Coping with Coronanomics

The global economy is in a tailspin. IMF and the World Bank have both predicted a contraction of the global economy with developing economies likely to be worst affected. This situation is the direct result of the menace of the COVID-19 pandemic, and the energy crisis that the world faces. With many businesses and factories on lockdown, with the tourism and travel industry playing possum, the world is confronted with a demand and supply shock, and a financial and economic shock in addition to a catalytic global health crisis, the end of which no one knows. Commodity dependent countries like Nigeria, Algeria and Angola, in the absence of buffers to deal with endogenous and exogenous shocks are in dire straits. The Micro, Small and Medium Scale Sector is also facing special difficulties. In a country like Nigeria where SMEs account for about 85% of the economy, many businesses are bound to declare bankruptcy or die off, sending millions of persons into the unemployment market. Before COVID-19, Nigeria’s unemployment rate stood at over 23%. This will get worse. Nigeria’s GDP growth profile for 2020 has been downgraded from a possibility of 2.4% to about 1.3%, and with projected contractions of 0.5% in the first quarter and 0.3% in the second quarter, Nigeria’s economic outlook for 2020 and beyond is severe. Many other countries are in a similar situation, even if the degree of vulnerability varies.

Only last week, Arik Air took the decision to cut the salary of its staff by 80% for the month of April; by May, it says it will ask 90% of its workforce to proceed on leave without pay until further notice. Arik Air expects its staff to understand the situation in which the company has found itself. In March, the Nigerian government shut down the country’s airports to prevent the importation of COVID-19 cases into the country. Arik and other airlines, as is the case with other airlines worldwide have not been able to do business or earn regular revenue. Another company, Mikano International Nigeria Ltd., has already sacked over 600 of its workers due to the biting effect of COVID-19. More companies are bound to take similar steps, to cut cost and ensure business continuity. What makes the situation worse is that the adverse economic impact of Corona Virus is bound to last longer than the disease itself. This is probably the most disruptive aspect of the current global experience.

The effect is already most telling at the individual and household levels. Many have referred to the similarity between COVID-19 and the Spanish Flu pandemic of 1918, but except for a minority of persons who were alive in 1918 and are still alive today, the fact is that the present generation is totally unfamiliar with a pandemic of this scale. It is for us, a strange phenomenon. It has disrupted our lives and our world. Many bread winners have lost their bread. In many homes, pronounced poverty has become a reality. As lockdowns continue, families find their resources being depleted, or they sink deeper into debts, as an epidemic of empty pockets rears its head. Thus, a poverty pandemic is certain, especially in developing countries where there are no social safety nets, or unemployment benefits, and when that is combined with a COVID-19 pandemic, the consequences could be fatal for society.

Meanwhile, in many African countries, both governments and the people are arguing over whether or not a prolonged lockdown can help check the spread of COVID-19, and how best Africa can adjust its response strategy to basic realities in the continent. For example, Africa has a huge population of self-employed persons in the informal sector: an army of cab drivers, motorcyclists, barbers, event-centre managers, hairstylists, make up artists, artisans and traders who work daily to earn a living and are now stranded at home, unable to sustain themselves. Their home economics has been violated. Their daily source of income has been wiped out. While the rich may have savings and be able to fall back on financial reserves, the poor who hardly ever save, and rarely have any surplus to save for the rainy day, because for them it rains every day, are most vulnerable. The effect as seen in Nigeria, is that many people are beginning to defy the lockdown order and government’s determination to enforce it. The hungry and the angry can be seen on the streets of Lagos begging for food and money, or threatening to attack the rich. There is a looming crisis of social unrest. Business owners are also beginning to suggest that it may perhaps be more advisable to ease the restrictions to allow businesses to function. Nigeria recorded its first index case on February 27. President Muhammadu Buhari announced the lockdown of Ogun, Lagos and the FCT on March 29. States subsequently imposed dusk to dawn curfews and shut down their borders.

But where is the trade off? Should we cancel the lockdown and allow businesses to re-open, so people can keep their jobs and businesses can make profit? I do not buy the argument that businesses should re-open. We must avoid the mistake made by Mayor William Randolph Mills in Denver Colorado, United States, in 1918. Denver was shut down for five weeks during the Spanish Flu but as business owners began to mount pressure on the Mayor, arguing that the plague was under control, and that life should return to normal, Mayor Mills succumbed. It was a decision the city regretted. More people died – 8,000 in total. Nigeria must tread cautiously and avoid the error of imitation. It is better to be patient than to become patients. The urge to protect or attract investments should not supersede the need to protect the people from themselves.

On that score, African governments are often obsessed with the search for investments, even if many of these countries fail to provide the necessary infrastructure, enabling environment, and policy framework to support business, either local or foreign. This has been a major challenge for Nigeria too, but whatever efforts that may have been made to improve the environment have also been affected by the shocks and uncertainties occasioned by the COVID-19 pandemic. Investors like to hedge their bets and minimize risks. Whereas it has been said that certain aspects of the economy stand to gain from the current situation, such as tech finance, telecommunications and agri-tech startups, the reality has been in the shape of capital flight, disruptions in the markets and distortions that could precipitate a long-lasting financial crisis.

Let us remember that investments and businesses were the first to take the Corona Virus hit. From Asia to Europe to the United States and everywhere, stocks crashed. In the month of March alone, the Nigerian Stock Exchange lost over a trillion Naira. Portfolio investors dumped their investments and tried to convert their stakes into dollar, thus putting pressure on the Naira, the country’s national currency. The Naira depreciated quickly, forcing the Central Bank to close its multiple Forex windows and adjust prices – a euphemism for currency devaluation. The New York Stock Exchange at a point had to shut down. Stock Exchanges across the world, including Nigeria’s have since opted for remote trading. Trading has always occurred on the floor of the market each time markets opened, but Corona Virus has driven every floor broker into holes. Even foreign remittances from the Diaspora, a major source of support for African economies, have shrunk, and that may be the case in the short to medium term window. The challenge that governments face is how to turn the challenges of today into new opportunities for a re-set. Investors are bound to remain careful and watchful, especially in volatile sectors. There is no point jumping the gun.

