Over the years, Nigeria depends on the crude oil proceeds as the major source of national income, international trade and foreign reserves. This dependence coupled with the huge cost of running and maintaining the political structure among other factors proves disastrous by leading the economy into the worst decline in decades.
The oil price shock which took off in mid-2014 severely affected the Nigerian economy. In 2015, the economy slowed sharply as annual real GDP growth declined to 2.7%y/y from 6.2%y/y in 2014. By 2016, the economy recorded its first recession since 1991, recording a growth of -1.5%y/y as oil production shortages exacerbated the decrease in the oil price.
The International Monetary Fund has forecast a 5.4-percent drop in Nigeria’s GDP this year. In June 2020 the World Bank noted the macroeconomic impact of the COVID-19 pandemic will likely be significant, even if Nigeria manages to curb the spread of the virus. Oil constitute more than 80% of Nigeria’s exports, 30% of its banking-sector credit, and 50% of the overall government earnings.
With the drop in oil prices, government revenues are expected to fall from an already low 8% of GDP in 2019 to a projected 5% in 2020. This comes at a time when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy.
Simultaneously, the pandemic has also led to a fall in private investment due to greater uncertainty, and is expected to reduce remittances to Nigerian households, which in recent years have been larger than the combined amount of foreign direct investment and overseas development assistance.
Currently, Nigeria is in 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, growth has been fragile and COVID-19 has hit the economy hard, amid low oil prices. Africa’s biggest economy to contract 3.4 percent in 2020.
The Nigerian economy dive into recession as the country’s GDP in real terms fallen by -3.62% YoY in Q3 2020, the second contraction in 2020, according to official data published.
The economic recession in Nigeria is caused by both endogenous and exogenous factors. Job losses, unemployment, sharp drop in market capitalization and falling external reserves etc etc, etc are all integral element of recession which per se is a representation of distinct and objectively identifiable episodes in which the dynamic factors that drive economic growth the technological progress, population growth and capital accumulation – are replaced by distinctly different dynamic in which loss income in some sectors feedback into decline in output of others.
The continent’s top oil producer and exporter rely on crude sales for 90 percent of foreign exchange earnings. Nigeria’s GDP in the third quarter of 2020 stood at N39 trillion, the largest in Africa. Nigeria normally accounts for an average output of two million barrels per day. But the effects of the pandemic and low oil prices have cut production to around 1.4 million barrels.
After Nigeria’s first confirmed COVID-19 case in late February, lockdowns were imposed from late March until early May in the main cities economic hub Lagos and the capital, Abuja. Lockdowns were also imposed on some of the country’s other states and a prohibition was placed on state-to-state travel.
The oil sector declined 13.9%, following a 6.6% slump in the second quarter, amid lower crude oil production (1.67 million barrels per day, down from 1.81 mbps in Q2 and 2.04 mbps a year ago). Meanwhile, the non-oil sector shrank 2.5%, less than 6.1% in the Q2 amid softer declines in transportation & storage (-43% vs -49%); accommodation & food service (-22.6% vs -40.2%); trade (-12.1% vs -17%) and manufacturing (-1.5% vs -8.8%). Meantime, the information & communication continued to grow notably (14.6% vs 16.5%). On a quarterly basis, the GDP grew 12.1%, the most since at least the Q2 of 2010, recovering sharply from a 5% contraction in the previous quarter.
The central bank took further steps this year to unify its exchange rates and devalued the mire by 20 per cent, moves the World Bank, the IMF and many economists had long encouraged. The government has also used the crisis created by the pandemic to take steps toward introducing a series of key reforms that have long been seen as indispensable for promoting sustainable growth.
These covers fast-tracking key oil industry reforms that have been in the works for two decades, dropping down a burdensome fuel subsidy that costs the government billions every year, raising VAT and revamping the tariff for electricity that had turned the power sector uneconomical.
The extent to which the Nigerian economy moves towards its near-term development aspirations is dependent upon the success of its economic policies. While, diversification of the Nigerian economy by prioritizing agriculture and manufacturing, massive fiscal stimulus plan to enhance domestic infrastructure and production, re-injection of recovered loots, will ameliorate the effects of current recession and strengthen the structures of the economy in order to prevent reoccurrence of economic recession in the country.