Impact of Covid-19 Lockdown on the Economic Activities in Kaduna State,Nigeria
The Covid-19 pandemic’s effects on economic activities and businesses in Nigeria is taking a negative turn.
Firstly, the virus has led to the crash in global commodity prices particularly crude oil, due to a slump in demand and a spike in supply (particularly from Saudi Arabia).
Secondly, the pandemic has led to lockdowns which has crippled economic activities in the largest commercial nerve centres of the country.
Thirdly, the effect of the pandemic across the world implies that global supply chains have also been materially disrupted with huge consequences on the Nigerian economy. We will examine the effects of these three challenges on businesses in Nigeria.
Slump in Crude Oil Prices
With governments of some of the world’s major economies enforcing a lock down and the slump in international travels and local commute, the consumption of energy has shrunk materially which has led to a supply glut in the crude oil market. Furthermore, ego battles between Saudi Arabia and the Russians have led to the deterioration of the oil market, making a bad situation even worse. Crude oil represents about 95% of Nigeria’s export revenues and a downturn in the market for the commodity always has a ripple effect on the economy. These shocks tend to spook the foreign exchange market leading to a depreciation of the naira and reactive demand management by the Central Bank to conserve foreign reserves. In January this year, the price of Bonny Light, the major variant of Nigeria’s crude production, averaged over $60 per barrel but had lost more than half that value by the end of the quarter. The Federal Government of Nigeria has a benchmark crude price of $57 per barrel for the 2020 Fiscal Budget. Our preliminary forecasts have been built around an average price of $35 per barrel for the rest of 2020. Under this scenario, Nigeria’s oil & gas export proceeds may fall by half in 2020 to $25 billion on a year-on-year basis ($50 billion; 2019). This has led to genuine concerns not only for the naira but also the fiscal position of the Federal Government.
Figure 1: Bonny Light Prices (January – March 2020)
We believe the naira will come under enormous pressure owing to the slump in crude oil prices from the soft commodity market due to the slowdown in global demand for crude. Our prognosis also indicates that with an economic crisis in several western nations, Nigeria could see a slowdown for the first time in over a decade in workers’ remittances. We are forecasting a 20% drop in the diaspora remittances to $20 billion from $25 billion in the prior year further placing the naira under strain. While we do acknowledge that the country’s import bill will drop owing to the distortions in local and global economic activities, we do not believe that this will provide sufficient support for the naira. The Central Bank’s shock moves to allow a 15% depreciation (from N305/$ to N360/$) in the official market will be the subject of greater discourse as the non-alignment of rates in the parallel market, the Investors’ and Exporters’ (I & E) Window and the CBN’s official rates could lead to speculative arbitrage trades reminiscent of 2015/2016.
Effect of Lockdowns in the Nigeria Economic Activities
Lagos and Abuja are currently under an unprecedented lockdown that could last for as long as two weeks (at a minimum). However, other sections of the country such as Port-Harcourt, the oil and gas capital of the country akin to Texas in the US, are also under some form of lockdown. The lockdown of Lagos, Abuja and Port-Harcourt, effectively crimps the three largest economies in the country. Global experts on public health and epidemiology argue that the success of the lockdowns in various countries is largely hinged on the rate of tests for the virus and then the ability to flatten the curve. Nigeria is in a bit of dilemma at the moment as current benign numbers of infected persons (<200) raise a bit of scepticism due to issues around the underwhelming rate of tests currently circa 2,000. It is only when Nigeria ramps up the rate of tests, contact tracing, isolations (for asymptomatic patients) and treatments that the subject of flattening the curve will become valid. For now, without increasing test rates, it is difficult to gauge the actual number of infections in Nigeria. Thus, it may be quite premature to make a call on the success or otherwise of the on-going lockdown and its outcome. At the moment, the lockdown does have a telling effect on the Nigerian economy which could become protracted especially if it needs to be extended. An extension of the lockdown, could raise the risk of a social unrest while stoking political risks. Without addressing the underlying issues of tests and contact tracing, Nigeria faces an extended lockdown that could push the economy into a double-digit recession spanning beyond 2020 and into 2021.
