Poor country’s comparative advantage exposes Nigeria’s multiple weaknesses

The outbreak of coronavirus pandemic that shut down global economy exposed Nigeria’s multiple weakness emanated from poor country’s advantage.

The performance of the Nigeria’s economy which is largely driven by petrol dollars receipt has been brought to its knees following drop in global oil prices.

While accretion into the nation’s external reserves remain low, trending at around $36 billion, the country import bills has been forecasted to increase.

This, as a result of inability to meet local demands for certain products and services would put pressure on exchange rate as analysts have predicted.

The Central Bank of Nigeria’s multi-tiered exchange rate failed to stem pressure due to low buffer, thus forced the apex bank to adjust rate to close gap in the FX market.

The official exchange rate was adjusted from NGN307/US$ to NGN360+, a move that seek to close gaps, from Investors and exporters windows as well as National Autonomous Foreign Exchange Rate.

Currently, at the parallel market, Naira is trading at NGN430 to a dollar, Banks are charging as much when use their platforms to make payment for transactions.

The manufacturing sector has not been able to rise to the challenges of meeting the local needs.

In the telecommunication segment, more than 98% of mobile phones in the country were imported.

In healthcare, there is less to be desire due to years on neglect and low budget provision.

The pandemic exposes all the dirt in the healthcare and science with close to nothing to show for a country with more than 200 million people.

Fitch Solutions in its Africa monitor report for June highlighted some economic woes that will confront the nation after the pandemic.

The firm estimated that Nigerian inflation would hit 13.5% on the average in 2020 as against 11.4% in 2019.

Also, it added that private consumption will face increasing constraints due to rising inflation on one side and elevated unemployment on the other.

On that note, Fitch Solution expects a sharp deterioration in the outlook for Nigeria’s oil sector to see the country enter recession in 2020, following years of underperforming growth.

“A combination of declining global oil prices and lower domestic oil production led to Nigeria’s first recession in 25 years in 2016”, it explained.

Oil production has since remained structurally lower than pre-recession levels due to a lack of investment into major new oil fields, while output from existing fields falls as they approach maturity.

With oil a major driver of exports, investment and fiscal revenues, this has seen real GDP growth severely constrained, averaging just 1.7% from 2017 to 2019 compared to a 2011-2015 average of 4.6%.

“We forecast that a combination of falling oil production and low global prices will see growth contract by 1.7% this year”, the firm stated.

“While we anticipate a gradual recovery in global macroeconomic conditions in late 2020/2021 will see growth to return to positive territory next year,

“…uncertainty over the duration of the Covid-19 pandemic and global economic downturn leaves risks to our forecast weighted to the downside”, the report reads.

According to Fitch in the report, it stated that net exports will drag on growth as oil output falls.

Fitch Solutions explained that its Oil & Gas team now forecasts Nigeria’s oil production to contract by 2.8%.

This was a revised down from initial forecast of 0.7% growth. Then, it stated that exports decline by 4.3% to 1.49 million barrels per day in 2020.

“We had long expected that a lack of new investment would temper oil production growth; however, against a backdrop of lower oil prices, we now expect output will slow even more than we initially projected as the lower prices prompt production ‘shut-ins’ for some of the country’s higher cost fields”, Fitch explained.

Though, Fitch Solution stated that its Oil & Gas Team now forecast an average Brent crude oil price of US$30.0/bbl in 2020

This was a reduction from US$64.2/bbl in 2019, as a combination of subdued demand due to the coronavirus and rising supply due to the Saudi Arabia-Russia price war has resulting in a sizeable glut.

On Wednesday however, Brent crude cross $30 per barrel as global lockdown is gradually easing.

With the rise in the economic activities, some analysts have started predicting that demand would increase.

Explaining further, Fitch Solution said with crude oil accounting for around 90% of annual exports, this suggests a sharp drop-off in export growth.

While import growth is poised to remain relatively subdued, it will outpace exports as Nigeria’s limited agricultural and manufacturing capacity will leave the country dependent on imports of consumer and capital goods.

Falling oil exports and lower prices will exacerbate constraints on fiscal revenues and government capital spending, while a challenging operating environment will continue to deter significant private investment.

The report also noted that significant operational challenges such as the country’s sizeable infrastructure deficits and complex bureaucratic processes have long constrained foreign involvement in the Nigerian economy.

“This contributes to Nigeria’s low rank of 131st out of 190 countries in the World Bank’s ease of doing business index”, it stated.

Amid heightened global risk-off sentiment and low oil prices, private investment will remain constrained over the short term.

At the same time, a drop-off in revenues will weigh on public investment, with revenues from the oil sector accounting for an annual average of 64.8% of total fiscal revenues from 2009 to 2018.

The environment of low oil prices has already seen the federal government announce plans to revise the assumed oil price in its 2020 budget to US$30.0/bbl – down from the previous baseline of US$57.0/bbl – as well as cuts to planned expenditure.

“While details are limited thus far, we expect that capital spending will likely be cut sharply.

“Additionally, private consumption will face increasing constraints over 2020”, the firm stated in the report.

On prices, Fitch Solutions stated that inflation has remained structurally above the Central Bank of Nigeria’s 6.0-9.0% y-o-y target range since June 2015, weighing on consumers’ purchasing power and economic activity.

“This has been on the back of factors including ongoing violence in crop-producing regions (which has weighed on food supplies), as well as restrictions on various imports amid limited domestic production.

“We forecast an acceleration of inflation from an average of 11.4% in 2019 to 13.5% in 2020, with risks to the upside due to a weakening of the naira,

“…an ongoing closure of land borders and limits on cross border trade, and potential panic buying amid the Covid-19 spreading”, Fitch Solutions stated in the report.

Further risks to consumption stem from Nigeria’s unemployment rate, which rose from a 2014-2015 average of 8.4% to 23.1% in the third quarter of 2018.

Job creation has been tepid since the 2016 recession and will likely increase further amid a renewed economic downturn, weighing on consumption while also increasing risks to social stability, the firm stated in the report.

Poor country’s comparative advantage exposes Nigeria’s multiple weaknesses

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