E-Financial
What Next for Nigeria as Recession Stages a Comeback?
By Lukman Otunuga, Senior Research Analyst at FXTM
If the Nigerian economy needs more proof that it is wise to diversify away from a heavy dependence on the Oil industry, the latest recession and threat to government revenues ought to do the job.
The country’s ongoing battle to reach healthy growth is under threat thanks to an unprecedented Oil price crash triggered by the coronavirus pandemic back in March 2020. Africa’s largest economy has sunk into its second recession within five years, shrinking by 3.6 percent in the third quarter versus a 6.1 percent contraction in the second quarter. Oil production fell to 1.67 million barrels per day (bpd) from 1.81 million bpd in the previous quarter. The ominous signs are reminiscent of the third quarter of 2016 when the economy contracted for over a year.
The biggest vulnerability is the outsized contribution that the Oil industry makes to the state coffers. In times of strong Oil prices, the industry accounts for around 90 percent of foreign exchange earnings and a handsome 50 percent of government revenues. The plunge in oil prices – which reached sub-zero levels in the wake of the pandemic – dragged on the economy’s recovery from the contraction in 2016.
Government coffers face the prospect of cash flow drying up and the accompanying, unwelcome consequences. These include the prospect of austerity measures, job and salary cuts in the state sector, a reduction in development projects and social protection subsidies along with a heavier reliance on bail-out funds from the IMF and other international lenders.
The IMF projects a 4.3 percent contraction in Nigeria’s GDP this year, the biggest drop in nearly four decades. For the man on the street, this means the threat of unemployment, inflation and soaring food prices. Already, more than half of Nigerians are unemployed in this dire economic scenario. On top of that, a Dollar shortage negatively impacts the private sector’s imports of raw materials and equipment.
Additional vulnerabilities are apparent in the banking sector, which had a N19.54 trillion credit exposure to the weakened real economy in the third quarter, up by N290.13 billion in comparison to the end of August. When added to the state sector’s woes, the results are the triple threats of sovereign debt defaults, bank credit defaults and the state’s reduced capacity to bail out the banking sector.
There’s a chance it’s not too late to avert the worst consequences. On the brighter side, earlier this year, the Central Bank of Nigeria (CBN) took some necessary steps to unify its exchange rates and devalued the Naira by 20 percent, satisfying the World Bank and IMF and opening the door to credit lifelines from international lenders.
Equally important, several international pharmaceutical companies are poised to release their COVID-19 vaccines as early as the end of 2020. While it will take several more months for the vaccinations to progress and short-term uncertainty is expected to prevail, the light at the end of the pandemic tunnel has finally appeared.
Nigeria’s first quarter 2021 outlook is likely to remain influenced by the same themes of pandemic pressures, suppressed Oil prices, shaky demand for Oil, and economic weaknesses. The country is expected to exit the recession by the end of Q1, according to Minister of Finance, Budget and National Planning, Hajiya Zainab Ahmed.
While these are promising signs, the major question is whether the 2021 state budget can revive Africa’s largest economy and get it back on track towards healthy growth. At N13.08 trillion, the budget is over 20 percent higher than the revised 2020 budget. Nigeria plans to borrow N5.2 trillion and the Finance Ministry takes the relatively bullish position that GDP will grow by three percent. Benchmark oil prices are seen at $40 per barrel and the Oil production estimate is 1.6 million bpd. Inflation is expected to close at 11.95 percent.
In closing, Nigeria’s short-term ability to defeat the recession by the end of Q1 depends on two key factors: how quickly the COVID-19 vaccination reaches the population and how fast demand for Oil rises. In the long term, the importance of diversification cannot be underestimated for the economy to be balanced and more resilient against shocks.
A new European Investment Bank (EIB) research released yesterday shows the number of fintech companies in Africa has nearly tripled since 2020, boosting access to finance for people and businesses across the continent.
The report Finance in Africa 2024 highlights both developments in the African financial sector and constraints to the region’s economic progress.
According to the report, Africa’s fintech sector is prospering as digital finance grows at a faster rate than traditional banks.
