PwC predicts COVID-19 could knock 10% off GDP; sees unemployment above 35%
PriceWaterhouseCoopers (PwC), one of the big four multinational professional services firms, expects coronavirus pandemics to shrink the nation’s gross domestics products by 10% in 2020. The firm made this known in a webinar it organised to discuss economic impact and policy responses to COVID-19 recently.
The webinar has in attendance the PwC’s Country and Regional Senior Partner, Uyi Akpata, its chief economist, Andrew Nevin and Fiscal Policy Partner, Taiwo Oyedele.
Due to the estimated drop in the size of the economy, PwC Nigeria projected that the Nigerian unemployment rate would cross 35% mark in the year.
In its assessment, PwC stated that Nigeria should expect an unprecedented economic shock. It added that although, structural reform could reduce the impacts.
Speaking to this, Andrew Nevin, the Chief Economist at PwC Nigeria explained that GDP reduction could be worse. According to Nevin, there will be a massive spike in unemployment, increase the number of people in the informal sector not earning daily wages between lockdown and recession.
He projected that there will be huge food security challenges and fiscal crises at both FG and State level including depletion of external reserves. In the presentation, PwC stated that the overriding priority of the government should be the health and safety of Nigerians.
Options for Government
Speaking about options on targeting at getting money the balance of payment and keep food supply chain intact, Nevin said 50 to 70% of the economy is informal and these employees are living on daily subsistence conditions.
“FG can use mobile phone registration and harmonize with voters register and tax registration (TIN).
“This can be credited to their phones which they can cash in arrangements with banks, FinTech’s and mobile payment providers or to their bank accounts for those who have BVN.
“As lockdowns and semi-lockdowns take place, it is becoming increasingly difficult for the food supply chains to work.
“Keeping the food supply chain working means being very smart about how the rules work on the necessary social distancing and safety rules, while continuing with food (and power) systems”, Nevin highlighted.
The second option by PwC is for FG to seek external funds including World Bank and diaspora remittances.
“Immediately start tapping into announced programs for support, including the IMF Rapid Credit Facility, WB/IFC facility to support response to the COVID19 crisis and Afrexim Bank program.
“To use a fiscal modelling tool to have an up-to-date view of the fiscal situation and possible scenarios with movements in oil prices, GDP, etc.
“Establish regular communication with IMF, WB, and Rating Agencies so they are up-to-date on Nigeria’s fiscal situation and have confidence in the transparency and the management of these issues.
“Communicate clearly to donor community like DFID, USAID, EU, etc. what the situation is and what the FG really needs to ensure targeted resources from these groups”, PwC stated.
Fiscal stimulus and cuts.
“Keeping the economy going with appropriate fiscal stimulus by paying legitimate payables to contractors immediately.
“Also, paying legitimate pension arrears owed by FG and continuing with critical FG capital projects if they employ Nigerians”, PwC said.
Experts explained that many states are likely to enter a fiscal crisis.
Thus, the firm advised that FG needs to urgently consider how it intends to address this – possibly through a combination of grants and low-interest loans.
The firm however expects this to come with stringent conditions that will set up for economic growth across the country. It explained that these conditions will also be required if FG is asking for support from IMF, others to pay for the program.
“Send a positive signal to investors that the FG will further improve tax policy leading to future growth with better compliance by MDAs and some quick tax wins”, Nevin explained the firm’s option.
On the final lap, PwC advocated that FG should restructure for the future.
Experts explained that unlocking the dead capital the FG has across many industries and in all parts of Nigeria and crowding in private capital is important now.
“The FG has significant assets, but to the extent, these continue to be dead capital, it is an enormous drag on the economic recovery. Leveraging the crisis to make real structural reforms in the power sector, leading to industrialization and diversification.
“Launch an urgent review of NNPC operations to ensure FG is receiving all it should from this asset and take appropriate action.
Monetary Policy Responses
Nevin reviewed various intervention actions by the monetary policy authority to assuage the impacts of the pandemic on the economy.
He noted that the Central Bank of Nigeria in its responses to the pandemic reduce interest rates on all applicable interventions fund from 9% to 5%.
In the review, Nevin the monetary policy authority injected liquidity of ₦3.6 trillion, stimulus package in the form of loans into the banking system.
