Culled—Proshare

April 30, 2020

by FBNQuest Research                                                                                 

The current health crisis has resulted in a global economic downturn, signaled by the GDP data for Q1 2020 from the US and China. At least for now, multilateralism has been replaced by governments designing new economic solutions and protecting their nationals. Declining oil prices due to a supply glut, triggered partly by Covid-19, have exposed Nigeria’s Achilles heel, resulting in a twin shock. Perhaps the narrative around diversification will now become more compelling and the authorities will take significant steps to boost revenue collection to help finance the transformation of the economy.                                                                                                           

Nigeria depends heavily on imports and as such, movements in exchange rates have a direct impact on consumption patterns. In March the CBN tweaked its fx policy in what President Buhari termed a “realignment”.

Alongside the ongoing global supply chain disruptions due to Covid-19, the new fx rates will contribute to higher prices of imported inputs/products and  therefore weaken the purchasing power of consumers.

To manage the CBN’s fx supply, oil companies (international and domestic) and all related companies (oil servicing) have been directed to sell fx to the CBN and no longer to the NNPC. 

There are growing fears around unprecedented global food insecurity as containment measures are constraining agriculturists from planting and harvesting crops. According to the International Food Policy Research Institute, at least 37 countries have enacted various forms of food export restrictions in response to Covid-19 including those where average output for the products in question exceeds domestic consumption.

The CBN governor recently called for import substitution through a boost to local production/manufacturing. The CBN remains committed to supporting smallholder and large agricultural production of specific staple and cash crops.

There is also talk around creating an ecosystem of factories, storage facilities and logistics companies to move raw materials for value-added production and finished goods to markets. We note that existing structural deficits would affect the execution of these laudable plans.

In the medium term, the country’s manufacturing industry is set to receive a facelift as the authorities have earmarked N500bn targeted at securing hi-tech machinery and equipment that can fast track local production of products such as steel, iron rods and doors.

The FGN has no difficulty in creating policies and well-meaning initiatives. The challenge is primarily with implementation.

The economy is projected to contract by – 3.4% y/y in 2020 according to the IMF’s World Economic Outlook. In response, the FGN could seek to fuel the recovery and support sustainable growth by pushing ahead with its policies to diversify the economy away from oil and by extension, boost growth for other segments.