Dwindling growth of key economic segments toughens job for economic managers

While it is no news that the Nigerian economy is facing a downturn due to several factors, anecdotal evidence suggests that multiple segments of the economy are indeed going through tough times, thereby making the task of managing the economy a more complex one for its managers.

Apart from the obvious fall in oil prices and the attendant fall in government income, the less visible but equally disturbing setbacks that the economy faces have resulted from a cascading of the main issues, such as the plunge in the price of commodities, and dollar illiquidity in the system.

A look at the components of the macro-economy helps to shed light on these key issues that have cascaded down, which the economy is currently grappling with:

In estimating the size of economy through the Expenditure Approach, the size of private consumption spending, investment spending and government spending have often sufficed.

The rationale behind this approach is that every Naira spent or expended within the economy is an income for someone else in that economy. The total amount of money spent in the economy, and the total amount of money received as income by the economic agents in the economy can both act as proxies for the size of economic activity in the country.

Following the rules of simple mathematics, the larger the size of any of the comprising units of the economy as listed above, the larger the size of the total GDP, (and the larger the size of the economy by implication). When any of the components reduce in size, the economy will fall.

What this means is that:

The more people spend their money on goods and services in the economy, the larger the economy becomes; and the lesser people spend, the lesser the economy becomes.

Side note: part of the reasons why Nigeria’s economy surpassed that of South Africa to become the largest in Africa, and why the Nigerian economy is/was attractive to foreign investors, is because a lot more people spend a lot more money in the economy, which is a good thing for businesses and the economy at large.

Continuing in the same logic;

The more businesses invest in the economy, the larger the economy becomes, and vice versa.

The more the government spends money within the economy, the larger the economy becomes and vice versa. (This is why governments around the world borrow money to spend in their economy).

And lastly, the larger the net exports made from the economy, the larger the size of the economy and vice versa.

Nigeria’s economy is in trouble for the following reasons:

Consumption spending is declining sharply. It is declining because inflation is eating up consumers’ purchasing power, and eroding the value of the Naira.

Also consumer spending is declining because salaries and wages paid to households and individuals are declining, hence people have less money to spend in the economy.

Investment spending by businesses in the economy is not growing because companies are not making new investments (domestic investments). They are not making new investments because their sales and revenue are low. Their revenues are low because consumers are not buying as much as they used to, as a result of the factors listed above in point 1.

Since domestic investment is declining, foreign investment ought to come in and lend a hand if the economy is attractive, right?

But foreign investment is not coming, because foreign exchange regime is still uncertain. Hence aggregate investment spending is down.

So, as long as the currency remains unstable, foreign investors will stay at arms length.

Government spending is at a very low ebb because it is not getting enough money from its main revenue earner – Oil. As a result, it cannot pay salaries and embark on projects from which citizens can make some income. If citizens do not get income, they cannot spend. This takes us back to point 1, which takes us further to point 2!

Lastly, export revenues are declining because the country’s main export commodity – Oil, is languishing in the international market due to an oversupply that is sinking its price. This takes us back to point 3, which in turn takes us back to point 1, which further leads us to point 2!

It is a ‘triple-whammy that has plunged the economy into a negative spiral, or what economists call a ‘vicious cycle’.

The economy desperately needs to be stimulated by some fresh spending, either from the government or from business investors.

If any of the sectors listed above are stimulated, the economy as a whole will be stimulated, and growth will be restored to pre-crisis levels.

 

Edozie Ifebi