Nigeria’s economy slipped into a recession after its gross domestic product contracted for the second consecutive quarter.
Africa’s biggest economy went into recession for the first time since 2016. The recession four years ago was its first in a generation, and the country emerged from it the following year.
However, economic growth was fragile as the COVID-19 pandemic plagued the economy virulently, amid low oil prices. Nigeria, Africa’s top oil producer and exporter relies on crude sales for 90 percent of foreign exchange earnings usually accounting for an average output of two million barrels per day. But the effects of the pandemic and low oil prices have cut production to approximately 1.4 million barrels.
Prior to the onset of the COVID-19 pandemic in December 2019, the Nigerian economy was on a positive growth trajectory, having made a significant recovery from the 2016-2017 recession, which was triggered by the drop-in commodity prices in 2016. Following the recession, we witnessed 12 consecutive quarters of economic expansion, and GDP growth in the fourth quarter of 2019 stood at 2.55 percent. Our exchange rate remained stable for over two years at N360/$ and our external reserve witnessed significant accretions from the sale of crude oil and continued inflows from foreign investors.
Also, the country’s banking system through sustained reforms anchored by the CBN remained strong, as key indicators reflected improvements across several areas. Capital adequacy ratio for the banking industry was above 15 percent, surpassing the prudential requirement. The ratio of non-performing loans declined from 11 percent in April 2019 to less than 6.1 percent by January 2020. The intervention efforts of the CBN in the agriculture and manufacturing sectors continued to support employment generating activities and improved local production of goods that can be produced in Nigeria.
The onset of the COVID-19 pandemic in the first half of 2020, and the lockdown measures that were put in place to contain the spread of the virus, caused an unprecedented shock to the global economy. Global economic downturn, which was particularly significant in the second quarter of the year, saw declines in growth in advanced and emerging market countries, such as the United States (-9.5 percent), United Kingdom (-20 percent), India (-24 percent) and South Africa (-17 percent). As a result, far-reaching measures were taken by fiscal and monetary authorities in advanced and emerging markets to stabilize their respective economies.
Like other economies, the Nigerian economy was not immune from the COVID-19 shock in 2020. Nigeria’s gross domestic product (GDP) contracted by -3.4 percent in the third quarter, a welcome improvement from the – 6.1 percent recorded in the second quarter. The negative rate of growth was due to a series of external factors in addition to the lockdown measures, imposed in order to curtail the spread of the virus.
Given the impact on COVID-19 on key economic variables, the fiscal and monetary authorities through the coordinated laudable policies of the CBN, took unprecedented measures to prevent any long-term damage to the growth prospects of our economy. The first objective of the CBN was to restore stability to the economy by providing assistance to households and businesses that had been severely affected by the pandemic.
In addition, the CBN sought to stimulate economic activities through targeted interventions in critical sectors such as agriculture, manufacturing, electricity and construction. Cumulatively these intervention efforts represent about 3.5 percent of Nigeria’s GDP.
Some of the critical measures taken by the CBN included a cumulative reduction of the monetary policy rate from 13.5 to 11.5 percent between May and September 2020 in order to spur lending to the economy. A 1-year extension of the moratorium on principal repayments for CBN intervention facilities; regulatory Forbearance was granted to banks to restructure loans given to sectors that were severely affected by the pandemic as well as reduction of the interest rate on CBN intervention loans from 9 to 5 percent.
The CBN also strengthened the Loan to Deposit ratio policy, which has resulted in a significant rise in loans provided by financial institutions to banking customers. Total gross credit rose by over 21 percent over the past year, from N15.5 trillion to N19.54 trillion. In addition, over N738 billion which has been provided as credit to manufacturing related activities by the banks.
