By Peter Egwuatu, Assistant Business Editor
Professor Uche Uwaleke, a Financial Economist, is the President of Association of Capital Market Academics of Nigeria. In this interview, Uwaleke speaks on Nigeria’s plunge into recession and the likely paths to recovery.
Do you agree with the reasons given as being responsible for this recession?
Unlike the recession of 2016 chiefly caused by the sudden crash in crude oil price resulting in a significant fall in government revenue to the extent that several state governments could not pay salaries thereby weakening aggregate demand, the current economic recession in Nigeria is the result of twin shocks coming first from the health crisis occasioned by COVID-19 and government attempts to contain it by imposing restrictions in movements and lockdowns. As you know, international flights were banned by most countries including all forms of public gatherings.
Expectedly, there were disruptions in supply chains, production and exchange which hurt several sectors of the economy such as manufacturing, agriculture, transport, trade, construction, hospitality and education to name just a few. You recall that even schools were shut due to COVID-19.
The second shock came from the collapse of crude oil price given the country’s dependence on the oil sector. I must equally mention that the OPEC+ cut agreement in response to the fall in crude oil price, led to a reduction in the country’s daily oil production.
You recall that the 2020 budget was predicated on an oil output of about 1.8 million barrels per day. The real GDP contraction of -3.62 per cent recorded in Q3 of 2020 was partly caused by the poor performance of the oil sector which witnessed a reduction in average daily oil production to 1.67 million barrels per day. So, in summary, this recession was caused by COVID’19 and collapse in crude oil price. I say this because before the pandemic, the economy was already on the path of growth recording about 2.27 per cent in 2019.
What is the implication of the recession for the ordinary Nigerians and the country as a whole?
Recession as you know is simply the downturn in economic activities. Even before the release of the NBS report, it was obvious even to government that the economy, like many other economies of the world, was in a recession.
The NBS report merely gave it an official status since the economy had gone through two consecutive quarters of negative growth in GDP. Unlike in many other countries also in a recession, that of Nigeria is made worse by the fact that the inflation rate is also on the rise. So, in the Nigerian context, it is actually stagflation. Against this backdrop, the implication is grave for the common man and for Nigerians in general who have been grappling with high cost of living, lower living standards, and for firms’ high cost of production and weak productive capacity. I wish to note that the disappointing performance of the agriculture sector in Q3 2020, at a mere 1.39% growth, worse than the Q2 growth rate, gives cause for concern. The negative impact of food prices is capable of worsening poverty and the health crisis occasioned by poor nutrition. So, by and large, the twin impact of recession and rising inflation otherwise known as stagnation will only impoverish the common man.
Inflation is on the rise, a foreign reserve is dropping and the manufacturing sector is shrinking. How can government encourage production and exports to earn foreign exchange to boost the economy?
Inflation rate was on the rise even before the pandemic hit the economy primarily due to the continuous border closure, increase in Value Added Tax, VAT, and pump price of fuel as well as the scarcity of forex. As you know, inflationary pressure is coming more from food index due in part to insecurity in the food-producing areas of the country. As you rightly noted, the country is experiencing foreign reserves depletion. This is due largely to the point I mentioned earlier about the collapse in oil revenue as well as the exit of foreign investors and reduction in capital importation. Not surprising, therefore, the manufacturing sector, in particular, challenged by lack of forex to import raw materials, is underperforming. For several months now, except for this month, the Purchasing Managers Index, which is an indication of manufacturing activity, has been below the 50 point threshold.
Therefore, to answer your question against this backdrop, government can encourage production and exports by investing in infrastructure, especially power, roads, rail and IT infrastructure in partnership with the private sector. The current plan by the government to have a N15 trillion Infrastructure Fund to be financed by the Central Bank of Nigeria, CBN, AFC, Sovereign Wealth Fund, SWF, and other private sector players, is a step in the right direction. It is also important that the insecurity which hampers production, especially in the agriculture sector should be tackled.
Doing so will help diversify the revenue sources and attract foreign investments which will ultimately shore up foreign reserves.
Was this recession avoidable?
