Nigeria’s management of the Covid-19 challenge and the oil question

With most of the world entering a management and reopening phase in the covid-19 pandemic, economies are trying to strike a balance between reopening and managing the ongoing public health threat. Africa’s biggest economy, Nigeria, is no exception: having passed through an initial period of lockdown and rapid economic contraction, the country is trying to pick up the pieces while avoiding a second spike in infections and deaths. And while there is some good news, Nigeria’s economy and its relationships with other major economic actors will make recovery complex and challenging.

First, it is important to observe that the pandemic is very much not over. Nigeria has thus far officially recorded over 35,000 cases and nearly 800 confirmed deaths. The rate of new confirmed infections has been declining since the beginning of July, but serious questions remain around how much of the outbreak is being captured by those statistics. In April and May, the northern city of Kano saw a huge uptick in unexplained deaths, resulting in an aggressive (though not always observed) lockdown, but limited testing capacity meant that those deaths were not officially attributed to the coronavirus.

Nationwide – and especially in Lagos, the country’s largest city, and Abuja, the capital – businesses are reopening with social distancing and mask requirements in place. Reopening, which began in early May, was driven less by public health targets and more by the fact that huge numbers of poor and informally-employed Nigerians simply do not have the resources to be locked down for long stretches. Bars, restaurants and religious gatherings remain mostly closed, with state governments left in charge of determining criteria for reopening. Intra-state travel, which had been halted in an effort to prevent the spread of covid-19 from high- to low-incidence areas, has been resumed, with domestic flights operating again as of early July. International flights, however, remain shut down, and the government has not yet given any indication as to when they might resume.

As with many other countries, the combination of public fear of the virus and the measures taken to control it caused substantial economic disruption starting in March. While the National Bureau of Statistics no longer has the resources to track national unemployment on an ongoing basis, as part of its covid-19 data collection it reported a drop to 43% employment in April/May from a pre-pandemic baseline of 85%. That had recovered to 71% by June; a substantial but not complete rebound, in other words. However, as a phone survey, the NBS’s research does not reflect the portion of the Nigerian population that does not have regular access to a phone. (They do note that nearly a quarter of responding households did not have sufficient access to soap to maintain recommended hygiene standards.)

At the national level, the biggest structural issue Nigeria faces is the price of oil. Nigeria is a massively oil-dependent economy; before the pandemic, the government estimated that a minimum benchmark price of $57/barrel was necessary to sustain its planned level of expenditure. But that assumption has been buffeted by both supply and demand; oil wasn’t even holding steady over $50 when the world went into lockdown, sending demand and prices plummeting to 20-year lows. While both have recovered, oil is currently trading well below the benchmark, at roughly $40 a barrel, while government expenditures on coronavirus relief measures have sharply increased.

That has several knock-on effects. First, oil provides about 90% of Nigeria’s foreign exchange income and supplies roughly half its federal budget; disruptions to the oil market therefore inordinately impact its fiscal policy. Second, oil revenue contributes substantially to not only the federal budget but the budget of the individual states (in Nigeria’s federal system), which manage much of the day-to-day public health and economic support aspects of the crisis, creating shortages just as expenditures rise. And third, lowered prices allow the government to eliminate, for now, gasoline subsidies, saving money without passing the costs on to consumers. Unfortunately, doing so simply moves the problem down the road to when oil prices rise, forcing the government to either reinstate subsidies, which are unpopular with key creditors such as the IMF, or risk consumer revolt by forcing Nigerian drivers to pay more to travel.

If prices stabilize at the new, lower level – e.g. assuming a prolonged global slowdown – it will be increasingly difficult for Nigeria to continue to support its relief programs along with its ordinary levels of spending; painful cuts may become necessary in a country already struggling with persistent high unemployment and poverty.

As a stopgap measure, Nigeria has applied for and received a $3.4 bn emergency IMF loan, but will need further cash injections quickly. The government is seeking roughly $7 billion in loans from multilateral institutions to supplement it, and the World Bank is considering a $3 billion budget support loan. But the World Bank will push for reforms as a lending condition, especially on gasoline subsidies and monetary policy. And as the government tries to fill its funding shortfall with money from national, multilateral and non-state sources, the conditions of lending will pile up, and may not be reconcilable: after all, China’s interests in Nigeria are not the same as the World Bank’s. The PRC has become a major investor in Nigeria, especially in its rail and aviation infrastructure, though local business conditions remain an obstacle for many Chinese firms hoping to deepen the relationship.

In the long term, Nigeria will need to diversify away from oil as a primary revenue source, especially if much of the world uses the recovery from the pandemic to accelerate the transition to renewable energy. A more diversified economy will make it easier to navigate shocks like the pandemic – and given its rapid population growth and large urban centers vulnerable to sea level rise, the impact of climate change on Nigeria is likely to dwarf the impact of covid-19. But the nation’s handling of this challenge over the coming weeks and months may offer some insights on how it will prepare itself for that more uncertain future.