FEATURE ARTICLE

Chamberlain S. Peterside, Ph.DFriday, June 10, 2016
[email protected]
Lagos, Nigeria

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NIGERIA IS HEADING INTO RECESSION, SO WHAT’S NEXT?

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…Is Depression Calling?

ccording to the aggregate output data released by the National Bureau of Statistics (NBS) for the first quarter of 2016, Nigeria could be heading into a recession. With a 0.36% decline in GDP, many sectors are shrinking; including manufacturing, real estate, financial services and crude oil production, which is currently at its lowest level in 25 years (with production volume of 1.4 million barrels per day) according to a statement by the Minister of State for Petroleum, Mr. Ibe Kachikwu. It is not the highly scary depression yet, but that too may not seem far away unless the right steps are taken early. Based on the econometric definition, if a recession persists for several more quarters in a row then depression will ultimately become real. From sustained high single-digit growth rate of an average of about 6% over the last decade (till 2015), Nigeria’s GDP growth dived to 3.5% last year and forecasted to fall even lower in 2016, based on IMF estimate.


Source: National Bureau of Statistics (NBS).

This should indeed be quite disconcerting, but not surprising. For a country that recently achieved the crowning glory of becoming the largest economy on the continent, the continued reliance on a single product for most of its budget revenue (80% of budget derived from oil exports) will definitely be fraught with serious risks. Evidence around the country attests to how tough conditions have become for the ordinary folks and businesses. The chain reaction of low crude oil prices is widespread and deep. Starting with current public finance and budgetary crunch – in which a majority of state governments are either unable to pay or late in paying workers’ salaries; up to the removal of fuel subsidy and low investors’ confidence. All this shouldn’t come as unexpected to any discerning mind.

…Brave New Cyclical World

The economic trend of the post-war world we live for the last 60 years is without question cyclical. The gyrations of the global commodity prices and financial markets have become a common feature. This is even more pronounced in commodity-based and mono-product dependent countries like Nigeria. So the ability to forecast, diversify or build fiscal buffers against such occurrences is very fundamental to withstanding the shock. But beyond that are the actions that governments take during time of crises – how appropriate, bold and timely are those measures? Whereas successive governments in Nigeria are culpable in the inability to diversify the economy despite the opportunities and resources available, the worse of it all, is the shortsightedness and lack of political grit to save for this current rainy day when the going was good.

At its peak in early 2007, the excess crude account was over $20 billion while the foreign reserve was in excess of $40 billion. Thanks to this financial shock-absorber; Nigeria was able to withstand the impact of the global financial meltdown in 2008. Despite the clamor by critics who stood against the building up of the ECA or argued against the subsequent draw-down of funds in the heat of the meltdown, I think it is fair to say that the funds served a very good purpose at the nick of time when it was needed most. That current dire conditions will reverse with time is not in doubt, but rather than dwell in the blame game, how the current President and his economic team respond to the impending calamity will determine if a depression can be averted before things improve or how quickly Nigeria can rebound.


Source: Central Bank of Nigeria, Bloomberg.

…The Right Response Is Crucial

If you ask me, the ongoing crises revolve around two main factors and if addressed decisively will enable Nigeria to ride out the storm – namely the subsidy debacle and Naira exchange rate. All sorts of numbers and arguments have been bandied around on the removal of the subsidy or otherwise as well as on the exchange rate problem. Without sentiments, it is fair to say that the truth lays somewhere in between and that’s where the fact-based wise decision, political will and sound economic judgment of the President will come into play, if he is able to walk the fine line.

There just can’t be wishing away these problems. The numbers are very clear. At its peak in 2012, Nigeria spent well over N1.7 Trillion paying oil subsidy, which constitutes a large chunk of the budget-spend, competing very highly with recurrent expenditure (80%) and debt service payments (30%) and topping expenses on social services or infrastructure. By late last year according to the Minister in State for Petroleum, Nigeria paid over N600 Billion as backlog of debts to petroleum product marketers.

According to empirical evidence, some of these petroleum products already subsidized, (if at all actually imported), ultimately end up in neighboring West African markets where prices are much higher. This has been the practice historically. It is utterly wrong and implausible argument to assert that the common man benefits from petroleum subsidy. On the flip side you can call the perpetrators of this nefarious acts economic pirates or whatever expletive you prefer because when the chips are down it is the market forces that determine economic and social behavior. When prices are skewed and lopsided as they are in the face of over-regulation you are bound to get this sort of results. Therefore, I strongly support the removal of petroleum subsidy.


Source: GlobalPetrolPrices.com

…Strike the Right Balance

Rather than subsidize consumption, the government should aim at supporting domestic production (by artisans, manufacturers and value-adding entrepreneurs) and local refining of crude oil. Instead of dolling out frivolous handouts to the already well-off refined petroleum product importers or subsidizing the lifestyle of middle to high income households with multiple vehicles, the government should target the most disadvantaged and vulnerable citizens (unemployed youths, rural women and children) by providing direct conditional grants and subventions. But more importantly invest heavily in infrastructure (roads, railways and housing) and social services (healthcare and education) that has the capacity for catalyzing economic productivity, create jobs and improve the caliber of human capital available in the country.

On the Naira exchange rate front, most Nigerians recall with nostalgia the favorable exchange rate regime of the 1970s/1980s. Those years are gone for good. The inability or unwillingness to diversify the economy over the last three or more decades or attempt to manage exchange rate volatility via administrative fiat has failed woefully and remains the main cause of the challenges faced today. It is apparent that when every conceivable consumer product (both food and manufactured goods) are imported, including refined petroleum products that gulp a large portion of our forex proceeds, mixed with a declining export earning of our singular lifeline, the outcome is what you see today. No country in the world under current circumstances will earn enough foreign exchange to meet its needs.

The alternative is either to deplete the foreign reserve defending the Naira or curtail imports and tighten forex regulations and risk capital flight or simply freeze most economic activities and wait out the downturn. None of these measures make common sense at all, especially if you consider that it could wreak havoc on the country by stoking social discontent, stifling economic activities and worsen living conditions. Ease the overly restrictive regulations on business activities (such as licensing scheme for petroleum product importation, construction of refineries and power plants and pricing mechanism for this products and services) and redirect government’s attention and expenditure to the critically needful areas with the most multiplier effect (infrastructure investments and human capital development).

The recent CBN announcement after its committee meeting on Tuesday, 24th of May to create a dual forex exchange window and lift restrictions on conversion and capital control is helpful, albeit coming a little too late when recession is already looming. It remains to be seen what immediate impact these measures would have on exchange rate, foreign capital inflow and investor confidence - factors that are quite crucial to stem the current economic slide.

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