Another laudable policy is the creation of N150 billion Targeted Credit Facility (TCF) for affected households and small and medium enterprises through the NIRSAL Microfinance Bank. Already, N149.21 billion has been disbursed to 316,869 beneficiaries. Given the resounding success of this program and its positive impact on output growth, the CBN decided to double this fund to about N300 billion, so as to accommodate many more beneficiaries and boost consumer expenditure which should positively impact output growth of the economy. The Bank also disbursed AgriBusiness/Small and Medium Enterprise Investment Scheme (AGSMEIS) (N92.90 billion to 24,702 beneficiaries), Anchor Borrowers Program (ABP) by the sum of N164.91 billion to 954,279 beneficiaries.
The CBN also pushed for and coordinated the mobilization of key stakeholders in the Nigerian economy through the Coalition against COVID19 (CACOVID), which led to the provision of over N28bn in relief materials to affected households, and the set-up of 39 isolation centers across the country.
The creation of a NGN100 billion intervention fund in loans to pharmaceutical companies and healthcare practitioners intending to expand and strengthen the capacity of our healthcare institutions; so far 60 health care related projects are being funded to the tune of over N60 billion as a result of the intervention as well as the creation of a research fund, which is designed to support the development of vaccines in Nigeria.
The CBN saw to the establishment of a N1 trillion facility in loans to boost local manufacturing and production across critical sectors of the economy. Already, 53 major manufacturing projects, 21 agriculture related projects and 13 service projects are being funded to the tune of over N360 billion from this facility.
The impact of these crucial policies along with the removal of restrictions on movement and resumption of international travel, led to improvement in key indicators of the economy, as several economic activities returned to positive growth thus leading to the country’s exit recession, the shortest experienced in recent time.
A sectoral assessment of economic activities indicates that the economy witnessed positive growth in key sectors such as Information and Communications Technology, Agriculture, Health, Construction, Finance and Insurance and Public Administration. The Agricultural sector continued to record positive growth supported by productivity gains in the sector, interventions by the government, and improved demand for local produce.
The Manufacturing Purchasing Managers Index, in the month of November stood at 50.2 points, indicating an expansion in manufacturing activities after six months of contraction. A total of 18 sectors recorded positive growth in the third quarter relative to 13 sectors in the second quarter, which reflects significant improvement in economic activity.
Furthermore, 36 out of the 46 economic activities tracked by NBS, reflected positive improvements in growth, which includes activities that recorded negative growth. In the Investors and Exporters Window, close to $150m is being traded daily as a result of our measures to sanitize activities in the foreign exchange market. In addition, the Nigerian Stock Exchange All Share index rose by 65 percent between April and November 2020, reflecting improved sentiments by investors on the fundamentals of publicly listed companies.
With the decline in economic activities, the CBN instituted measures in the banking system, in order to prevent an economic crisis from spilling over into a financial crisis. As inaction on would have led to a wave of bankruptcies by firms along with rising unemployment, which would ultimately have a significant impact on the balance sheet of banks. As a result, the CBN ensured that banks made adequate capital provisions to cover for unexpected losses. Supported viable businesses that had been affected by the pandemic through access to our intervention funds as well as enabled banks to restructure loans granted to sectors affected by the pandemic.
As a result of these measures, NPL ratios have remained low at 5.7 percent. The capital adequacy ratio of the banking industry, at 15.5 percent, remains above the prudential requirement percent. In addition, return on earnings in the banking sector was over 21 percent as at October 2020.
Similarly, Other Financial Institutions (OFIs) recorded a remarkable improvement as aggregate assets grew by N582 billion, or 16.94 per cent (year-on-year), to N4.02 trillion as at end-September 2020.
Evidently, the wake of COVID-19 has demonstrated the impact externally induced disruptions could have on the Nigerian economy. It is therefore imperative from an economic as well as a security perspective, that the banking and financial system works to support growth in sectors that have significant growth potential, and can enhance the resilience of the Nigerian economy, in the face of external shocks. This objective the CBN has vigorously pursued, thus leading to Nigeria exiting recession.
Adzuu, a public policy financial advisor, writes from Makurdi, Benue state