By Olu Fasan
NIGERIA recently fell into recession for the second time in about five years. In 2016, this country’s economy contracted for the first time in 20 years. Less than five years later, Nigeria has now slumped back into another recession.
The government blames the current recession on external shocks; specifically, on COVID-19 and the oil price crash. But, in truth, the external shocks only preyed on the soft underbelly of the Nigerian economy and the bad policies that exacerbate its weakness.
External shocks are inevitable, but COVID-19 has shown that nations that lack resilience against them will be harder hit than those that have robust resilience.
In a recent interview with the Financial Times, the managing director of the IMF, put it this way: “Countries that have been building strong fundamentals and diversifying their economies are in a better position”, adding: “Countries that are more dependent on one or two sectors and where levels of debt have gone up before the pandemic are in a much tougher place.”
Nigeria is, of course, in the vulnerable category – commodity-dependent and debt-laden. It certainly has not built strong fundamentals or diversified its economy. The consequences are two recessions in less than five years. But given that the two recessions happened under President Muhammadu Buhari’s administration, the question is: Did his policies contribute to them? Well, the answer is: Undoubtedly yes!
Take the 2016 recession. Of course, the failure to diversify Nigeria’s export and revenue bases and to build buffers ahead of the 2014 oil price crash were not President Buhari’s fault, as he was not Nigeria’s president in 2014 and in early 2015. But, despite the oil price crash, Buhari inherited an economy that was still experiencing positive growth.
A leader that takes office in the middle of an economic crisis must make tackling the crisis his top priority, as President Barack Obama did when he assumed office during the 2007/2008 global financial crisis. This is now a belaboured point, but, truth is, President Buhari had no finance minister for the first six months of his first term, and when he eventually did, he appointed someone with absolutely no international standing or clout to inspire confidence in the international markets and foreign investors at a time of crisis.
Of course, subsequently, the Buhari administration began to make pretty unwise decisions, particularly on the exchange-rate, that forced foreign investors to flee the country. Dr Ngozi Okonjo-Iweala, two-time finance minister, was disapproving in her verdict. In her book Fighting Corruption is Dangerous, she wrote: “A disjointed monetary and exchange policy damaged investor confidence, led to capital flight and ultimately led to economic contraction in 2016 – the first such contraction in the Nigerian economy for two decades.”
So, then, as a counterfactual, we can say that if President Buhari had made the right policy choices, the recession of 2016 could have been avoided; thus, in Okonjo-Iweala’s view, the recession “can be seen as something of a self-inflicted wound”!
Well, that was in 2016. What about the current recession? Should we simply blame it on COVID-19 or did other factors, endogenous in nature, play a role? It would certainly be disingenuous to dismiss the impact of COVID-19 altogether, given that it led to falling commodity prices, suppressed remittance flows and collapse in tourism and investment.
But the truth is that Nigeria was teetering on the edge of a second recession even before the pandemic spread to the country in the second quarter of this year. For instance, before the pandemic, Nigeria was already experiencing massive capital outflows, and foreign investment inflows were already drying out. Of course, COVID-19 accelerated these trends, but the fundamentals were extremely weak, making the economy an easy prey for the pandemic.
Put simply, a recession is the decline of economic activity. It’s marked by a significant contraction in each of the four components of the gross domestic product, GDP, namely: consumption, government spending, investment and exports. But which of these areas was not already comatose before the outbreak of COVID-19?
Take consumer spending, usually the biggest component of GDP. About 90 million Nigerians – nearly half the population – live in extreme poverty – on less than $1.50 a day – the largest number of any country in the world; the poverty-ridden informal sector makes up about 65 per cent of the economy; and over half the population are unemployed or underemployed. So, given such appalling conditions, where is the consumer base, with the purchasing power, to drive economic growth in Nigeria?
Business investment is another critical component of GDP. But even before the pandemic, business and investment confidence was so low that Nigeria was virtually experiencing no private-sector-led or foreign-investment-led growth. In a recent piece, the Financial Times asked: “Has Nigeria missed the manufacturing bandwagon?” It concluded that the obstacles are just too insurmountable to make any form of industrial production viable in Nigeria.
Which brings us to exports. This is arguably the most important component of a country’s GDP because when a country’s firms produce manufactured goods for exports, they do not only increase productivity and create better jobs, but they also generate much-needed foreign exchange. Yet, non-oil exports have declined significantly under the Buhari government, which has pursued import-substitution instead of export-led growth policies.
Of course, government spending also contributes to GDP growth, but where would a government find sufficient money to spend when the other components of the GDP – consumer spending, business investment and exports – are non-existent? Yet, it’s bad policies that caused the collapse of those components of economic activity.
Think of the border closures, the import bans, the exchange controls, the massive supply-side constraints, the failure to tackle insecurity, etc, all of which – before COVID-19 – stifled the business environment. Above all, given the need for visionary and dynamic leadership, think of President Buhari’s body language and ideological orientation, which signal hostility to wealth-creation and open markets. So, blame COVID-19 for the recession, but don’t forget the bad policies!