Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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Subjects of Interest
- Financial Market
- Fiscal Policy
The recession is less the problem than weak recovery 07 Dec 2020
By the time the current recession in Nigeria was confirmed last month by official data, the worst phase of the economic slump was probably in the past. GDP growth rate is a lagging indicator. It tells of what happened at least in the preceding quarter. By the time the official data is released, the economic reality would have changed.
In Q2 2020, the GDP contracted by 6.10 per cent. With the Q3 data showing a contraction of 3.62 per cent, the two consecutive quarters of negative growth rates meant the economy had entered a recession. But according to the projection by the IMF, the economy would contract by 4.3 per cent in the 2020 calendar year and return to a positive annual growth rate of 1.7 per cent in 2021. The current recession would thus be short-lived. Growth is likely to return to positive as early as Q1 2021.
Therefore, the recession is not what should be agitating Nigerians. Rather, we should be more concerned about the prospect of a weak recovery. Five consecutive quarters of negative growth between Q1 2016 and Q1 2017 were followed by three years of anaemic growth. Between 2017 and 2019, the GDP grew at average 1.65 per cent. Being well below 2.6 per cent estimate of the country's population growth rate, and overlooking uneven distribution of the gains of economic growth among the citizens, little wonder poverty was increasing in the country in those years instead of decreasing.
The recession in 2016 was directly caused by a cyclical collapse in the prices of crude oil in the international market. However, two factors are responsible for the current negative macro trend. Effective from the end of March this year, the federal and state governments announced lockdown measures to control the spread of the COVID-19 pandemic, thereby shuttering the economy for months. Similar lockdown measures around the world slashed demand for crude oil and the prices of the commodity. This adversely affected the Nigerian government's revenue and the economy, both of which are heavily dependent on proceeds from oil export.
The unprecedented combination of a major public health crisis and oil price collapse meant the depth of the current recession would be historic. That the recession is the second in five years of the administration of President Muhammadu Buhari, and the deepest in 36 years, have generated a political hue and cry. But this recession was inescapable. The impact of the COVID-19 lockdowns alone saw many countries that have good track records in economic management post economic contractions of historic depths. The US economy entered recession after its GDP contracted by 5 per cent in Q1 2020 and a whopping 31.4 per cent in Q2. But the economy roared back with 33.1 per cent growth rate in Q3. Similar economic rebound is needed in Nigeria; but, sadly, it is improbable it would be achieved.
There are fundamental issues that would impede strong economic performance in Nigeria post-2020. Many of these factors have been well discussed by pundits, making a rehash of them of little use. But offering different perspectives on the same issues may be helpful, as below.
First, the political courage to implement salient policy solutions has been lacking in Nigeria. Some of the oft-repeated solutions for the political economy include restructuring the country to a true federal system to improve internal and external competitiveness of the economy, economic diversification, separation of regulation from operation in the extractive industry, market-based exchange rate, and even including electing a competent president. The country is nowhere in implementing any of these solutions. Although the citizens like to blame everything on the government, they have so far refused to vote for the best candidate for managing the economy during elections. Everyone seems to prefer to cope with, or complain about, the problems rather than implement the solutions.
Second, there is an egregious absentmindedness to planning in Nigeria. For instance, the government claims it wants to diversify the economy. But the two sector-specific headline targets set in the Medium-term Expenditure Framework (MTEF) – the three-year rolling plan mechanism of the government – are oil price and oil production benchmarks. After formulating the budget with these benchmarks and the fixed dollar exchange rate advised by their combination, the government then proceeds year-long harping on economic diversification, whereas oil was the bedrock of its fiscal plan.
I recently submitted to a technical working group on the economy formed by the government a suggestion that we develop a composite benchmark price for key exportable commodities. With this, a broad range of commodities, and not solely oil, would have necessary fiscal policy attention. Of course, this proposal does not say the commodities must be exported raw. But such solutions are easier said than done and, therefore, ignored.
Third, the government has been unwilling to adopt a more pragmatic policy of making adequate investment in the people – through the provision of public education, healthcare and support for small businesses. In downplaying the importance of these sectors by grossly underinvesting in them, the government is betting on alternative long-term investment in infrastructure projects that evidently have had negligible impacts on job creation and economic growth in the country.
The failure of the infrastructure strategy of the recent years is apparent. With the completion dates for the projects delayed by many years, like the Lagos – Ibadan Expressway and the Lagos Rail Mass Transit System that was initially expected to be completed in 2011 but is now planned to become operational in 2022, the projected economic impacts of the projects are also delayed at best. But such projects also affect productivity in other sectors, as funding for one project often means others are kept on hold. A new infrastructure project in Nigeria also affects the functioning of the existing ones, generally because of lack of maintenance. In the case of commuting from Abuja to Kaduna, the new rail line connecting the two cities has more or less led to near-abandonment of the Abuja – Kaduna Expressway where armed robbery attacks and kidnapping for ransom by bandits have become very regular.
Finally, the fiscal space for the government to implement growth policies has become severely limited. This is as a result of dwindling revenue. Also, many traditional lenders to the country have become wary of the level of indebtedness of the country. Whereas Nigeria's debt-to-GDP ratio is relatively low, the concern is that over 60 per cent of government's revenue is already being used to meet its debt service obligations. So, whereas the Buhari administration may want to continue its borrowing binge, which has seen the outstanding public debt increase by N18.9 trillion in five years, creditors are concerned about the country's debt sustainability.
A weak recovery after the current recession would not augur well for the country. Crippling poverty has set many citizens' teeth on edge – particularly the youth, whose peaceful protest against police brutality in October was brutally crushed by military intervention. It is of utmost importance that social investments targeting poor and unemployed Nigerians become mainstream public policy from 2021. Such policies should seek to boost consumption of locally-made products among the generality of Nigerians, thereby raising domestic production.
Also, Nigeria needs political stability to buy time for policies that have long-term gestation, like investments in education, healthcare and infrastructures. This is why the government cannot continue to prevaricate in implementing the solutions to the political issues besetting the country.