The effect of the disruption is perhaps best magnified by the crisis in the global oil industry. With the global industrial complex shut down, the oil industry faced a demand and supply crisis, resulting in a sharp drop in the spot price of crude oil. In the last few weeks, oil prices have fluctuated between $65/barrel in January to as low as $22/barrel by March 30, and up to $34/barrel by April 8, and about a week ago, the West Texas Intermediate (WTI) went into negative territory, selling at below a dollar per barrel due to a demand-supply-storage crisis. Brent Crude dropped to as low as $19/barrel only to improve slightly in the face of tensions in the Middle East between the United States and Iran. In March, an OPEC+ meeting to agree on production cuts in order to ensure a balance between demand and supply, and hence stabilize prices, ended in a stalemate, and a price war, as Russia opposed the move. By April, OPEC+ and non-OPEC members eventually agreed to a 10% production cut, but this was a case of too little, too late.

Oil revenue accounts for about 80% of Nigeria’s foreign exchange revenue and provides the benchmark for its budget. Nigeria’s 2020 budget originally had a crude oil benchmark of $57/barrel, and a production output of between 1.7 million to 2.1 million barrels per day. With the crash in oil price, and the OPEC+ production cuts, Nigeria’s Budget 2020 was turned upside down; its production quota has been further reduced. The Federal Government has since revised the benchmark downwards to $30/barrel, and shaved off close to half of the budget. Nigeria may have to review its 2020 budget benchmark again, and the situation could get worse if uncertainties persist in the global oil market. Right now, Nigeria is already operating at a loss. At least one commentator has predicted that the country faces a Venezuela or Zimbabwe-like situation. Growth is stagnant. Inflation is rising: at 12.26%, there is no indication that the figure for April ending will be better. The energy crisis occasioned by COVID-19 should be a wake-up call for mono-cultural economies like Nigeria, and a pointer to the importance of diversification. As it is, Nigeria faces a revenue squeeze, a sovereign debt crisis and a liquidity crisis. Federation Accounts Allocations (FAAC) shared monthly between the Federal Government and the states have dropped from a projected N888.5 billion to N716.36 billion in January, and N647. 4 billion in February, with a slight rise to N780. 9 billion in March. The share for April and May/June could drop to as low as N400 billion, which is why the Federal Government is seeking foreign loans and the withdrawal of N150 billion from the Stabilization Fund component of the country’s Sovereign Wealth Fund (SWF). The need for economic reform in Nigeria has never been more urgent than now. COVID-19 has exposed fault lines and vulnerabilities in Nigeria’s economy and its health and education sectors.

The long and short of it is that the economics of Corona virus or Coronanomics, shows the interconnectedness of everything, that is the value chain of human existence from biology to economics, politics, technology, trade, investment, race, culture, identity and everything else. In the face of such infinitude, what is most required is leadership to help the people regain a sense of balance and restore all things that may have gone awry. Where leadership fails, the people’s misery is made worse, but the leadership also pays a price. When the New York Stock Market crashed in October 1929, Herbert Hoover (R) who had distinguished himself as a great mobiliser of relief efforts after World War 1 was the President of the United States. But his failure to manage the Great Depression, tactically and realistically, ruined his reputation.

In 1932, he lost the Presidential election to Franklin Delano Roosevelt (D). Roosevelt introduced the New Deal and an effective stimulus package that was backed by the Federal Government. This helped the United States to recover faster than other countries. Many countries were still battling with the Depression until World War II broke out in 1944. The quality of leadership made all the difference. Roosevelt was re-elected four times as President. Hoover is not remembered as a great American President. FDR died in office as one of America’s greatest. The cause of the Great Depression of 1929 -1944 may have been economic or financial, and the cause of COVID-19 may be biological, but there are clear areas of convergence in terms of economic and political impact. The fortunes and legacies of political leaders today may rise and fall with COVID-19 and its various fall-outs.

The common denominator, so far, is the attempt by governments to protect and save lives and the economy. China is ahead in moving quickly from pandemic to economic recovery. The United States, UK, Canada, Russia, Japan, United Arab Emirates and other countries have announced different stimulus packages to cushion the effect on households and businesses. In Nigeria, the government has also introduced a number of measures and initiatives. But many questions have been raised about the quality of our government’s intervention and strategy. Nigeria has a reputation for doing the right thing the wrong way. We see that at play. There are yawning disparities in the delivery of Conditional Cash Transfers and doubts have been expressed about the enabling criteria and the absolute numbers. Nigeria is targeting 3.6 million households, and a total of 11. 6 million persons who are considered poor and vulnerable because they have less than N5, 000 in their bank accounts and cannot afford to buy up to a N100 worth of recharge cards. In a country of 200 million people, even if this cash transfer is well-managed, it would amount to a non-intervention. Food palliatives have also been announced in the form of release of 70, 000 metric tonnes of grains from the National Grains Reserve. Yet, a few days ago, the Oyo State Government openly rejected 1,800 bags of rice donated to the state by the Federal Government on the grounds that the rice was infested with weevils!

Corona Virus confronts Nigeria with basic Economics and Sociology 101 lessons. Nigeria may well end up not as one of Ruchir Sharma’s BreakOut Nations (Norton and Company, 2012) but as a Break Down Nation. Nobody can predict the point at which the country’s leaders will begin to understand the difference between both. The relevant lessons lie in the nexus between politics, economy and leadership.