By Akeem Akorede
The economic fallout arising from the coronavirus pandemic has posed new challenges we have never experienced before. From manufacturing to financial services, plans have been shattered, strategies defeated, and urgent recourse to dashboard is key to escape this trying time. The world was just settling from global trade tensions, especially the US-China trade protectionism stance before the eventual “phase-one” deal by both parties. The Brexit deal that shook the Eurozone geopolitics and the fragile economic state of emerging markets.
The virus emerged like a bolt from the blues, crippling the economy of the world’s largest manufacturing centre, China and causing a disruption in global trade and value chain. We saw the crash of the Stock Exchange, fall in the price of crude oil and loss of income by households and nationals.
The disruption on the Chinese economy reminds the world of an old lesson, “sickness does not fall on one’s roof”, and a reliance on one’s well-being is not sufficient, you must check on your neighbor. As the economic lockdown begins to peter out, the economic management team must have to deploy different policies to create a more favorable business climate, stimulate the real sector, and neutralize the effect of predicted contraction to come.
According to the International Monetary Fund [IMF], the Sub-Sahara Africa is likely to face a GDP contraction of 1.6 per cent YOY in 2020 with countries like Nigeria, South Africa and Egypt expected to be the worst hit. For Nigeria, the country’s economy is expected to contract by about 3.4 per cent; the biggest likely contraction in about 32 years. While the recession looms, how soon we escape from the downgrade is a function of our holistic review and selective implementation of policies and directives.
The Finance Act of 2019 recommends the increase in the Value Added Tax from 5 per cent to 7.5 per cent, with implementation scheduled to start from 3rd February 2020. With the present disruption in income and the high cost of production of goods and services, it is expedient shelving this policy in the short run. While this may reflect in the government’s fiscal position, it’s important that we do not ring-fenced ourselves from present economic reality. Restaurants, hotels and other business within this tax net are among the worst hit of the pandemic. Besides, basic economics teaches we do not hike tax rates in a time of slow or no growth. It basically reduces purchasing power.
The tax collection agencies at the federal and state levels must also be flexible in the mean time in terms of regulatory deadline for filing tax returns and giving relief by spreading payment terms to ease cash flows of firms, for business operation. Except maybe for ICT, all sectors have been hit from different angles, and stimulating these businesses will require different initiatives, continuous engagement in terms of sectoral needs and coordination. The government spending on infrastructure should be targeted at linking the local supply chain to markets. Our focus should be on public goods, strictly those that improve public welfare and boost economic activity.
On the other side of the game, these should be a re-evaluation of some monetary policies to ensure they fit into the present state of economic affairs. As part of its mandate of achieving financial system stability, the Central Bank of Nigeria in H2 of 2019 issued several policies designed to pump credit into the real sector. Beginning with the Loan to Deposit ratio of 60%, which was later reviewed upward to 65%, and the subsequent ban of individuals and local corporates from investing in Open Market Operations (OMO) securities, banks were mandated to lend more to the real economy.
The policies were lauded and applauded. The moves were particularly impactful for the manufacturing sector. For Fast Moving Consumer Goods (FMCGs), availability of credit allows for the importation of more raw materials, increase in the scale of production, keeping more inventories, and eventually, an increase in profit. The pandemic has brought about disruption in the source of material, consumption pattern has changed, and firms will have to face the serious threat on the ability to service their debt obligations. It is advisable that CBN adopt a wait and see approach and not reinvigorate this LDR policy until the coast is clear.
One of the strategic imperatives of the present CBN‘s leadership is Foreign Exchange Rate stability. To demonstrate this unalloyed commitment, the demand management strategy adopted by initially banning 41 items as non-valid for FX reduced the pressure on our reserves. The apex bank has also had to adopt different unorthodox policies to sustain the stability. The crash in the price of crude oil and the reduced demand for the commodity exposed the weak economic underbelly of non–diversification of the country’s source of foreign exchange. This period also coincides with mass outflows by Foreign Portfolio Inventors that ran for capital protection.
The demand in the FX market was further heightened by the increased credit availability to the real sector. These situations led to tightness in the FX market, and the CBN’s denial and indecision sent the parallel market rate to high heaven before it eventually succumbed to depreciating the naira in early March this year. It is a common fact that when a country focuses on the export of raw materials, it exposes herself to exogenous shocks, and ends up utilizing her FX in importing finished goods. This is a good time to review the items not valid for FX and add more to the list, especially for items that can be sourced locally.
In summary, it is hoped that there will be goal congruence and consistency in policy direction among the relevant authorities. The country should embark on fiscal consolidation while also putting up measures to alleviate the impact of the pandemic on individuals and firms. This is a hard time, but also a good time to rank our economic priorities and decide on “Next Best Action” (NBA) even when they appear non-popular. According to the CBN Q4 report of 2019, an analysis of the sectoral allocation of FX shows that “invisible” transactions took 64.35% of the total FX utilization of the country.
It is believed that a huge chunk of these funds was spent on travels, while 23.4% of FX was allocated to the industrial and manufacturing sector combined. It is important that priority be given to the productive sector of the economy in terms of allocating of foreign exchange for expansion and growth. As every country takes its own battle for this time, we have to be pragmatic and dynamic in our policy formulation and adoption. As Deng would put it, “It does not matter if the cat is black or white, what matters is that it catches mice”. What we need is urgent economic recovery.
Akeem is a Chartered Accountant and Certified Financial Market Dealer.