FG, focus spending to cushion COVID-19 effects
Currently faced with the twin shocks of the COVID-19 outbreak and an oil price crash, the IMF projects that the Nigerian economy will contract by 3.4% in 2020, possibly marking second recession in the last 5 years and the worst recession in the last 30 years. Little can be done to avert the impending slump […]
Currently faced with the twin shocks of the COVID-19 outbreak and an oil price crash, the IMF projects that the Nigerian economy will contract by 3.4% in 2020, possibly marking second recession in the last 5 years and the worst recession in the last 30 years.
Little can be done to avert the impending slump in economic activity as current containment measures are necessary to limit the death toll and avert a healthcare crisis, which unless contained, could overwhelm the nation’s current healthcare capacity. Faced with the inevitability of a recession, the response of fiscal authorities should be tuned towards facilitating a V-shaped economic recovery. Such a recovery may only be attained if scarce resources are deployed strategically to quickly arrest the decimation to consumption (which accounts for c.90% of Nigeria’s GDP). The importance of conserving spending power is heightened when considering higher inflation due to supply chain disruptions and the recent devaluation of the naira.
To preserve current consumption levels, Nigeria must prioritise alleviating the burden of industries and companies in the private sector that have been hit by the pandemic and deepen welfare provision and social security efforts. For welfare, the FGN has to look beyond current programs like those that only cater to small scale traders (TraderMoni) and farmers and expand focus to the average salary earner (both in the formal and informal sector) who either has been retrenched or faces a real probability of retrenchment as a result of the lockdown. The expansion of the welfare net to capture workers and the urban poor may preserve some spending ability and also importantly limit social unrest that could result from a lack of insufficient social safety nets. Likewise, private sector intervention should be prioritised to preserve current production capacity and limit the retrenchment fallout of current disease containment measures. While productive sectors (which large employee footprint across their value chains) such as the manufacturing and agriculture are particularly important intervention targets and agents of a robust rebound, it is however, often easy to neglect the services and construction sectors, which comprises over 50% and 6% of GDP respectively. To facilitate a quick recovery from external shocks and limit the expected jump in unemployment (23% unemployment rate as at 2018, easing the operating burden for private players across various sectors should also be considered to ensure a holistic and robust response to the effects of COVID-19.
A sustainable measure the government could implement is fulfilling their debt obligations to private companies and contractors to improve their cash flow, support payroll financing, prevent mass retrenchments, all the while paying down the part of the nation’s debt. To improve the efficacy of this measure, staff retention may be included as contingencies for quick disbursements. In the Nigerian context companies that already have the Presidential Initiatives on Continuous Audit (PICA) certificate and are owed money should be among the first to receive such interventions as their projects have already been appraised by the appropriate government agencies. The government may begin by fulfilling local debt payments earmarked for local debt payments (to government contractors) in the 2019 to local contractors. Till date, only 50% of payments have been made, with the money simply warehoused in the Office of the Accountant General of the Federation. Furthermore, like advanced nations, direct payroll support could be offered to companies hit by the pandemic. The proposed taxed 50% tax relief for companies that retain their employee compensation by NASS is a step in the right direction. Furthermore, the provision of CBN backed loans to businesses that endured severe hits to their revenue can de-risk lending for commercial banks, allow for funds to be funneled into desired sectors and better improve the transmission mechanism from CBN to the real sector.
While we await the passage of the fiscal stimulus package by the NASS, it will be well served to address the impending fall in consumption by reallocating budget spending to measures that more directly protect jobs, incomes, and business operations. However, where applicable, the FG via the federal ministry of finance and FIRS could be able to implement some of the measures above through administrative oversight to ensure a rapid response to the effects of COVID-19.
Mbachu wrote from Lagos.