In addition, there was a provision of ₦100 billion to support the health sector, ₦2 trillion to the manufacturing sector, and ₦1.5 trillion to impacted industries in the real sector. The CBN created a ₦50 billion targeted credit facility through NIRSAL Microfinance Bank for households and MSMEs.
It also granted all DMBs leave to consider temporary restructuring of loan terms for businesses/ households affected by COVID. The CBN again emphasises that it would strengthen its Loan to Deposit ratio (LDR) policy targeted at banks to support the real sector.
Again, to reduce pressure on FX, the CBN suspended the sale of foreign currency to members of the Association of Bureau De Change Operators of Nigeria (ABCON).
“Despite all these interventions, the reality is that Africa is expected to have difficult times”, PwC Nigeria Chief Economist said.
Pre-existing challenges
Taiwo Oyedele, PWC’s fiscal partner stated that Nigeria has pre-existing fiscal challenges compounded by the pandemic.
According to Oyedele, before the virus hit Nigeria’s base, the country tax to GDP ratio was below 6%. This comes at the time when FG records steep debt to revenue ratio.
Also, there has been a low level of tax compliance, according to experts reduce the non-oil revenue of the government. In addition, PwC listed other myriads of issues face with the economy to include exposure to the risk of declining oil prices.
“The difference between now and economic crisis of 2008/09 is that there is little fiscal buffer”, Oyedele said.
The firm held that the nation’s has dated Brent oil prices as low as $19 per barrel early in April as against the 2020 budget benchmark of $57.
Just as the country’s oil production volume of 2 million barrels per day (mbpd) underperforming 2.18 mbpd used to prepare the budget.
“Even the original budget showed huge deficits and low revenue expectation”, PwC stated in its presentation.
The firm understands that while the country’s debt to GDP ratio is within acceptable limits, other indicators suggest a revenue crisis.
Oyedele explained that in 2019, FG has planned to rake in N7 trillion as revenue but ended up with N4.8 trillion. Meanwhile, the budgeted spending plan for the government in the same year was N8.9 trillion but an expenditure of N9.4 trillion was made.
States budget deficits
In the review, experts at the firm explained that internally generated revenue is very low across the country. It said large informal sector and multiple taxations make tax collection difficult. The firm added that poor accountability dampens taxpayers’ morale hence a high level of evasion.
In 2019, States recorded a 60% fiscal gap as both internally generated revenues and federal allocation disbursements accounted for 40% of the budgeted expenditure.
Oyedele said in 2019, all the states in Nigeria total spending plan was about N9 trillion. PwC held that distributions to the tiers of government are constrained by unbudgeted fuel subsidies and other tax expenditures.
“The huge fiscal gap at States level will be compounded by the implementation of new minimum wages and COVID-19. Local government are also challenged, if not worse”, he remarked.
Fiscal responses
The firm stated in the review that FG has responded to the economic emergency forces on the nation by COVID-19 with contingency funds of N984 million ($2.7 million).
The amount was released to Nigeria’s Centre for Disease Control and an additional N6.5 billion ($18 million) is planned.
Also, FG established a N500 billion COVID-19 Crisis Intervention Fund which will be channelled to the upgrade of healthcare facilities at the national and state level.
This will also provide intervention for states.
Experts noted that FG approved the employment of 774,000 Nigerians to ameliorate the suffering caused by COVID-19 in the country.
“The 774,000 youths will be engaged in Special Public Works Programme aimed at cushioning the effects of the economic downtown.
“Each of the 774 local government areas in the country will be allotted 1,000 slots.
“It also granted a Three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans with immediate effect”, the firm stated.
Then, FG is giving moratorium on loans issued by the Bank of Industry, Bank of Agriculture and the Nigerian Export-Import Bank.
In addition, FG made N15 billion grant to the Lagos State Government to support the fight again the pandemic. Further measures adopted include conditional cash transfers for the next two months.
Also, due to the reduction in global oil prices, FG reduced the petrol pump price from N145 per litre to N123.50 per litre. FG then suspend the proposed increase of electricity tariffs by the electricity distribution companies (Discos).
Plus Waiver of import duty on medical equipment, medicines, protection equipment for the treatment of COVID-19. Just as all 43 Cabinet Ministers donated 50% of their March 2020 salaries to support the Federal Government’s efforts.
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PwC predicts COVID-19 could knock 10% off GDP; sees unemployment above 35%