The EIB report says the number of African companies offering new financial services increased from 450 in 2020 to 1,263 at the beginning of 2024.
“Fintech is revolutionising the way we think about finance in Africa,” says EIB vice-president Thomas Östros. “By leveraging technology, we can improve access to finance for millions and foster sustainable economic growth.”
The Finance in Africa report includes data from the ninth annual EIB Banking in Africa survey that details diverse challenges and confirms resilience of the African banking sector.
“While we see some signs of improvement, the high cost of finance remains a source of concern,” says EIB chief economist Debora Revoltella. “As we navigate the dual challenges of climate change and the digital transformation, the role of multilateral development bank lending is even more relevant in supporting sustainable growth on the continent.”
Central Bank of Nigeria (CBN) has authorized banks to trade with foreign currency deposits made under its new amnesty initiative, the “Disclosure Scheme.”
This directive, intended to boost transparency and economic resilience, was issued on November 5 and signed by CBN officials John Sonojah and Adetona Adedeji.
The “Disclosure Scheme,” launched on October 31, offers individuals and businesses a nine-month window to deposit foreign currencies with amnesty assurances, aiming to strengthen Nigeria’s financial sector.
According to CBN’s guidelines, banks—including commercial, merchant, and non-interest banks (CMNIBs)—can trade these foreign currency deposits, known as Internationally Tradable Foreign Currencies (ITFCs), unless participants choose to invest them directly.
However, banks must ensure the funds remain available to depositors upon request.
CBN outlined the role of banks in facilitating this scheme. Responsibilities include opening designated domiciliary accounts, issuing receipts within 24 hours of deposit, and maintaining confidentiality as per Nigerian data protection laws.
Additionally, banks are required to report all ITFC transactions and ensure compliance with regulatory frameworks, including anti-money laundering and terrorism financing laws.
Participants in the scheme can convert foreign currency deposits to naira at the prevailing exchange rate without restrictions on withdrawals.
The scheme’s transparency measures, combined with the flexibility for participants to manage their foreign deposits, are designed to build confidence and encourage wider participation.
9 Payment Service Bank (9PSB), a leading digital payment service provider committed to advancing financial inclusion in Nigeria, observed World Savings Day 2024 by conducting a financial literacy and mentorship programme for students at Fountain Heights Secondary School in Surulere, Lagos.
This initiative aligns with the Central Bank of Nigeria’s (CBN) directive for all financial institutions to implement financial literacy programmes aimed at students, youth, and the public. The goal is to instill a culture of financial discipline, savings, and prudent money management practices among Nigerians.
At the event, Tolani Jemi-Alade, Chief of Business Planning, Operations, and Resources at 9PSB, addressed the students, underscoring the importance of cultivating positive financial habits, particularly considering economic uncertainties. She stressed the need for young individuals to integrate into the formal financial system, stating,
“We encourage every young person with a regular income to open a bank account as an essential step towards financial independence and savings for future needs. Money is necessary for day-to-day transactions and to manage unforeseen circumstances. Early planning is crucial, as these needs are inevitable.”
Tolani further highlighted the significance of World Savings Day, as championed by CBN, which aims to raise awareness of financial literacy and promote a culture of saving, particularly among students and youth. She emphasized the importance of understanding and leveraging formal financial services for long-term financial security.
Oladimeji Saka, Lead for Retail Banking and Customer Acquisition at 9PSB, echoed these sentiments, noting that financial literacy should begin at an early age. He advised that parents play an instrumental role in guiding their children through transitional stages to adulthood, equipping them with the necessary financial knowledge to manage their finances responsibly.
In his remarks, the Vice Principal Academics, Mr. Romanus Emegwakor, who represented the Principal of Fountain Heights Secondary School, expressed his gratitude to 9PSB for their commitment to empowering students with financial knowledge.
“We are extremely appreciative of 9PSB for this invaluable financial literacy programme. It is crucial for our students to understand the significance of financial discipline, and we believe this initiative will help them develop the necessary skills to make informed financial decisions in the future,” he said.
World Savings Day is an annual global campaign dedicated to educating individuals, particularly the youth, on the importance of prudent financial planning and saving through formal banking systems.
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