Report: How COVID-19 affects govt expenditure, household consumption in Nigeria

The impact of the coronavirus pandemic does not bode well for the Nigerian economy, given the fragile outlook of the country prior to the outbreak.

According to a report by Brookings, which looked into the economic impact during and post COVID-19, there is rise in government spending through expansionary fiscal policies and increases in healthcare expenditure, as well as a decline in aggregate demand, as all the components indicate through lockdowns.

Meanwhile, the report predicts decline in investments, as there are uncertainties that discourage forward-looking decisions and poor expectations of return on investment. There is already a decline in net exports reflecting in disruption of supply chains for exports, border closure to non-essential and limited markets for exports due to decrease in global demand.

Efforts are already taking shape in Nigeria, the report says, to “bolster aggregate demand through increased government spending and tax cuts for businesses. The public budget increased from N8.83tr in 2019 to N10.59tr in 2020, representing 11 per cent of the Gross Domestic Product, while small businesses have been exempted from company income tax, and the tax rate for medium-sized businesses has been reviewed downwards from 30 per cent to 20 per cent. Unfortunately, the COVID-19 crisis is causing all components of the aggregate demand, except for government purchases, to fall.”

Household consumption also takes a hit following the outbreak. It is reported that with the restriction of movement in some parts of the country, particularly Lagos and Abuja, consumer spending on essential foods and services decreased, with little or no expectation of income during the outbreak.

The report added, “Investments by firms will be impeded largely due to the uncertainties that come with the pandemic – limited knowledge about the duration of the outbreak, the effectiveness of policy measures, and the reaction of economic agents to these measures – as well as negative investor sentiments, which are causing turbulence in capital markets around the world.

“On the other hand, government purchases will increase, as governments, which typically can afford to run budget deficits, utilise fiscal stimulus measures to counteract the fall in consumer spending. However, for governments that are commodity-dependent, the fall in the global demand for commodities stemming from the pandemic will significantly increase their deficits.”

It looked into some other measures that can be taken by the government through policy responses, which can be implemented as recovery strategies to stimulate demand.

The report recommends the following fiscal policy measures:

• The Federal Government should improve efforts towards enhancing the efficiency of the distributive mechanisms to reach households that are worst hit by the pandemic.

• Federal and state revenue service agencies should waive payments on personal and corporate income tax for the second quarter of 2020 considering that the shock has affected the income and profits of households and businesses.

• Central Bank of Nigeria should reconsider the decision taken in January to increase the Cash Reserve Ratio from 22.5 per cent to 27.5 per cent to provide liquidity for banks, so that banks can, in turn, provide credit facilities to the private sector.

• There should be a delay in collection of tax for the worst hit sectors, including maritime, hospitality and tourism to aid their rapid recovery from the steep decline in demand.

• The provision of additional liquidity in the FOREX market should be available, with the CBN establishing a swap facility with the United States Federal Reserve and/or the People’s Bank of China to make available dollar and yen liquidity to financial institutions, investors and exporters.

• The CBN should maintain exchange rate stability through the deployment of external reserves to avoid investors selling off assets denominated in the local currency.