Nigeria’s floundering economy at crossroads, needs urgent attention

Nigeria may dive deeper into an economic crisis if government does not take urgent, deliberate steps to rescue it from a looming collapse.

This is because most of the country’s macroeconomic outcomes do not look good as confirmed by the Presidential Economic Advisory Council (PEAC) during their recent meeting with President Buhari.

At that meeting – the 6th since inauguration – PEAC advised the president on a myriad of issues, including worsening security environment and impact on food prices, poverty, unemployment, vulnerability, among others. The Council also emphasised the sluggish oil sector reforms, especially on the need to pass the Petroleum Industry Bill (PIB), which has dragged since 2008.

Africa’s largest economy exited recession in Q4 2020, albeit with very slim growth of 0.1%. The return to growth was driven by improvement in some non-oil sectors – including agriculture, solid minerals, ICT and Agric sector – as well as continued growth in the technology sector, rather than broad-based growth. But the domestic economy remains fragile with rising inflation, unemployment remains high and external account weak.

Rising prices of goods and services continues to be a worry, mainly driven by disruption to farming activities and inter-state trade as a result of worsening security conditions. In addition, the effect of depreciation in the exchange rate and the residual impact of border closure contributed to higher prices.

Consequently, overall prices rose by 18.12% in April – though slower than 18.17% in March, whilst food prices increased by almost 23percent in March 2021 when compared with a year ago.

PEAC told the President that Policy must urgently address the challenge of rising prices by reducing post-harvest losses and continuing improvement in infrastructure.

The Council particularly drew attention to 3 issues requiring urgent attention including: the need for policy clarity with regard to fuel subsidies – which will help resolve the dilemma which rising crude oil prices present; worsening security environment; the need for the PIB to encourage investment in Nigeria’s Oil & Gas Sector by adopting a single sector regulator instead of multiple regulators currently proposed; deregulation of gas prices; and preparing the NNPC for commercialization through a sell-down of government shares.

The journey towards poverty reduction is currently more challenging than in June 2019, when President Buhari made the audacious pledge to lift 100 million Nigerians out of poverty within a decade. Over 80 million Nigerians are classified as poor, with more than 50 percent multi-dimensionally poor, because of their limited access to education, health, electricity and other basic services.

72 percent of the extremely poor live in Northern Nigeria where the predominant economic activity is low productivity, subsistence agriculture and population growth, driven by higher-than-national-average fertility rates which outpaces output growth. Poverty in the North is further worsened by the region’s poor education outcomes.

Persistent conflict in the major food-producing regions of northeast and north-central Nigeria impacts on prices that consumers face. Average purchasing power has been gradually eroded, resulting in more and more people falling into poverty.

It is also well known that the impact of the covid-19 pandemic hit most economies of the world hard. Many advanced and emerging economies were able to pass a huge fiscal stimulus plan to prevent the rise in the unemployment rate. The fiscal discipline adopted by some of the advanced and emerging economies in the past shored up their ability to intervene to cushion their economy from the negative effect of the pandemic. The British government, for instance, embarked on job retention schemes, the American government paid unemployment benefits while recently passing the $1.9trn stimulus.

But some analysts have attributed the significant rise in Nigeria’s predicament to poor governance which limited the government’s ability to salvage the economy from crisis, thus leading to the current crippling statistics recorded across the various sectors of the economy today.

Nigeria’s economy has been caught in an unemployment bear hug. Data released by the National Bureau of Statistics (NBS) showed Q4 2020 unemployment figure rose to 33.33% from 27.1% in Q2 2020. Unemployment rate was highest amongst Nigerian youths. The unemployment rate for people between the ages of 15 and 24 years stood at 53.4% while those between the ages of 25 and 34 stood at 37%.

Continuing pressure on the Naira at the foreign exchange market suggests that external trading account remains weak – despite the increase in oil prices. Data shows cumulative trade deficit of N7.4trn between January and Sept, 2020, current account deficit of -3.7percent of GDP, while almost 30percent of foreign exchange used in Nigeria came from non-official sources.

Though Interest rates are now rising, there are concerns that the value of returns to savers and investors remain negative because prices are rising faster than interest.

