A Rethink of the Impact of Covid-19 on the External Sector of the Nigerian Economy

The external sector is generally regarded as the pivot of the Nigeria macroeconomic condition given the magnitude and the speed at which shocks to the sector transmit to other macroeconomic sectors of the economy. The study therefore examines the impact of the health crisis (COVID 19) on the external sector of Nigeria economy with the overarching objective of identifying and quantitatively estimating the effect on the various components of the sector. Due to paucity of data and the heterogeneous nature of the components of external sector, a combination of approaches was employed in the analysis, including descriptive, trend and econometric technique based on Structural Vector Autoregressive (SVAR) model, with data spanning 1981-2020q1. The descriptive analysis reveals that the major source of shock to the current account during the period emanated from drastic slowdown in export demand, culminating in a plunge of crude oil price by about 80 per cent with the attendant deterioration in current account balances. Other components of current account like net transfers to government and net remittances equally recorded significant decline with the projection showing a decline of 12.9 and 8.8 percent, respectively, in 2020. The results of SVAR model simulation under different scenarios show that adjustment of selected macroeconomic variables on account of the pandemic would have varying effects on different components of current account. For example, a reduction of interest rate by 0.55 percent would increase the level of import by 0.07 percent while a depreciation of the exchange rate by 2 percent would increase import by 0.26 percent. On the contrary, the reduction of interest rate by 0.55 percent would increase the level of exports by 0.19 percent while depreciation of exchange rate by 2.13 percent would increase exports by 0.19 percent. Although exchange rate depreciation tends to increase level of export, the net effect shows that it worsens trade balance given that the associated increase in imports exceeds the increase in export. This invariably suggests that an optimal mix of policy would be required to achieve a stable macroeconomic environment. Among others, policy measures that would drive lending rates towards a single-digit may be a preferable option in addition to the need to embrace import substitution strategy to sustainably drive down the import bill.