declining dollar inflows.
This is the lowest level since April when it touched $33.4 billion in the wake of the COVID-19 lockdown and falling oil prices.
Data from the CBN showed that foreign reserves fell by $805 million from $35.656 billion as of November 4, 2020.In January, the reserves stood at $38.5 billion before declining to $36 billion in February and early March. It further declined to $35 billion late March, before sinking further at $33 billion in April.
E-Payment gallops to N111.29trn in 9 months
The value of transactions via the two digital payment platforms – Nigeria [Interbank Settlement System(NIBSS] Instant Payment (NIP) System and Point of Sales (PoS) terminals – rose to N111.29trillion from January to September 2020. The two platforms recorded a 44 per cent growth in value of payments when compared with an aggregate of N77.49teillion in the corresponding period of 2019.A breakdown showed that NIP grossed N105.3tn from January to September this year while PoS deals were worth N6.4tn during the same period.
In the first nine months of 2019, total NIP transactions amounted to N75.53trillion while PoS payments were valued at N2.24trillion during the same period.
In January, instant money transfers valued at N10.3trillion were reported by NIBSS, compared with the N8.11trillion in the same month in 2019. In the following month, the value of NIP transactions was N9.97tn compared N7.47tn NIP deals recorded in February 2019.
The banks grossed NIP transactions valued at N10.97tn in March 2020 as against N8.58tn in the same month last year.
On the economic outlook for 2021
Uwaleke predicted it will be shaped by a second wave of the pandemic, increasing the vulnerability of banking credit to default risks and pushing up NPLs once again.
“Another source of vulnerability is the International oil market. If crude oil price disappoints, this will jeopardize the capital Adequacy ratios of many banks with significant exposure to the oil sector.
“It is expected that CBN’s policies will continue to be pro-growth in 2021. This will include sustaining the Loan-to-Deposit Ratio policy, as well as a low interest regime environment which for the banks would mean survival of the fittest.
“The banking landscape is likely to witness significant change next year via restructuring. Already, a few of them are embracing the holding company structure.
Chances are that a number of banks in 2021 will recapitalize to meet up with the challenge of upscaling technology in response to the new normal of doing business occasioned by COVID-19. So, the capital market will likely witness some traction in primary market activities induced by the banking sector. It is also not unlikely to record some Mergers and Acquisitions next year especially involving tier-2 and tier-3 banks.
According to the CBN Governor, “with sustained implementation of our intervention measures, we do expect that the Nigerian economy could emerge from the recession by the first quarter of 2021. We also expect that growth in 2021 would attain 2.0 percent. However, downside risks remain, as restoration of full economic activities, particularly in service related sectors, remains uncertain until a COVID-19 vaccine is produced and made available to millions of people across the world.”
“Not surprisingly, Banking stocks have outperformed the stock market thus far especially tier-1 banks stocks of GTB, Zenith, FBN, Access and UBA with year-to-date returns higher than the NSE All Share Index of about 40 percent.