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Recession: Averting a creeping economic depression

By Nelson Chijioke
31 July 2016   |   4:30 am
The history of economic recession has never been that of a sudden “explosion”. It has never taken fiscal and monetary authorities by surprise, but has always dovetailed series of faltering economic indices. The faltering numbers are sometimes...
Kemi Adeosun, Minister of Finance

Kemi Adeosun, Minister of Finance

Last week, the Minister of Finance, Mrs Kemi Adeosun announced that the country is in recession. The announcement, though did not take many by surprise, was like bitter pill, which forced through the throat of Nigerians who had expected that the government which they voted for, at the federal level would end their sufferings of the last 16 years. Nelson Chijioke now traces Nigeria’s journey into recession and measures being taken to get out of the woods

The history of economic recession has never been that of a sudden “explosion”. It has never taken fiscal and monetary authorities by surprise, but has always dovetailed series of faltering economic indices. The faltering numbers are sometimes induced internally and externally.

Recession is a period of significant decline in activities across the economy- low industrial production and manufacturing, high inflation, rising unemployment, falling purchasing power, low fiscal spending, as well as poor consumer spending, among others.

Of course, six months of persistent negative (two consecutive quarters) records in Gross Domestic Product (GDP), an economy is declared recessed. Perhaps, government and its policy makers have come to the realization that the economy will by no means escape challenge, given a woeful second quarter performance to be unveiled soon.

Nigeria has over the years recorded cases of fiscal mismanagement, basically by obvious irresponsibility and impunity in public finances. The country has also lost advantages of the “boom cycle” by virtue of its sole commodity offering (crude oil) in the international market. It is currently facing the “burst” curve of the commodity and indeed, the development is no palatable for the country.

It is a public knowledge that the economy relies heavily on the proceeds from crude oil to maintain between 65 per cent and 70 per cent of its total revenue. It generates about 90 per cent of the country’s foreign exchange earnings.Trading at over $100 a barrel for years, the country had every opportunity to save in expectations of the cyclical “burst”. It did not. Alternatively, it could have invested heavily in infrastructure, such that at this point, domestic activities would be raved up through diversification. The true position is that investments in infrastructure were merely heard, but not on “ground” and this was the foundation of recession.

The commodity’s trade at below $50 a barrel now, under $40 and $30 for months meant that the economy lost substantial foreign exchange earnings- almost two-third in quantum. This is the beginning of panic purchases and speculations on exchange rate of the Naira, as importers begin to scramble for available ones for storage. This is another foundation for recession.

The monetary authority, at first, may have projected wrongly that the crude oil crisis was a short-term challenge, or at worse, a medium-term development, as in other previous experiences. This is a crisis that has so far lasted more than 24 months.At first, the Central Bank of Nigeria started with the defence of the local currency when it was battered by high demand of dollar, but the more its intervention, the more the oil price’s crash in the international market and the more the pressure. This was another step to recession.

Before now, the economy has become used to imported items, with “sentimental attachment”. So, despite falling forex earnings, demand for dollar remained high.CBN Governor, Godwin Emefiele, said: “While foreign exchange earnings have fallen to $1 billion monthly, against $3 billion monthly before now, demand for foreign exchange continues to rise to $5 billion monthly.”

After the first and second technical devaluation in November 2014 and February 2015, CBN started the currency restriction and peg on exchange rate, in efforts to support the Naira and import substitution strategy.For foreign portfolio investors, they read the move extremely as lack of confidence and the country’s inability to meet forex obligations in investment inflows. The first to react was JPMorgan, which delisted Nigeria from its platform- the Government Bond Index-Emerging Market. Followed by threats from Barclays, among others.

Consequently, forex attracted by JPMorgan and Barclays’s participations in the financial market activities in the country was lost, worsening the supply shortage. The capital market’s daily capitalization turned into red endlessly and bonds were priced with high risk. This was a step towards recession.

With subsidy on the exchange rate, round tripping was heightened as some of the dollars auctioned by CBN at its weekly official intervention found their way into the “black market” and Bureau De Change, where they sold some to politicians and the rest to manufacturers of the products removed from the official window intervention.

Of course, the unofficial markets became the agog with forex business, as rent seekers and arbitragers took advantage of the forex subsidy and were even importing the currency illegally, to keep supply and high exchange rates at the segment.The double challenges of supply shortage, increasing demand at official window and high rates at the unofficial market, soon introduced general price hike on goods and services. Consequently, inflation followed. This was another step further to recession.

With heightened shortage of forex supply, manufacturers and industrialist were rationing raw materials, leading to falling productivity. This year has seen every month produce huge numbers of retrenchment across all sectors of the economy, with inflation persisting.

The real sector performance in terms of production dipped further, with sub-sectorial output declining at faster rate in the build up to the decisive moments for the country’s economy- second quarter Gross Domestic Product (GDP).The Purchasing Managers Index’s record of economic activities for manufacturing and non-manufacturing organizations, recorded a sixth monthly negative production levels; new orders; employment; inventories; and general business operations.

The manufacturing index dropped to 41.9 index points in June 2016, compared to a negative position of 45.8 in the preceding month, implying that the sector declined at a faster rate during the review period.Of the 16 manufacturing sub‐sectors, 14 recorded decline in the review month, among which are fabricated metal products; chemical and pharmaceutical products; printing and related support activities; food, beverage and tobacco products; cement; plastics and rubber products; and textile, apparel, leather and footwear.

