Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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- Financial Market
- Fiscal Policy
Nigeria recorded historic GDP contraction in Q2. But who cares? 07 Sep 2020
In Q2 2020, the Nigerian Gross Domestic Product (GDP) contracted by 6.10 per cent. This was the worst quarterly dip in production in the country since the Q1 of 2004, when the GDP contracted by 7.59 per cent (but with growth for the full year rebounding to 9.25%). However, reactions to the latest sharp economic decline has been largely muted, including by the economic commentariat.
Awful, as the economic data was, it was widely expected. The sharp economic decline was caused by the acutely negative impacts of the COVID-19 pandemic. After U.S. oil prices tanked to a negative territory for the first time in history and Brent crude hit 18-year low at about $20 a barrel on April 20 due to the coronavirus disease that broke out in China’s Wuhan province and spread around the world, acutely disrupting global supply chains, the spot price for Brent crude averaged $29.34 per barrel (pb) in Q2, compared to $63.65 pb in January. Overall economic performance in Nigeria remains highly positively correlated to oil prices. Whereas the proportion of the economy accounted for by oil has dropped to 9 per cent, oil revenue still accounts for over 50 per cent and 90 per cent of government’s total revenue and foreign exchange earnings, respectively. Foreign investors also factor oil prices in their bets on Nigeria.
The COVID-19 lockdowns and physical distancing protocols, put in place since the end of March, had many businesses and government offices shuttered or only partially opened throughout Q2. The IMF had predicted that the cumulative effect of fallen oil prices and COVID-19 economic disruption would cause the Nigerian economy to shrink by 5.4 per cent in 2020. And ahead of the release of the country’s latest GDP data, many advanced economies were already in COVID-19-induced recession as the pandemic worsened their existing economic weaknesses. In the OECD countries, a group of mostly advanced economies, real GDP growth in Q2 was an unprecedented -9.8 per cent, according to provisional data.
Given the horrendous economic data from the more developed countries, but overlooking or unaware of the deep concern and responses by their policymakers, a media aide to President Muhammadu Buhari, Femi Adesina, said the Nigerian data was not one of the world’s worst. Indeed, ahead of the release of the new Nigerian GDP data on August 24th, government’s fiscal policy remained business as usual. The administration continued to focus on its much-ballyhooed investment in physical infrastructures.
But the economic data, if put in some perspectives, would show why the government should be really worried. In Q2 2020, the value of the GDP in dollar terms, fell to approximately $94 billion. That was less than the size of the GDP in 2002, which was $95.3 billion, according to data from the World Bank. But whereas the Nigerian population was 128.6 million in 2002, it had grown to over 200 million in 2020. With income inequality much acute now than 18 years ago, it becomes really clear how economically worse off the average Nigerian has become. In any case, poverty has been rising in the country over the last few years.
Occasionally, senior officials of the Nigerian government come clean on their lack of expectation for the lot of the poor to improve. On one of such occasions of rare truth telling, if not hubris, David Mark, when he was the Minister of Communications in the military government of General Ibrahim Babangida, said telephone was not for the poor. Infrastructure development headlined by rail and airport projects, which the poor would hardly be able to afford to use, have been the obsession of the Buhari administration. In the 2016 Appropriation Act, N500 billion was approved for the Social Investment Programme. But the implementation of the programme, which presumably would immediately benefit poor households and unemployed youth, was entirely delayed for one year. The government, however, largely implemented the N1.57 trillion capital expenditure on physical infrastructure projects that created insignificant number of local jobs.
If poor Nigerians are not expected to have access to highfalutin infrastructures, are they also to cope with lack of access to healthcare? This would seem to be the official expectation. While failing to invest in healthcare in the country, senior government officials no longer use Nigerian hospitals for even routine medical check-up or treatment. They are medical tourists to the Western and Eastern countries. Many Nigerians had thought that this trend would end for good when international travel restrictions forced members of the officialdom to use the local health facilities. Such a silver lining of COVID-19 will hardly materialise. Once Nigeria and those countries eased their travel restrictions, the Nigerian medical tourists simply ignored the subsisting international travel ban in the country, hopped on presidential and private jets to address their healthcare needs abroad.
Despite the evidence to the contrary, the poor is taken to have a limitless coping capacity in their worsening privation. Rather than coping with their poverty, as the government presumes, Nigerians are dying because they are poor. In 2017, Nigeria accounted for 19 per cent of global malaria deaths, according to data by the World Health Organisation (WHO). Nigerian poor are more vulnerable to the disease because they are not able to afford both the preventive measures as well as the recommended treatment for malaria. Because of endemic poverty, maternal deaths and infant mortality are also disproportionately high in the country, compared to other countries. And in the northeast, the poorest region of the country, poor Nigerians are both the foot soldiers and victims of the unending, deadly insurgency by Boko Haram.
In 2019, President Buhari announced his commitment on taking 100 million Nigerians out of poverty over the next 10 years. One year later, the credible action remains the acknowledgement that at least half of the country’s population is poor. But instead of being lifted out of poverty, more Nigerians have since fallen below the poverty line. The COVID-19-induced economic slump has now made the fight against poverty much tougher than before.
Many economists have recently been arguing that GDP growth is not a good indicator for measuring economic progress, including fighting multi-dimensional poverty. But without economic growth, such as it has been in 2020, poverty is bound to increase around the world. Therefore, returning Nigeria to high economic growth in the shortest possible time – not the anaemic GDP growth since 2017 – should become a shared goal. The post-COVID-19 growth has to be both equitable and green.
To address how the country might be able to engineer such growth requires we look back to the past growth trends. The 12 years between 2003 and 2014 featured real GDP growth rate of average 6 per cent. But given the estimate for the current year, inflation-adjusted GDP growth rate is expected to average 1 per cent between 2015 and 2020. Clearly, the growth strategy of the past six years has failed to deliver against the challenges, including low oil prices and COVID-19 disruptions.
But while high oil prices boosted GDP in the 12-year period mentioned, they do not fully explain the growth trend. Two major sectoral reforms complemented the uptrend in oil prices to accelerate the economic growth. One of the specific sector reforms was the competitive auction of mobile spectrum for GSM. While the reform was launched earlier, it gained more strength over the years, crowding-in significant foreign and domestic investments. The second reform was the banking industry consolidation programme, which also mobilised an unprecedented scale of domestic capital in the sector and attracted significant amount of foreign investment.
Thus, the challenge of economic growth in Nigeria today requires the identification of some sectors for effective reform that would help mobilise both domestic and foreign investments. The current fiscal strategy that is led by government borrowing has only created challenges for growth by failing to co-opt the local private sector.
Among others, two sectors that have the potential to boost domestic production and private sector investment are power and agriculture. The privatisation of the generation and distribution assets in the power sector in 2013 has seemingly become an impediment to attracting the required quantum investment in the sector subsequently. The government must overcome the challenges in the sector by addressing the existing oligopolies in power generation and distribution. Investment in renewable energy needs to be unlocked as well.
With regard to agriculture, government at both federal and state levels need to end communal clashes in the predominantly agricultural communities. The lack of political will to address deadly clashes between pastoralists and farming communities is a major obstacle to boosting investment in the agriculture sector. The cowardice of investment capital is well known. Conflict – especially fatal clashes – and investing don’t mix.
It is absolutely important for Nigeria to rebound to high economic growth at the shortest possible time. The country cannot afford to allow poverty to continue to run riot.
Jide Akintunde is Managing Editor, Financial Nigeria publications. He is also Director, Nigerian Development and Finance Forum.