A vaccine, a seat across from the IMF, and the economy

Almost three months into the global pandemic, the scorecards for most economies are in. The first quarter of this year was awful for just about every country in the world, even though most did not start responding to the challenge posed by COVID-19, through restrictions on movement, until mid-March. This latter reason is why most commentators are sure that output numbers for most economies will be worse this quarter than they were in the first three months of the year. Inflation, unemployment, and business bankruptcy numbers currently support this outlook. Technically, therefore, the global economy will be in recession by the end of June.

As befitting the first country to respond to the lockdown, and the most draconian implementer of the restrictions on movement that best describe the global response to containing the virus’ spread, China was the first country to tentatively lift restrictions as it felt confident that it had put a lid on the virus’ capacity to replicate. Other countries have since gone down this path. Significantly, gauges of purchasing managers’ expectations in these countries have recovered dramatically. Still below the 50 point mark at which economies are still thought to be contracting, most of the recent purchasing managers index scores show a sharp upturn once lockdowns are lifted.

Do these support the view that once a vaccine or treatment is found for the virus, the global recovery will be a sharp one? Not much of that matters right now, given that the best-case timeline for a therapeutic breakthrough is by the third quarter of this year. Until then countries will remain challenged to keep the funding taps open in order that their economies are not completely submerged, as it were. Nowhere is this difficulty more obvious than back home. Here, the dilemma faced by the Buhari government remains where to find the money to finance the boost that the economy requires to stay on an even keel until global demand recovers.

This task, currently, is broader than are the action plans from thinking through the near- to medium-term implications for the economy of the outlook for crude oil. As it is, on the back of its numerous pre-pandemic interventions, the Central Bank of Nigeria (CBN) might already be in violation of the limits imposed on how much it can lend to government by both the CBN Act 2007 and the Fiscal Responsibility Act 2007. Granted that persuaded of a “clear and present threat to national security or sovereignty of the Federal Republic of Nigeria”, the latter Act allows the president, in any given year, to budget for a fiscal deficit “exceeding three percent of the estimated gross domestic product or any sustainable percentage as may be determined by the National Assembly for each financial year”, it is doubtful whether both fiscal and monetary authorities currently have the fire power to spend at the levels needed to move the economy’s dial.

Recourse to the International Monetary Fund (IMF)’s Rapid Financing Instrument (RFI) facility was thus inevitable. While we continue to debate whether the RFI is a loan or not (and on what terms), it is fair to submit that Nigeria’s existing debt burden means that further external borrowing will not be easy, at least, commercially – both in terms of being readily available and affordable. Lebanon and Argentina’s recent debt defaults guarantee that financing conditions for emerging economies will be tougher over the next five years. As an aside, although the RFI may not come with the “conditionalities” associated with the IMF’s traditional balance of payments support arrangement, to the extent that we have to repay the sums given us over a mutually agreed period, and were “required to cooperate with the IMF to make efforts to solve (our) balance of payments difficulties and to describe the general economic policies that (we) proposed to follow”, the RFI is a loan. One to which, in addition, the finance minister is reported to have ascribed a coupon.

Domestic borrowing is of a different order, though. The CBN has kept rates artificially low. Accordingly, some have argued that this is the best time for government to stock up on domestic debt. But as I am minded to point out, an economy is like a latex balloon. You forcibly squeeze air out of any part of this, and a bulge builds up elsewhere. There is a cost to financial repression. And in our current case, rates on naira asset far lower than inflation mean that the naira is headed for “shit money” status. No one with a long-term savings need will seek to hold the naira. And so, the dollarisation of the economy will continue, further imperilling the economy’s outcomes.

A large part of the ongoing conversation about the economy’s outlook is taken by reflection on the severity of this year’s downturn. The loss of oil revenues, already well advanced before the pandemic, will hurt. As will the extinguishing of personal home remittances – with large parts of our diaspora treading water in their respective host countries. The half-hearted lockdowns across the country may turn out to have been far more disruptive of domestic economic activity than they were of the virus’ infection path and mortality rate. All of which mean that an ailing economy may soon be headed for the intensive care unit.

Effective policy responses will matter. But an autarkic mindset, a staple of our policy pronouncements to date, will hurt. Either way, neither offers a useful answer to the question: “How long, therefore, before we are again across the table from the IMF?” However this question is answered, one fact is not in doubt, it would matter for the medium-term health of the Nigerian economy that a vaccine or a treatment for the new coronavirus is found, and very soon