Nigeria may lose $45 billion to COVID-19 – PwC

Nigeria may lose $45 billion to COVID-19 – PwC
President Muhammadu Buhari of Nigeria


…Tasks FG on Power sector, NNPC restructuring

PriceWaterhouseCooper (PwC), one of the big four accounting firms, expects coronavirus pandemics to shrink the nation’s gross domestics products (GDP) by 10%, or $45 billion (N16 trillion) of the $450 billion of the largest economy in Africa 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 had in attendance the PwC’s Country and Regional Senior Partner, Uyi Akpata, its chief economist, Dr Andrew Nevin and Fiscal Policy Partner, Mr Taiwo Oyedele. While PwC forecasts that GDP could drop off as much as 10%, it said Nigeria’s unemployment rate is expected to cross 35% mark.

In its assessment, PwC stated that Nigeria should expect an unprecedented economic shock. It added that although structural reform could reduce the impacts there is a need for clear thinking and comprehensive policy framework review to streamline policy with current demands. Speaking further, Dr 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 wage between lockdown and recession. He projected that there will be huge food security challenges and fiscal crisis at both FG and State levels including depletion of external reserves.

In the presentation, PwC stated that overriding priority of the government should be the health and safety of Nigerians, which made the lockdown necessary but it government should also face up to the challenges it has created both in the immediate, short and long terms. The government must see the situation as both a challenge and an opportunity.

Option for Government

Speaking about options on targeting at getting money for the balance of payment requirements 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). Money 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 fund including World Bank and diaspora remittances.

“Immediately start tapping into announced programs for support, including the IMF Rapid Credit Facility, World Bank/IFC facility to support response to the COVID19 crisis and Afrexim Bank program.

“Government should 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.

“It is also important to communicate clearly to donor community (DFID, USAID, EU, etc.) what the situation is and what the FG needs to ensure targeted resources from these groups”, PwC said in the presentation.

PWC third option for FG is to deploy fiscal stimulus and cut recurrent expenditure on non-personnel cost.

“It is critical to keep 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.

It stated that many states are likely to enter a fiscal crisis, thus, FG needs to urgently consider how it intends to address this – possibly through a combination of grants and low-interest loans. It, however, expects this to come with stringent conditions that it 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 the IMF, others to pay for the program.

“Sending 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 is important”, Nevin explained.

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 through privatisation.

“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 is necessary. The government should 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, noting that the Central Bank of Nigeria in its responses to the pandemic had reduced interest rates on all applicable interventions fund from 9% to 5%. The apex bank also injected liquidity of ₦3.6 trillion stimulus package in the form of loans into the banking system.

Also, 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 also created ₦50 billion targeted credit facility through NIRSAL Microfinance Bank for households and MSMEs, he said, 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; and 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). Nevin said despite all these interventions, the reality is that Africa is expected to have difficult times.

Pre-existing challenges

Taiwo Oyedele, PWC’s fiscal partner stated that Nigeria has pre-existing fiscal challenges that have been compounded by the pandemic. According to Oyedele, before the virus hit Nigeria’s base, the country tax to GDP ratio was below 6%. This came at the time when FG recorded steep debt to revenue ratio.

Also, there has been a low level of tax compliance, which according to experts reduce non-oil revenue of the government. Besides, PwC listed other myriads of issues facing 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 highlighted that the nation has dated Brent oil prices as low as $19 per barrel early in April as against 2020 budget benchmark of $57; just as the country’s oil production volume of 2 million barrels per days (mbpd used to prepare the budget is underperforming at 2.18mbpd. This may also face further cuts by OPEC.

“Even the original budget showed huge deficits and low revenue expectation”, PwC stated.

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 had 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 the expenditure of N9.4 trillion was made.

States have bigger budget deficits

According to data presented by PwC, internally generated revenues is very low across the country. It said a 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 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 subsidy and other tax expenditures.

“The huge fiscal gap at the States level will be compounded by the implementation of new minimum wages and COVID-19. Local governments are also challenged, if not worse”, he remarked.

FG fiscal responses to pandemic

The firm stated in the review that FG has responded to the economic emergency imposed on the nation by COVID-19 with contingency funds of N984 million ($2.7 million). This was released to Nigeria’s Centre for Disease Control and an additional N6.5 billion ($18 million) is planned.

Also, FG established N500billion COVID-19 Crisis Intervention Fund which will be channelled to the upgrade of healthcare facilities at the national and state-levels, as well as provide intervention for states.

“The President 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 the 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 three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans with immediate effect; similar moratorium would be given to all Federal Government-funded loans issued by the Bank of Industry, Bank of Agriculture and the Nigerian Export-Import Bank. Another N10 billion grant from FG to the Lagos State Government”.

Also, due to the reduction in global oil prices, the government reduced the petrol pump price from N145 per litre to N123.50 per litre on April 1, 2020. FG then suspended the proposed increase in electricity tariffs by the electricity distribution companies (Discos). It also announced waiver of import duty on medical equipment, medicines, protection equipment for the treatment of COVID-19.

All 43 Cabinet Ministers donated 50% of their March 2020 salaries to support the Federal Government’s efforts.

Author: abokimallamfx