Regarding what the government could have done to avert the economic recession, it is my opinion that given the structure of the Nigerian economy, which you well know is a legacy issue, the present economic recession was inevitable.
No one doubts the fact the pandemic and the sudden collapse of oil prices were unexpected. In particular, the pandemic caught many countries including Nigeria unawares. Expectedly, these countries, both developed and developing, have recorded bigger contraction in real GDP growth.
I think government through the Central Bank responded swiftly with various stimulus packages and interventions which have gone a long way in reducing the size of the recession below projections by international agencies including the International Monetary Fund, IMF.
I must mention that a number of economic policies being implemented now, such as the increase in VAT could have been deferred till 2021 due to its impact on aggregate consumption and inflation.
Recall that I said earlier that the real challenge the economy faces now is stagflation. There is also the issue of insecurity bedeviling the country, which I think could have been better dealt with. On the part of monetary policy, I think the right steps were taken.
Can our monetary and fiscal policies yield positive GDP?
I think, overall, fiscal and monetary policies are in the right direction. In response to the pandemic, government has scaled up the social investment programmes. It has also provided cash support to some households that were seriously affected by COVID-19.
In addition, government came up with an Economic Sustainability Plan, outlying bold measures aimed at helping economic recovery including mass agriculture, housing and investment in infrastructure, especially solar energy.
The major challenge now is its implementation to ensure a quick return of the economy to the growth path.
On its part, the CBN has been deploying its development finance function, beyond the use of the traditional monetary policy tools, to support economic recovery.
I think the policies are in the right direction. I would like to see speed and a sense of urgency, especially concerning the implementation of fiscal policies.
Do you agree with federal government that Nigeria will get out of recession in the first quarter 2021?
I am quite optimistic the Nigerian economy will weather the storm and pull out of recession by the first quarter of next 2021.
My optimism is predicated on the fact that unlike in Europe and America, the country may not have to grapple with a second wave of COVID’19 on a scale similar to what was experienced in Q2 2020.
Consequently, I don’t foresee another round of nationwide lockdowns and movement restrictions.
Secondly, the economy is fast opening up and business confidence is gradually returning. I am sure you are aware of relative improvements in the Purchasing Managers Index which has now crossed the 50 point threshold. You must equally be aware of the current boom in the stock market, especially in recent times. Indeed, the entire financial sector has been resilient with positive performance as indicated in the NBS Q3 2020 report.
Again, the early submission of the 2021 budget proposal and the expectation that its implementation will commence in January hold a lot of promise for economic recovery.
As I mentioned earlier, the impact of the raft of COVID-19 interventions by government should begin to manifest from the first quarter of 2021. Also, the implementation of the government Economic Sustainability Plan will go a long way in assisting economic recovery.
It is equally important to mention that a critical assumption in all these is that the economy will not experience any major shock either coming from the external sector such as another crude oil price shock or another crisis in the magnitude of the one witnessed during the #End SARS nationwide protests.
Is government getting it right in the area of diversification since the petroleum sector still accounts for the huge revenue earned?
With respect to diversification of the export base and creating multiple sources of revenue for the country, this government, like many others before it, has articulated the roadmap in the Economic Recovery and Growth Plan.
The key challenge has been the implementation of the lofty ideas contained in that plan especially in the area of diversification especially through Agriculture, Solid minerals and Tourism. This is not unconnected with bottlenecks in revenue generation for the purpose of executing developmental projects.
In what ways do you think government can do better to take the country out of recession?
Government projects the economy to recover next year with a real GDP growth rate projected at three percent. While I have no doubt a positive GDP growth rate will be recorded in 2021, I think a growth rate of three percent, though desirable, appears a little ambitious given the present state of the economy.
To quicken economic recovery, the implementation of the 2021 budget, especially the capital component must start quite early next year. A lot more attention should be paid to the agriculture sector, which contributed about 30 percent of GDP in Q3 2020 but recorded a very weak performance. The CBN can also scale up its interventions in the agriculture value chain as doing so will not only bring down food prices but will also support economic recovery. Above all, government should move fast to tackle insecurity in the country, which is detrimental to the production and exchange of goods and services.