Reflections on a biting recession
Life remains painfully hard and the Muhammadu Buhari administration must act fast to improve the situation.Gross Domestic Product (GDP), inflation, unemployment, and capital formation data as well as the manufacturing performance index of the Central Bank of Nigeria (CBN) then showed a terrible economic downturn.
The GDP, measuring the country’s overall economic activity, shrank by 2.06% in the second quarter of 2016, following a 0.36% decline in the first quarter. Those two consecutive quarters of negative GDP growth rates meant that Nigeria’s economy registered its first recession in more than two decades. The overall GDP growth rates, however, mask the sector performances. Non-oil sector’s growth rate declined by 0.4% while the oil sector shrank by 17%. While agriculture which grew by 4.5%, ICT, and other services such as education were the bright spots, other sectors, notably manufacturing, construction and trade services performed poorly.
Other macroeconomic indicators did not fare better. The declining economic growth rates then, along with inflation and the combined unemployment and underemployment rates of 17.1% and 31% respectively, as well as rising interest rates with the treasury bills reaching over 20% meant that the country’s misery index was on the rise. Financial markets, most especially the equity sector, were also in contraction as profitability of companies in the real sector nose-dived with low consumer purchasing power, and business confidence impacted by policy uncertainties. Capital flight, especially, portfolio outflows continued unabated as capital importation declined by 75.7% from a year ago, putting further pressure on the naira, which has since depreciated to N425 in the parallel market and to N320 against the U.S. Dollar in the official market.
The tragedy now is that the situation has not improved!There are well-known key drivers of the economic difficulties that Nigeria had experienced for almost two years, leading to the recession and the continued hard times. A major driver is the fall in oil prices from $115 in July 2014 to a low of $27 in February 2016, before rebounding to a range of $40 to 45 in recent months. As oil prices fell by more than 70%, government revenue plunged with oil-related revenues accounting for 95% of export earnings and 70% of fiscal revenue. Public sector spending is curtailed by low oil revenue, while non-oil sector slows down indirectly as lower foreign exchange reduced imports of both consumer and capital goods.
While the lower oil prices played a significant role, the current economic difficulties and recession could have been avoided if the other economic drivers had been effectively and efficiently managed especially since the rebased GDP puts the oil sector at less than a tenth of GDP.
First, the fiscal buffers were not carefully managed. Indeed, they were squandered by previous governments both at the Federal Government and the state levels. Nigeria’s hitherto oil savings funds would have provided an ammunition to be deployed by governments to offset declining exports, private consumption and investment as was done by several other oil-exporting countries such as Algeria which had over $200 billion in oil savings funds compared to Nigeria’s $2.5 billion.
Second, instead of saving for the rainy day, Nigeria was not only depleting its oil savings funds, it was actually pumping up its domestic debt to finance consumption-led growth. Servicing these debts now consumes a third of government revenues, and when combined with other high non-debt recurrent expenditure, left very little space for infrastructure and other capital spending needed for long-term sustainable economic growth. As a result, critical infrastructure, especially power, has become a drag on economic growth, while accumulated debts face re-financing risks at higher market interest rates.
Third, Nigeria could still not benefit much from the rally in oil prices from their lows of $27 in February 2016 doubling to nearly $52 in August: Oil production fell from a 2016 budget target of 2.2 million barrel per day to an estimated 900 thousand barrels per day due to the disruption to oil pipelines by militants in the Niger Delta.
Policy uncertainties throughout 2015 and 2016, of course, compounded the economic trajectory brought about by low oil prices. While the largely overrated economic management team of the previous government was essentially in denial of the economic difficulties and the rising misery indices that the country was facing during the electoral cycle, the new administration’s lethargic approach to economic management as well as its underwhelming economic leadership team exacerbated the underlying economic downturn leading to the recession.
Nigeria was, therefore, denied the benefits of the counter-cyclical policies needed to reflate the economy as fiscal policy tools of budget and capital spending were substantially delayed. Policy somersaults by the Central Bank of Nigeria with its numerous directives and its misguided current tightening monetary policy posture aimed at attracting elusive portfolio capital flows with higher and rising interest rates in a recession, has simply further stifled productive activity and other businesses, most especially manufacturing.
A lot still needs to be done to lay the foundation for economic recovery, sustainable long-term economic growth and inclusive prosperity. The economy must indeed be diversified.
However, the value chain for strengthening higher revenue and export earnings from agriculture to light manufacturing, from oil to petrochemicals and refining, from solid minerals to industrial production, from ICT to other services including education and tourism, remains untapped, all the seminars and official speeches notwithstanding. Once again, the Muhammadu Buhari regime’s agriculture roadmap as well as the solid minerals sector roadmap are both great ideas. Their effective implementation should contribute towards real economic, export, and revenue diversification as well as import substitution.
As this newspaper has always noted, the current fiscal federalism model in Nigeria is not only unsustainable, it is a fraud. What the country currently has is a structure in which 36 states, with the exception of Lagos State, depends overwhelmingly on the allocation of dwindling oil revenues from the centre on a monthly basis with very little efforts at internally generating revenues or at creating taxable economies. Nigeria witnessed rapid development in the past when regional autonomy encouraged competitiveness in areas of comparative advantages of each subsisting region.
Now more than ever is the time to adopt the principles and practices of true fiscal federalism and restructuring that allow devolution of powers and control over resources from the centre to the states and local government levels.