The Nigerian government has warned that its economy faced the possibility of falling into a recession in the third quarter of this year, which will be it’s second in four years.
It said that only strong economic performance in the period will be able to avert this possibility, stressing that a return to a recession will come with grave consequences.
The government blamed this on the COVID-19 pandemic, which led to a crash in global oil prices, in addition to other economic factors that adversely impacted on the economy. It said the GDP growth for the second quarter is likely to be negative.
Minister of State for Finance, Budget, and National Planning, Clement Agba, disclosed this in Abuja on Thursday at the start of a five-day interactive session on the 2021-2023 Medium Term Expenditure Framework and Fiscal Strategy Paper.
Agba had read out a written presentation by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, titled ‘Draft 2021-2023 MTEF/FSP: Presentation to the House Finance Committee.’
“Nigeria is exposed to spikes in risk aversion in the global capital markets, which will put further pressure on the foreign exchange market as foreign portfolio investors exit the Nigerian market.
“Nigeria’s Q2 GDP growth is in all likelihood negative, and unless we achieve a very strong Q3 2020 economic performance, the Nigerian economy is likely to lapse into a second recession in four years, with significant adverse consequences,” the minister said.
The event was organized by the House of Representatives’ Joint Committee on Finance; Appropriation; National Planning and Economic Development; and Aids, Loans, and Debt Management.
Agba said the fall in oil receipts had put further pressure on the foreign exchange market as a result of foreign portfolio investors exit from the Nigerian market.
He disclosed that crude oil prices declined sharply in the mild market, with Bonny Light crude oil price dropping from a peak of US$72 p/b on January 7, 2020, to below US$20 in April. 2020. Because of this, he said that the US$57 crude oil price benchmark on which the 2020 budget was based became unsustainable.
Agba explained that a massive output cut by OPEC and its allies to stabilize the world oil market was a major development in the international crude oil market and that Nigeria is contributing about 300,000 BPD of production cuts.
These developments, he said, led to about a 65 percent decline in projected net 2020 government revenues from the oil and gas sector, which adversely affected the foreign exchange inflows into the economy.
The minister said that disruptions in global trade and logistics would negatively affect Customs duty collections in 2020.
“The COVID-19 containment measures, though necessary, have inhibited domestic economic activities, with a consequential negative impact on taxation and other government revenues.
“Consequently, the projections for Customs duty, stamp duty, Value Added Tax, and Company Income Tax revenues were recently reviewed downwards in the revised 2020 budget.
“Customs revenue has generally performed close to target over the last few years, exceeding the target in 2019.”
The minister declared that over the past five years, actual revenue performance averaged 61.4 percent, adding that some government reforms are yielding positive results, with significant improvements between 2018 & 2019, adding: “We believe we can do more to improve revenues, especially remittances from Government Owned Enterprises, possibly up to N1 trillion”.
He noted that key parameters and other macroeconomic projections for the medium-term revenue and expenditure framework had been revised by the government, to correspond with current realities.
According to the minister, “oil GDP growth rate has a strong positive correlation with real GDP growth in Nigeria. Consequently, changes in the underlying drivers of oil GDP will significantly affect real GDP performance.”
But he noted that while Nigeria‘s total production capacity currently stands at about 2.5 mbpd, actual crude production stands at about 1.4mbpd, in compliance with the OPEC production quota), with additional 300,000bpd of condensates, totaling about 1.7mbpd.
According to him, the World Bank had projected that crude oil prices would rise gradually from an average of US$42 pb in 2021 to $44.5 pb in 2022, and US$47 pb in 2023, while EIA expects Brent crude oil prices to average $41 pb during the second half of 2020 and $50 pb during 2021, reaching $53 pb by the end of 2021.
Clarifying on the key assumptions of the MTEF/FSP the minister said that “Inflation, however, is expected to remain above single-digit over the medium term, given the structural issues impacting on the cost of doing business, including the high cost of distribution.”
He added that fiscal measures were being instituted to improve government revenue and entrench a regime of prudence, with emphasis on achieving value for money.
“The goal of fiscal interventions will be to keep the economy active through carefully calibrated regulatory/policy measures designed to boost domestic value addition, de-risk the enterprise environment, attract external investment and sources of funding, etc.,” the minister stated.
The minister explained that the draft 2021-2023 MTEF/FSP was prepared against the backdrop of a global recession and heightened global economic uncertainty.
“The medium-term outlook for Nigeria suggests that fiscal risks are somewhat elevated, largely due to COVID-19 related disruptions, which have exacerbated structural weaknesses in the economy.
“Nigeria faces significant medium-term fiscal challenges, especially with respect to its revenues, which, if not addressed, could snowball into debt sustainability.
He explained that the nominal GDP is expected to increase from N130,836.1 billion in 2020 to N132.1254 billion in 2021 and then up to N138,415.8 billion in 2023. Similarly, consumption expenditure ls projected to stay at N118,735.2 billion in 2020 and N118,468 billion in 2021 and grew to N124,358iS billion by 2023, reflecting a gradual steadiness in the recovery.
