Absence of economic linkages hampers national competitiveness (1)

Nigeria is currently going through a serious reversal of the many years of growth that it had enjoyed in the not-too-distant past. We may be aware that long before the pandemic, Nigeria had seen decades of growth in the range of 10 per cent some years back. A lot of experts have been pontificating on the reasons for our current state of affairs but I’m afraid some of the analysis have not been quite deep, or they may be downright misleading.

While we all agree that corruption, and the absence of rule of law, are at the centre of most problems in Nigeria, and we have been abjectly unable to act decisively against it, we cannot overlook other agents of our lack of progress, including our failure to holistically promote the MSME sector. Clearly, there can be no development for as long as the grassroots that produce more than half of our GDP remain observers in the production process, due to policy neglect. But to turn round and insist on following the current state of affairs where everyone, including technocrats in government, agree that we are doing a lot but seeing no results is strange analysis.

The truth is that there is little or no production going on in the rural communities because they have lost everything, including the confidence to go to the farms. Nigeria is not producing enough of anything except politicians that compete for political position and actually gain it but do nothing good with it. We have too many cows that have become a threat to the lives of farmers but we still import beef from South Africa where not a word has been heard about famer/herder clash. We claim to have arrived at a boom in rice production but a bag of rice is now about N30,000 naira – much higher than when we didn’t have a boom. So there is a problem and it is not hard to see.

My initial take is that the Nigerian economy has been high-jacked by a few people and its benefits are not coming to the majority of the people. These few people are not just the powerful people in government but includes the big companies who may have had the economy rigged into their palms and have run away with it. Big companies are supposed to be a source of business and income for the small ones, typically in the MSME space. However, when all the inputs of the big operators come from abroad, for all kinds of not-so-valid reasons, such as quality and standard, then you have another enclave economy in manufacturing as we have in oil.

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There is no nexus between the huge informal sector in Nigeria and the formal sector. Not only are the operators in the informal sector largely excluded from the economy, there is no spirited effort to link big corporations to the SME sector through mutually beneficial interactive economics. This interaction is what economists call economic linkage, by which is meant the consistent provision of business opportunities by the big corporations for the MSME sector. Until we make it a national policy to buy local inputs for production and output for consumption, there may be no incentive to develop such inputs and we keep importing them. In addition, we must take special steps to restore the economic environment of the MSME sector, especially their financial ecosystem, to enable them recover from the current crises. Research evidence shows that MSMEs suffers most and have the least chance of recovery from major calamities. We saw it during Ebola and the Global Financial Crisis of 2008.

When the COVID 19 pandemic happened on humanity, and unleashed a wave of destruction across the world, two other things meant to combat it also happened simultaneously, and both of them were damaging to the economic health of the world, as side effect. First, was the lockdown. To isolate the virus and cut it off, governments reacted very forcefully by shutting down their economies. This implied closing down production lines, disrupting supply chains and cash flows, forcing contracts to be performed in breach, wiping out disposable incomes and expectedly, consumer spending. This, indeed, is the genealogy of the current recession.

The second thing that happened, also a reaction to the pandemic, was the massive financial support provided to the banking industry across the world, coupled with a lowering of the regulatory bar, encouragement of accommodating finance and lots more. Needless to recount the various financial packages the Central Bank of Nigeria made available to various operators in the economy, which were timely but definitely inadequate and, in my consistently expressed view, could have been better managed. In my view, it was the speed of the intervention that earned the CBN the praises it got rather than its adequacy or efficient management. I preferred the use of the big MFBs, some of which have over 500 branches, rather than NIRSAL, to distribute the financial intervention.

The point however, is that both actions had implications on the economy that were both positive and negative. In particular, while the provision of financial accommodation to customers (financial palliatives), which regulators actively encouraged banks to offer, had the effect of stabilizing the financial system, with respect to delinquency recognition and such, it also had the negative effect of straining lenders’ cash flows and constraining industry liquidity as loan repayments receipts were formally deferred.