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‘Why we may not exit recession in first quarter of 2021’

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By Peter Egwuatu, Assistant Business Editor

A chartered stockbroker and Executive Vice Chairman, HIGHCAP Securities Limited, Mr. David Adonri, in this interview, speaks on how Nigeria got into recession, the implication and possible way out among other things.

Nigeria found itself in another recession in five years. Could it have been avoided?

Nigeria’s economy is prone to recession due to its fragility. The economy has not been built to last. It has inherent structural deficiencies preventing it from withstanding stress. Recession in Nigeria’s economy is an accident waiting to happen.

The last time Nigeria’s economy entered recession was when GDP contracted in 2016. Then, it contracted by -0.67 percent in the first quarter and fell into recession in the second quarter when GDP contracted by -1.49 percent. At the end of 2016, GDP had contracted by -1.73 percent. The recession eventually ended when GDP grew by 0.55 percent in the second quarter of 2017, after a negative position in the first quarter of 2017. That recession lasted for one year.

For the second time in five years, Nigeria’s economy has fallen again into recession. The country’s GDP contracted by -3.62 percent in the third quarter of 2020, after contracting by -6.1 percent.

Several factors contributed to the 2016 recession, the most important being crash in crude oil price. The economic boom of 2013, which saw inflation rate at single digit and GDP growth rate of 5.49 percent, fizzled out in July 2014 as a result of crash in crude oil price from USD111.8 per barrel continuously to as low as USD30.7 per barrel in January 2016.

That drastic drop put serious pressure on Nigeria’s foreign reserve, causing scarcity of forex, high inflation rate and devaluation of the naira. The tapering of Quantitative Easing by US Federal Reserve Bank in 2014 also complicated issues for the Nigerian economy which was already reeling from the tension soaked build-up to the 2015 general election. The economic decline from 2nd quarter of 2014 intensified amidst laxity by government to take necessary remedial measures to avert the recession of 2016.

The current recession is not surprising because of the devastating impact of COVID-19 pandemic. Almost every country in the world suffered COVID-19 induced recession. If the Nigerian economy was more resilient, perhaps the impact would have been milder, considering the slower rate of transmission of the disease locally. Before the onset of the pandemic in February 2020, signs of weakness in Nigeria’s economy were apparent. Due to its fragility, early in January 2020, a global rating agency, Moody’s & Fitch had downgraded the Nigerian economy from stable to negative.

The widespread devastation of the pandemic, whose intensity surpasses 2008 global financial crisis, only worsened the country’s steadily deteriorating economy. Other than disruptions to global trade and financial flow caused by COVID-19, Nigeria’s economy has been terrorised by worsening insecurity and debilitating self-induced trade containment.

Experts have predicted hard times. Would the times really be as hard as they predicted?

Recession is a backward movement of the economy from a previous position. It is a difficult time for a country when there is less trade and industrial activity than usual and more factors of production are unemployed. During recession, national and household incomes drop. Non-performing debts escalate. Government, corporations and households are unable to meet their financial obligations. Recession escalates poverty and provokes social unrest.

The present case of Nigeria is more pathetic than recession. Simultaneously, the economy is faced with galloping inflation. This terrible condition is known as Stagflation.

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Inflation rate has risen in Nigeria for fifteen straight months, moving steadily from 11.02 percent in August 2019 to 14.23 percent in October 2020. It is projected to reach 15 percent in December 2020 according to the forecast made in recent Nigeria Economic Sustainability Plan (NESP 2020). Hyperinflation reduces the buying power of money, weakens domestic currency, constricts the disposable income of households, deepens poverty and escalates the cost of projects. Economies crave non-inflationary growth for development to be meaningful.

How can government encourage production and exports to earn foreign exchange and boost the economy?

Stagflation means that the economy is shrinking while costs are increasing. Domestic industrial and agricultural outputs are falling. Nigeria’s fiscal economy (production and trade) has suffered a series of setbacks since independence which has weakened its foundation. It is highly import dependent. Nigerian industries rely heavily on imported capital goods and raw materials to survive.

Any time there is shortage of forex, their production is crippled. Nigeria also lacks the engineering infrastructure to sustain the productive momentum of industries and make the economy competitive and internally self-regenerating. This is a structural defect that cannot be fixed overnight.