Supply Chain Disruptions
We believe that supply chains across the country will be materially affected by the lockdown in Lagos. While the order of the two-week lockdown of Lagos has granted material flexibility for the movement of essential goods and services, we believe that there will be other negative effects on supply chains across the country especially with more states effecting quasi-lockdowns. For instance, Ondo State has closed its land borders with all its neighbouring states while Kaduna has also announced a lockdown across the state. On the other end, the lockdowns of several other western and emerging market economies also imply that import-dependent supply chains in Nigeria will also be severely disrupted. Global linkages imply that Nigeria is increasingly aligned with trends and risks outside its shores. Thus, sectors in Nigeria that depend significantly on foreign input will be negatively impacted. Overall, we believe these supply chain disruptions will alter production and manufacturing, and general trade and commerce and other import dependent industries in the country.
Mitigating the risks
On a macro level, we believe that the response of Corporate Nigeria in the form of various corporate social responsibility (CSR) initiatives will go a long way in helping to manage the underlying health impact of COVID-19. We believe these CSR initiatives aimed at strengthening the healthcare management system for effective response to the pandemic will help mitigate the health risks and place Nigeria on a strong footing for economic recovery.
While we do recognise that it will be a herculean task to fully mitigate business risks induced by COVID-19, we also believe that firms must be proactive and seek to mitigate the risks as far as is practicable. We believe that risks like currency depreciation will crystallise in these times and that to play to win, firms must mitigate currency risks. At Agusto Consulting, our long-term creed has been that firms operating in soft-currency economies like Nigeria must not have net liabilities in hard currencies. This increases the risk of a significant rise in a firm’s overall liability position due to a depreciation in the domestic currency.
We note that companies – especially in the food and beverages industry – that have increased investments in backward linkages following the currency crisis of 2015/16 will be in a better position to mitigate risks to import-dependent supply chains. This will become increasingly important at this time as our prognosis indicates that more countries will adopt unorthodox policies that may stymie the export of food in a bid to ensure food security in their homelands.
We also recommend that businesses with formal letters of engagement may need to invoke the force majeure clauses which help mitigate legal risks arising from an inability to meet the terms of the contract. However, we do recognise the informal nature of several business transactions in Nigeria and believe that the lack of formal contracts poses a risk to these businesses, thus communication must be effectively managed at this time.
The lockdown also effectively challenges traditional methods of working not just in Nigeria but across the globe. Organisations which have traditionally been structured around physical office set-ups have had to quickly reconfigure operations to ensure staff can work remotely. We believe this will challenge traditional norms of work even after the COVID-19 season. The gains of remote working could lead to greater efficiencies for organisations and help organisations manage costs around office rental.
The Central Bank has offered a stimulus package to businesses. However, we will like to see more concerted efforts between fiscal and monetary authorities on a broader stimulus package. We believe Nigeria’s dire economic situation (pre-COVID19) characterised by a 2% post-recession GDP growth leaves the country in a bigger economic morass. This implies businesses will require a bigger fiscal stimulus package to sail through these times.
CONCLUSION – BRIGHT SPOTS
The major effects of COVID-19 will be the uncertainty and unpredictability of events in the business environment. Despite the deluge of risks, opportunities abound. We believe a few industries are set for strong growth as a result of the pandemic. Firstly, the increasing spate of global lockdowns also brings the subject of food security to the core. We believe the agricultural sector especially grains and other staples (particularly locally grown rice) is in a strong position to grow as food demand spikes from panic buying. Working remotely implies that several white-collar professionals will consume more internet data for work and virtual meetings leading to a spike in demand for data. Even beyond the white-collar segments, we note that more telecoms consumers will spend more time on social media and other streaming apps at this time. We believe these trends will help drive growth in the telecommunications industry in 2020 through to 2021. The home and personal care industry especially for players who have been able to adapt rapidly to the spike in demand for hand wash and sanitisers could also see record growths in revenue. The grocery focused supermarkets also represent a bright spot for the times. The rush to stock-up on groceries by households has been the major driver of growth for this segment of the economy.Download Full Material-N4000 PAY WITH PAYPAL