Merit Ibe
The Lagos Chamber of Commerce and Industry (LCCI) has disclosed that the outbreak of the coronavirus and the continuing decline in oil price at the international level pose a major threat to Nigeria’s macroeconomic fundamentals, which could be systemic and far reaching for the country’s economy in 2020 fiscal year.
In particular, the Chamber emphasised that the coronavirus and the fall in oil price could have major implications on the level of fiscal deficit in the budget, budget implementation, infrastructure financing, high borrowing and the capacity to fund capital project in the country. The Director-General of the LCCI, Muda Yusuf, who made these known in Lagos, said the two current scenarios are bad omen for the Nigerian economy as a whole, adding that they will definitely bring about sharp drop in revenue generation, which will cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers.
Yusuf explained also that the looming price war contemplation by Saudi Arabia, the largest crude oil exporter, portends even more ominous signs for the Nigerian economy on the back of the collapse of the OPEC – Russia alliance.
According to him, the coronavirus and drop in oil price at the international market will definitely bring about significant drop in government’s revenue for 2020 fiscal year since oil revenue currently accounts for about 50 per cent of government revenue and about 85 per cent of foreign exchange earnings for the country.
“The outbreak of the coronavirus few weeks ago has profound implications for the Nigeria economy. It poses a major threat to Nigeria’s macroeconomic fundamentals, the impact of which may be systemic and far reaching. The looming price war contemplation by Saudi Arabia, the largest crude oil exporter, portends even more ominous signs for the Nigerian economy. This is on the back of the collapse of the OPEC – Russia alliance. Saudi Arabia is offering significant discounts to its customers and also increasing output.
“As at Friday, March 6, 2020, crude oil price fell to all time low of $45.27 per barrel, the lowest since 2017. Oil price budget benchmark for 2020 budget was $57 per barrel. This sharp drop in revenue could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers. It is instructive that the Finance minister is contemplating a review of the underlying assumptions of the 2020 budget, and rightly so.”
On the revenue effect for Nigeria’s economy, the LCCI DG explained that “There is also the revenue effect of the coronavirus which is related to the drop in oil price. Oil revenue currently accounts for about 50 per cent of government revenue and about 85 per cent of foreign exchange earnings. With the current scenario of tumbling oil price, a drastic reduction in the revenue of government could become inevitable in the near time. This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy.
On the effects on foreign reserves, the trade expert said: “Oil revenue accounts for about 85 per cent of foreign exchange earnings and is the major driver of accretion to the foreign reserves. The slump in oil price and the associated adverse expectations will put fresh pressures on the reserves. Currently, it is at all-time low of $36.2 billion as at March 3, 2020. “This outlook has the following implications, weakening of investors’ confidence, generation of speculative pressures on the currency, likely depreciation of the naira exchange rate, heightened inflationary pressures on the back of currency weakening, likely increase production and operating costs for businesses and weakening of purchasing power with adverse implications for the welfare of the citizens.”
Speaking on Nigeria’s supply chain effects, Yusuf stated that the global supply chain has been deeply disrupted as China, which is the second largest economy in the world, is a major supplier of inputs for manufacturing companies around the world, Nigeria inclusive. He said many manufacturers and service providers in the country are already experiencing acute shortage of raw materials and intermediate inputs. “This has implications for capacity utilisation, employment generation and retention and adequacy of products’ supply to the domestic market. There is also an implication for inflation.”