“In consequence, savers and investors are actually losing money by holding the Naira. This continues to provide an incentive for Nigerians moving money into foreign currency. It also creates a distortion in capital markets resulting in misallocation of resources,” PEAC notes in their presentation.

The combination of rising inflation and unemployment have opened a floodgate of tears to drown an already troubled ‘misery index’. The index has become a shorthand method of capturing the state of economic wellbeing of citizens. Analysts note that the higher the index, the worse off the citizens and the lower the index the better the standard of living of citizens. The recent Nigerian numbers show that the misery index is not only high, but worsening.

Consequently, insecurity and insurgency have become the watch words of most Nigerians. The problems have become so daunting that they are now being used interchangeably. The correlation between inflation and insurgency is now a raging and controversial debate. Many analysts believe that insurgency causes inflation, whilst the counter factual suggests that inflation and unemployment breed desperate and dangerous citizens. ‘Economic insecurity as they say is the mother of all hopelessness’. Kidnapping is increasingly becoming the most lucrative business in Nigeria, promising high illicit returns. Recent abductions range from the Kangara schoolboy’s abduction, 279 girls kidnapped in Zamfara, about 39 students from the Federal College of Forestry Mechanization in Mando etc. In reaction to these kidnappings, the Canadian government has warned its citizens to avoid non-essential travel to Nigeria owing to the worsening security situation.

Rising in insecurity in Africa’s largest economy has also become an investors’ bane as they look for safe and secure locations to park their funds. About 26 states in Nigeria recorded no capital importation in 2020, while some analysts have attributed this to lack of infrastructural facilitates in the sub-nationals, others note that the levels of insecurity in the country must have been a major contributor to the absence of foreign inflows to these states. For instance, all the unsecured states in the North East recorded no capital importation in 2020. Unemployment statistics reveal that some of the states battling insecurity recorded high unemployment rates, which were lower when compared to analyst expectations.

Doing business in Nigeria is also tough, explaining why big brands like Twitter, Kia and Hyundai, recently, chose Ghana over the largest most populous nation in Africa. The cost of shipping goods into Nigerian ports is among the highest in the world, with Apapa port costing more than thrice that of Tema, Ghana, and nearly five times that of Durban and South Africa. In addition, local transportation of containers in Nigeria is averaged about $2,886.00 while Tema/Ghana and Durban averaged $890 and $636 respectfully.

The Manufacturing Association of Nigeria (MAN) estimates that transportation between Lagos and Kano is more expensive than China to Lagos, mostly due to higher cost of security, insurance and infrastructure. Cost of security, insurance and higher wages (for expatriates) are often priced into investment and consumption decisions, making the country a high-cost destination and eroding competitiveness.

With over 4 million people facing hunger and one million children malnourished according to Nigeria Security Tracker, covi-19 pandemic worsened the attainment of food security in Nigeria. The impact is already felt as food prices show steady uptick. Flooding, herdsmen attacks, border closure, and poor storage facilities were all factors that attributed to the rise in food inflation according to the Statistics Office.

Agriculture, which is supposed to be Nigeria’s largest job provider, is largely performing below capacity. Only 2.2percent of land under cultivation in Nigeria is irrigated. Consequently, agriculture is necessarily rain-fed and seasonal. These characteristics, compounded by the very significant post-harvest food losses, ensure that food supply is less than it can and should be, leading to higher food prices.

Analysts believe that with improved agricultural production processes in more matured economies, the pricing of agricultural output in Nigeria is globally uncompetitive. The poor productivity in the agricultural sector and the slow growth of the local manufacturing sector have conspired to raise domestic unemployment rates, thereby creating a scrappy outcome for public policy.

Finally, with more than a decade of deliberations and revisions on the Petroleum Industry Bill (PIB), it will be a great relief to all stakeholders and the economy at large if the Bill is finally passed into law. Many stakeholders hold strongly that new investments in the oil sector is dependent on the passage of the PIB which would take a more holistic approach in addressing issues around the fiscal terms especially following the passage of the Deep Offshore and Inland Basin Production Sharing Contracts (amendment) Bill and the 2019 (PSC Amendment Bill).