The sharp falls in oil prices to an 18-year low of $22pb has precipitated an involuntary change in attitude, perception and economic orientation within the Nigerian policy-making and leadership team.
What was more surprising and impressive was the ability of the fiscal authorities to bite the bullet by slashing the benchmark price by 47.37% to $30pb. This was a necessary but not sufficient condition to contain the fiscal imbalances necessitated by the potential sharp decline in revenues.
The 14.16% cut in expenditure shows a countercyclical move, a typical Keynesian antidote in times of recession tending towards a slump. The monetary authorities are more in a bind, this is because inflation is rising towards 13% at a time when GDP growth is expected to fall to 1.2% in Q1. Will this be transit at the stagflation bus stop before a recession or can Nigeria turn it around and make what is a pressure point into a leverage point?
The audacity to take a tepid step towards price deregulation of refined PMS (daily PMS consumption is up to 54 – 60mn litres/day) and reduce the multiple exchange rate practices. This is by allowing a convergence of rates in which 90% of all transactions will be traded at the I&E window shows that there is light at the end of the tunnel. This is not yet time to celebrate the success of economic reform. However, it shows that Nigeria has a fighting chance to unshackle itself from the unrelenting forces of crony capitalism.
Will there be a recession? – likely but mild
In the event of a fall in GDP growth to 1.5% in Q1 and negative GDP growth in Q2, there is a 45% probability that there could be a mild recession in Q3 with a quick bounce back. This is because of rising external imbalances, negative terms of trade likely to fall from 30 to 19 and a very low level of gross capital formation. The negative multiplier effect of a sharp contraction in aggregate demand (currently estimated at $345bn) due to Covid-19 preventive measures on public gatherings and market places could trigger job layoffs and higher unemployment.
Corporate focus: Presco PLC
Presco Plc recorded an increase of 13.5% in its cost of sales despite a decline in the global price of CPO and this dampened gross profit. A 6.85% decline in its revenue to N19.88bn relative to N21.34bn 2018 could be partly attributed to the almost 11% decline in global crude palm oil prices.
In this edition of the FDC monthly publication, the FDC Think-Tank analyzes these issues and their implications on businesses and the economy at large.
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