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Reversing Nigeria’s current economic malaise

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Nigeria is currently fighting on many fronts to keep the balance between a fall in oil prices and the global economic slowdown resulting from the COVID-19 pandemic.

Unfortunately, many of the country’s major trade partners are also grappling with the negative effects of the pandemic, compounding the dilemma of Africa’s most populous country.

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The International Monetary Fund (IMF), had predicted that the Nigerian economy would recede by 5.4 per cent this year, its worst recession in three decades.

The contraction comes amid a general slide in the global economy caused by the coronavirus pandemic.

Hitherto, the nation’s economy had been wobbling with weak recovery from the 2014 oil price shock to the 2016 economic recession with Gross Domestic Product (GDP) growth tapering around 2.3 per cent in 2019.

Due to cases of fiscal mismanagement, Nigeria also lost the advantages of the ‘boom cycle’ by virtue of its sole commodity offering (crude oil) in the international market.

Over the years, Nigeria’s economic growth has also been stunted due to lack of consistent investments in physical infrastructure in critical areas like health, power, roads, education and housing to boost its global competitiveness, now reinforced by the effects of the COVID-119 pandemic.

This is further compounded with a high debt profile, as the country’s debt service-to-revenue ratio was put at about 99 per cent in the first quarter (Q1) 2020. Data obtained from the Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) report show that in Q1, Nigeria incurred a total sum of N943.12 billion in debt service, where retained revenue was N950.56 billion.

According to the Nigerian Bureau of Statistics (NBS), Nigeria’s GDP grew by 1.87 per cent (year-on-year) in Q1 2020, representing a drop of 0.23 per cent points compared to Q1 2019, and 0.68 per cent points lower than recorded in Q4 2019.

Similarly, the GDP declined by 6.10 per cent (year-on-year) in Q2 2020, an 8.22 per cent points drop when compared to Q2 2019 (2.12 per cent), and 7.97 per cent points against Q1 2020 (1.87 per cent).

These constraining factors have become a source of worry for stakeholders. They argued that the government needs to be proactive if it aims to reduce the level of contraction expected in Q3 2020 as well as redirect the Nigerian economy into positive GDP growth in the fourth quarter of 2020.

Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Sheriffdeen Tella, stressed the need for a planned and orderly government intervention devoid of bureaucracy in the production sector to propel significant rebound in the third quarter.

He also urged the government to seek a moratorium on current debt servicing, and suspend further requests for foreign loans to push for intervention in domestic production.

“Such interventions should be both monetary and fiscal. That is provision of funds or credits at the low interest rate and the use of tax relief for both producers and consumers.

“This is not the time to impose taxes on consumers because they must have the wherewithal to buy goods produced for producers to be in business.”

Also, the Head of Research, FSL Securities Limited, Victor Chiazor, said all hands must be on deck to reduce the level of contraction expected in Q3 2020 and restore the economy on the path of sustainable growth.

“Monetary and fiscal authorities, as well as the private sector need to be involved in this drive to power up the Nigerian economy.

“In the immediate, the government must find innovative ways to increase its revenue as it will need to spend its way out of this negative growth by directing funds towards the largest sectors of Nigeria’s GDP to increase output in those sectors.”

He continued: “The monetary space will need to keep interest rate low and manage the foreign exchange market effectively so the trade sector will not suffer from the unavailability of foreign exchange (FX) to keep their business activities running smoothly.

“The private sector led by the banks would have to find smart ways to increase lending to the real sector at business-friendly rates without exposing themselves to higher non-performing loans.”

Furthermore, he stressed the need for the economic managers and the private sector to increase focus on the real sector of the economy, and provide the necessary funding and policies required to stimulate output across the sub-sectors.

In advanced economies, the IMF projects growth to stabilise at 1.6 per cent in 2020 to 21, while emerging markets and developing economies, which typically have normal growth levels well above advanced economies, are expected to record negative growth.

Although a rebound is expected in 2021, with the global economy projected to grow by 5.8 per cent in a ‘baseline scenario’ where the pandemic fades in the second half of the year, but the IMF insisted that effective policies are essential to forestall the possibility of such outcomes.

“The necessary measures to reduce contagion and protect lives are an important investment in long-term human and economic health.

“Policymakers will also need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses domestically considering the economic fallout is acute in specific sectors.

“And internationally, strong multilateral cooperation is essential to overcome the effects of the pandemic and help financially constrained countries facing twin health and funding shocks, and for channeling aid to countries with weak health care systems,” the IMF urged.

The Vice-Chairman, Highcap Securities, Imafidon Adonri, said a lasting solution is a movement of Nigeria’s economic structure away from primary products export, and manufactured goods import-dependence.

He pointed out that the socio-political environment hampered by the effects of population explosion, lack of unity in diversity, and pretentious federalism must be addressed to foster the social harmony necessary for peace and economic progress.

“Inflation rate has risen in Nigeria for 10 straight months, moving steadily from 11.02 per cent in August 2019 to 12.82 per cent in June 2020. It is expected to reach 15 per cent in December 2020, according to the forecast made in the recent Nigeria Economic Sustainability Plan (NESP).

“The last time Nigeria’s GDP contracted was in 2016. Then, it contracted by -0.67 per cent in Q1 and fell into recession in Q2, when it contracted by -1.49 per cent. At the end of 2016, GDP had contracted by -1.73 per cent.

“The recession eventually ended when GDP grew by 0.55 per cent in Q2 2017, after a negative position in Q1 2017. That recession lasted for one year. The impact on the economy then would have been mild if it was recession alone, but it also came with galloping inflation.

“The rising inflation rate hit 18% in December 2016, sending the economy into stagflation, a deadly form of economic crisis characterized by simultaneous recession and hyperinflation.”

According to him, the stagflation of 2016, precipitated by the crash in crude oil price, pervasive insecurity, tapering of quantitative easing by US Feds, the tension stoked build-up to the 2015 general election together with its aftermath, escalated labour unemployment rate over 30 per cent in Nigeria.

“The unemployment rate of other factors of production also tumbled, inflicting enormous damage on the economy. Inflation is a two-edged sword. Excessive movement in either direction can inflict severe wounds on the economy.

“Hyperinflation reduces the buying power of money, weakens domestic currency, constricts the disposable income of households, deepens poverty, depresses the capital market, and escalates the cost of projects. It can result in an asset bubble.”

He argued that economic growth and rising inflation do not work in harmony, adding that any economy that experiences deflation is in a nightmare characterised by severe recession where assets persistently lose their value.

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