The impending recession and how governments can assist businesses

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By Olusegun Koiki

 

While Nigerians were still battling with the effect of the lockdown of economic activities imposed by the federal and state governments in their efforts aimed at containing the community spread of the coronavirus disease (COVID-19), the federal government relayed the scary piece of information from the World Bank that the country’s economy would go into recession as a result of the coronavirus pandemic.

Mrs Zainab Ahmed, the Minister of Finance, Budget and National Planning, at the briefing of State House correspondents after a recent NEC meeting, said the fall in crude oil price in the international market, as a result of the COVID-19 pandemic, has worsened the economic situation of the country, leading to World Bank’s prediction of recession for Nigeria. According to her, “The World Bank maintains that the impact of the COVID-19 on Nigeria will lead to severe amplified human and economic cost, which will move the country into a recession.”

 

This is not cheering news at all, considering the facts that businesses in the country are yet to fully recover from the recession of 2016/2017, that economic recessions have lasting consequences on the people and businesses, and that the looming economic crisis would inflict more misery on the country through an increase in the poverty rate. Moreover, the fact that is making this prediction even scarier is that, while the country is yet to officially fall into recession, businesses in the country are already feeling the brunt of the COVID-19 economic lockdown.

 

Recently, one of the biggest banks in the country retrenched quite a huge number of its staff and placed those staff who were not retrenched on salary cuts of up to 40 per cent, citing the effects of the COVID-19 economic lockdown. Other banks and financial institutions were planning theirs and would have announced their own measures if the Central Bank of Nigeria (CBN) and the National Pension Commission (PenCom) did not intervene and order the banks and pension funds administrators under their respective purviews, not to layoff or place salary cuts on any of its staff as a result of the effects of the COVID-19 pandemic without the regulator’s express permission.

 

Also, the Federal Airports Authority of Nigeria (FAAN) recently announced a salary cut for its workers. In a circular to staff dated May 19, 2020, the Management of FAAN said the reduction in salaries is due to airport closures occasioned by the coronavirus pandemic. The memo, which was signed by Musa Mohammed, the agency’s General Manager of Administration, read thus: “This is to notify all staff that due to the dwindling revenue generation amidst COVID-19 pandemic, management may not be able to pay full salary to staff as from May 2020.” It took the uproar by Nigerians for the government agency to rescind on this decision.

 

These employees could be said to be especially lucky, as many of their contemporaries in other sectors of the economy are not so lucky. Many micro, medium and small scale enterprises (MSMEs), and even the large corporations, cutting across most sectors of the economy have either formally terminated or placed between 30 to 70 per cent of their staff on no-pay forced to leave as a result of the loss of business on account of the effects of the pandemic. Those most affected are the workers in the private sectors of aviation, interstate transportation, marketing and events management, food vending, hospitality and entertainment, hospitals businesses, etc.

 

The harsh consequences of a recession are a major reason the government must work to ensure that the country does not get into a recession, and in the event, this COVID-19-induced recession happens, to ensure that it gets out of it as quickly as possible. One of the surest ways of making this happen is for the government to support and empower the businesses, especially those promising ones in the MSMEs sector, and major start-ups etc. For example, Jumia Nigeria and many other businesses, especially in the e-commerce and logistics sectors have shown tremendous promise in the face of the pandemic thus pointing to the possible areas that government could extend support to in its efforts towards curbing the adverse economic effects of the pandemic in the country.

The theory of the interrelatedness of the macro and microeconomics of every country shows how effective this approach could be in our current situation. In Nigeria, according to the Nigerian Bureau of Statistics (NBS), the MSMEs sector has over 37 million businesses and start-ups like Jumia Nigeria, who employ over 54 million skilled and unskilled labour and contribute about 54 per cent to GDP of the country. This means that if this sector is empowered to run optimally, it will obviously boost the country’s GDP, thus helping in keeping recession at bay.

 

One of the major effects of the COVID-19 lockdown and the recession that may follow on businesses, especially the MSMEs is the solvency issues, resulting from low patronage, operational losses and reduced access to financing. Small businesses and start-ups are, in many ways, the hardest hit by a recession. Without the financial or negotiating power of larger corporations, and frequently with severely restricted credit flows, many MSMEs will be struggling to prevent layoffs or cutbacks.

 

Prior to this period, there still existed a huge gap between the financing needs in this sector and its present realities, which Godwin Emefiele, the Governor CBN, recently put at N48 trillion. The government can address the solvency issues by boosting the MSMEs’ access to finance, through special funding arrangements like funds provision, low-interest rates, credit guarantees and an extended moratorium on loan and credit facilities.

 

Almost all countries across the world that are being faced by similar predictions, including Nigeria, have created special bailout measures to ameliorate the economic effects of the pandemic. In Nigeria, however, the N50 billion intervention fund created by the CBN as a stimulus package for families and MSMEs is relatively too meagre to make the needed impact in the economy. The government should up this ante to reflect, at least, the current financial needs of the MSMEs sector.

Also, governments can also institute some tax measures like tax and duty waivers on some categories of business, tax holidays and reduction in/extended filing time off, tax obligations for businesses in the country. Some analysts have advocated for tax relief for businesses in the frontline of the covid19 like Jumia and other eCommerce companies because they have been playing the role of driver and aggregator for a lot of MSMEs/SMEs. According to them, a well incentivised private sector will not only kick-start the post-COVID-19 economy but will also boost the revenue of the government to ensure that recession, and its ugly consequences are averted.

 

The catch is this, a good proportion of the government revenues comes from defined percentages of the company profits paid as taxes, and the more the profits these companies make, the more the taxes they pay to the government. So, when the government assists these businesses reduce their cost of operations by adopting any of these recommendations, the businesses will make more profits and the government, in turn, will increase its revenues.

 


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