Nigeria’s inflation is essentially caused by her deficient supply-side economy, worsened by insecurity and scarcity of forex. Boosting inflow of hard currency through export may not be immediately feasible as a second wave of COVID-19 hamper the demand for crude oil and diaspora remittances wane. Other than crude oil which is the mainstay of Nigeria’s export economy, now in limbo, insecurity has already dented the country’s economy. Additionally, Nigeria’s manufacturing sector lacks the capacity to compete in global market, thus limiting available options for a leap in foreign income. This is why government is running from pillar to post trying desperately to secure foreign survival loans.

What could have been done by government to avert recession?

The high frequency of Nigeria’s economic bust is not surprising. Whenever the economy is subjected to little stress, be it political, social, trade dislocation, or natural disaster, it falls into immediate crisis. Between independence and the 1970s, Nigeria’s four years development plan cycles planned and built the economy to pro-actively forestall threats in future. They were geared towards the laying of a solid foundation for self-reliance. That objective became a mirage after the fourth national development plan was jettisoned by the next federal administration. The subsequent strategic plans which ended in 2000, 2010 and ending 2020, were more of sloganeering rather than genuine attempts at building a resilient economy that lasts.

Nigeria’s economy rests on a shaky structural foundation, hence the resort to short term panic measures to tackle economic crisis. If the necessary economic structures were in place before onset of COVID-19 pandemic, there would have been enough inventory of consumer goods and financial reserve to see us through the period of lockdown. Now, we would only have been grappling with recession like Europe, Asia and America and not the harshness of Stagflation. Credit must be given to government for early lockdown and timely reopening of the economy otherwise, the economic crisis would have been worse.

Apart from China, no other country succeeded in averting current recession. China’s world-class engineering infrastructure and early stern measures to curtail spread of COVID-19, enabled the country to sustain its fiscal economy. Although Nigeria was still functioning at low rate internally, drastic decline in demand for crude oil and decline of imports overwhelmed the economy. These are factors beyond the control of government and they are still prevalent.

Can the monetary and fiscal policies proposed by government yield positive GDP?

The dichotomy between fiscal and monetary policies has almost disappeared in Nigeria. In addition to formulating and executing monetary policies, Nigeria’s monetary authority, Central Bank of Nigeria, CBN, now also formulates fiscal policies presumably to plug fiscal gaps. It engages in formulation of trade policies and dishes out stimulus packages to industries. Government engages in an administrative method which misallocates public hard currency in a manner detrimental to the integrity and efficiency of Nigeria’s macro economy.

The federal government said Nigeria will exit recession in first quarter of 2021 while the World Bank maintained that the nation is at a critical juncture…

It will be miraculous if Nigeria exits recession in the first quarter of 2021. The headwinds against the economy are not likely to disappear fully in first quarter of 2021. It is not likely that farm security will be restored early next year as Boko Haram, bandits and herdsmen are increasing their rampage. Despite the euphoria surrounding the emergence of effective COVID-19 vaccine, disruptions by the pandemic may persist beyond first quarter of 2021, hampering Nigeria’s crude oil export and affecting diaspora remittances adversely. Agriculture and crude oil are the main drivers of the economy. Their probability of recovery in early 2021 is remote.

There is also no indication that the land borders will reopen soon to facilitate intra African trade. Nigeria’s structural deficiencies cannot be corrected within such a short period warranting an optimistic view that manufacturing can close any gap. The social environment remains charged as law and order have broken down in parts of the country. Consequently, the basis for government’s optimism that the economy will exit recession in first quarter of 2021 is difficult to understand. Government appears to be concerned only about recession. They are oblivious of the dire consequences of galloping inflation.

What options do you think should be explored?

Nigeria’s economic crisis is deeper than recession. It is Stagflation which is a deadly crisis that is difficult to eliminate. The macroeconomic policies so far enunciated by government are principally targeted at combating the recession but may also intensify the galloping inflation. The situation can degenerate into a serious hyperinflation if CBN’s expansionary monetary policy fails to stimulate production. Stagflation is not an economic crisis you can just spend your way out from.

It requires careful identification of the specific factors slowing the economy and those fueling inflation and acting to eliminate them one by one. This is an opportunity to address the long term structural deficiencies and imbalances that make the economy fragile and import dependent. If we do not start addressing them now, the environment that provokes recession will continue to hound the economy.

A critical imbalance in the economy is the ever increasing demand pressure piled by uncontrolled growth of the population. Purpose of economy is to meet the needs of people. Between independence and now, Nigeria’s population has increased by 390 percent. All the adverse consequences of population explosion on the socio economy are already evident. Excessive growth of population has orchestrated consumption and hampered savings accumulation in the economy. Incidences of recession can be minimized in Nigeria if demand management through population control is also factored into macroeconomic policies.

Vanguardngr.com

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