This edition of the Nigeria Development Update provides policy options that Nigerian policymakers may consider in order to mitigate the impacts of COVID-19 (coronavirus) and lay the foundation for a strong recovery. These policy options are organized in the five areas: 1. Containing the COVID-19 outbreak and preparing to deal with a more severe outbreak; 2. Enhancing macroeconomic management to boost investor confidence; 3. Safeguarding and mobilizing revenues; 4. Reprioritizing public spending to protect critical development expenditures; 5. Supporting economic activity and provide relief for poor and vulnerable communities.
Nigeria’s economy was still recovering from the 2016 recession when the COVID-19 pandemic emerged in early 2020. The collapse of global oil prices in 2014– 16, combined with lower domestic oil production put the brakes on economic activity. Although Nigeria’s oil sector accounts for less than 10 percent of gross domestic product (GDP), it is a key source of export earnings and government revenues. In some ways, the 2020 situation resembles the scenario after the oil shock in 2015‒16. Then, the plunge in oil prices caused the annual real GDP growth rate to fall from an average of 7 percent from 2000 to 2014 to 2.7 percent in 2015 and -1.6 percent in 2016—Nigeria’s first recession in 25 years. Growth slowly rebounded in 2017 and 2018, supported by rising oil prices and a recovery in agriculture and services. By 2019, the economic recovery appeared to be strengthening as annual GDP growth reached 2.2 percent.
The global spread of the pandemic and the subsequent collapse of international oil prices are destabilizing Nigeria’s macroeconomic balances. Over the past five years, oil has represented more than 80 percent of exports, 30 percent of banking-sector credit, and 50 percent of general government revenues. A large share of the country’s non-oil industrial and service sectors also relies on foreign-exchange inflows generated by the oil industry. The protracted slump in global oil prices has reduced Nigeria’s general government revenue from an already low 8 percent of GDP in 2019 to a projected 5 percent in 2020. This sudden drop in revenue comes just when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy, creating a financing gap that threatens to destabilize the government’s fiscal position. Meanwhile, the pandemic will reduce global remittances to Nigeria, which in 2019 were equivalent to 5.3 percent of GDP and 40 percent of oil exports. The fall in remittances is likely to affect household consumption because half of Nigerians live in remittance-receiving households, of which about a third are poor. Meanwhile, eroding investor sentiment is causing a decline in foreign portfolio flows (volumes were down 46 percent in the first quarter of 2020), thus compounding the pressure on foreign reserves imposed by the widening current account deficit. The macroeconomic implications of COVID-19 in 2020 and 2021 will be severe even if Nigeria manages to contain the virus.
Beyond external factors, behavioral changes and containment measures linked to the domestic outbreak of COVID-19 are affecting employment in all sectors of the Nigerian economy. To limit the spread of the virus, the government acted promptly to restrict international and domestic flights, interstate road traffic, and the movement of people in urban areas. As experienced by other countries, it is inevitable that such preventive actions will have profound knock-on effects on services and industry in both the formal and informal sectors. As an unintended consequence, a steep decline in output can therefore be expected. Agriculture is the only sector that is projected to grow in 2020—it is somewhat shielded from the effects of lower oil prices.
Nonetheless, it is highly probable that the disruption of supply chains due to lockdown measures will affect the planting season, lowering agricultural output later in the year. The difficulties arising from COVID-19 inevitably extend to the labor market, with significant impacts on employment anticipated for some time to come. As of May 2020, 4 in 10 workers in Nigeria were already reporting a loss of labor income, and disruptions to markets and supply chains are impeding agricultural activity. Retail trade, for instance, which employs 1 in 6 workers, is being hit especially hard as income losses spread through the economy. Overall, the disruption of employment dynamics will affect household incomes and consumption.