From December 2015, the challenge of forex demand for the importation of petroleum motor spirit heightened, couple with subsidy payment demand. This led to industrial action that lasted for months. Consequently, general price of goods and services rose further, inflation went up further too. The first quarter ended with negative growth as the Gross Domestic Product turned -3.6 percent. Thus, recession made the first grab on the economy.

The Central Bank of Nigeria (CBN), on the launch of the flexible exchange rate policy, intervened with $4.02 billion, made up of $3.5 billion in forward sales and about $520 million at the interbank market, targeted at clearing up the huge backlog of demands that have remained unmet.

It sold $697 million in one-month futures, $1.22 billion in two-month and $1.57 billion due in three months, in order to clear a backlog of $4.02 billion of demand, while recent demands are likewise settled at the market, which manufacturers are now becoming uncomfortable with.Forwards market, as part of the new policy regime, is trading windows where people can buy forex at present price for future use and most demands from manufacturers that are not considered as urgent are channeled there.

With the 2016 budget, expected to show direction of government’s development plan being delayed till June, amid fiscal failures in federating states, falling consumer spending, lay-offs, shutting of manufacturing lines, the stage is finally set for the official global declaration of the economy as recessed.Depending on the depth of the negative growth, any economy can easily come out of the recession, but will only be through mobilization of all economic agents- sectorial revival across board, and effective ustilisation of resources like public finance, to engender positive growth.

Nigeria recorded an approximation of -0.4 percent, which could be regarded as a peripheral negative growth in the first quarter. Depending on the second quarter figure and its depth calculated and determined policy options and real term implementation will surely get the economy back and the people will feel it. They will not need to be told.For a currency expert and Research Analyst at FXTM, Lukman Otunuga and Executive Director, Investment Finance, BGL Capital Limited, Olufemi Ademola, the solution starts from investment in infrastructure and price stability.

They both agreed that Naira’s weakness is a great challenge for the country, which has exposed the economy to downside risks, coupled with global instabilities.They noted hat with liquidity still lacking, coupled with the 41 banned items, which cannot be purchased on the official exchange, markets participants will be naturally attracted to the black markets and price instability will persist.

“The continued ban of some 41 products from accessing the interbank forex market will continue to create opportunities for black market and account for a large amount of forex transactions. This will continue to hurt the economy,” Ademola said.For the President of Chartered Institute of Bankers of Nigeria, Prof. Segun Ajibola, we must go back to economic plans because they are replete with workable ideas suffering from implementation inertia.

“Transparency in the implementation of our economic plans has a lot to do with our rebound from the current misfortunes and challenges. It is only when Nigeria is at peace that we can be politically, socially and economically better.“It is a collective issue as well, which calls for individual and collective discipline. Why do we need imported biscuits and toothpick and other unnecessary items that impedes on our forex reserves and pressure on exchange rate, which create and complicate the economic challenges.

“We must, as a matter of policy and action, pursue investment in infrastructure to come out of the economic doldrums that we have found ourselves. It must be real and must not fail,” he said.For a civil society activist and Lead Director of Centre for Social Justice, Eze Onyekpere, energizing the agriculture value chain should be beyond sloganeering and mere mantras, if the country would come out of the current economic retrogression.

“It is a practical thing that we convert idle arable land into cultivated or used land to produce plants and animal varieties to feed the nation; produce raw materials for industry and products for export. “This involves their processing into finished products for local or export use. The products of Nigerian universities of agriculture and the various agriculture faculties in our universities have produced enough manpower to be used in the agriculture revolution.

“The previous and current administrations have proposed the value chain approach and this needs to be deepened. There is also need to introduce new farming techniques, improved varieties of seeds and seedlings, soil diagnosis as a basis to introduce appropriate fertilizers or encourage organic agriculture.“On no account should this be a basis for legalizing or approving of genetically modified plants and animals. The challenge of the Fulani herdsmen can be converted into an opportunity for improved agriculture productivity. Herdsmen can become settled in ranches with good foliage, thereby increasing meat and milk production and their derivatives,” he said.

Warning on the debilitating fixation with monetary policy and what happens to the value of the naira, with all eyes on the Central Bank of Nigeria and its Monetary Policy Committee, Onyekpere sought the harmonization of policies.“While monetary policy is important, it will not achieve the desired results if it is not complemented by fiscal policy. The expectation and promise of the administration to reflate the economy with a stimulus package would have matched the monetary policy positions of the CBN. We may not have exactly seen Nigeria in this recession.

“There is unusual delay in implementing the budget, may be, due to paucity of resources, which raises issues around budget planning and revenue forecasting for the 2016 federal budget. The full implementation of the capital components of the 2016 federal budget is imperative,” he said.

After recession, the next phase is depression. It could be that the Venezualans are stretching into it. With their little population compared to Nigeria, developments in the country now would be worse in Nigeria, if the economy slips into depression or stays longer in recession.

Onyekpere added, “The Nigerian economy, because of its lack of competitiveness (while building the capacity to compete) needs to protect local producers of goods and services from adverse foreign competition.

“The idea of importing toothpicks and toys makes no sense. We may need to use high tariffs to discourage the importation of non-essential items that can be produced locally. “The full implementation of the automobile policy which encourages local manufacture and assembly of vehicles is imperative. Nigerian manufacturers need to be supported to export their products and this calls for the reinstatement of the Export Expansion Grant, which was stopped due to abuses. But the loopholes for corruption need to be plugged.”

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