Stagflation: Where is Nigeria’s economy headed?

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After contracting by 1.92 percent in 2020, its second annual contraction since 2016, Nigeria’s economy managed to limp out of recession in the fourth quarter of 2020 after it expanded by 0.11 percent.

The lives of the citizens have not improved since then, rather more people are finding it hard to live in the country that has the largest economy on the continent.

With the current realities in Nigeria, Africa’s largest economy is best described as one that is in a stagflation (a blend of the high inflation rate and slow economic growth), a case of poor Nigerians becoming poorer in real terms, and the middle class getting thinned out.

“We are now faced with stagflation, a situation more protracted than a recession,” Adetilewa Adebajo, economist and CEO of the CFG advisor, said.
The economy of Africa’s biggest oil producer grew by a paltry 0.51 percent in the three months through March from a year earlier, a slow recovery rate that remains too slow to create sufficient opportunities for a rapidly rising population.

Coupled with the high inflation rate that is forcing Nigerians to spend about 65 percent of their income on food, Nigerians are three times more miserable today than they were five years ago.

“Climbing misery index implies declining economic activity and reduced consumption,” Charles Akinbobola, an analyst at Sofidam Capital, said.

Among the saddest countries in the world, Nigeria’s high level of unemployment and stubbornly high inflation means that there is a mismatch in the cost of living and the earning capacity of its citizens.

What many Nigerians can buy today is three times less of the usual consumption basket they could afford in 2015.

Inflation rate which measures the rate at which the prices of goods and service increase in Nigeria eased to18.12 percent in April down slightly from a four year high of 18.17 percent in March.

“The resilience of the Nigerian economy is being severely tested by the ongoing insecurity and related uncertainty,” Adebajo, said.
According to him, Nigeria’s economic woes has also been exacerbated by a lack of economic leadership.

“With the Naira to US dollar exchange rate at $1 to N500 in the parallel markets and government spending 85-90% of its revenues to service debt, we need to seek ways to protect the values of our assets, protect our businesses and rethink our economic survival strategies.”

Before COVID-19, about 80 million of Nigeria’s 200 million people living on less than the equivalent of $1.90 a day. The pandemic and population growth could see that figure rise to almost 100 million by 2023, notes the World Bank.

While the impact of COVID-19 is easily blamed for the recent economic woes in Nigeria, an evaluation of the country’s macro-economic indicators before the pandemic exposes how the pandemic only made what was already a bad situation worse.

Long before the pandemic started spreading across the globe late last year; Nigeria’s economy had been gasping for breath for five years.

Economic growth in Africa’s most populous nation averaged 1.2 percent between 2015 and 2019. The problem with that is the population grew two times faster at an average of 2.6 percent per year.

Those five years were a painful squeeze for Nigerians who grew progressively poorer, as economic growth was too slow to lift many out of poverty. According to analysts, it is safe to say that COVID-19 made an already bad situation worse.

Nigeria retains a long list of economic reforms that can unlock economic growth and reduce poverty but have been stuck. Decrepit infrastructure and the lack of a functional rail system means Apapa, which houses Nigeria’s main post, remains a crying shame.

When transporting imported goods from the warehouse in Nigeria’s busiest seaport, businesses spend an average cost of $2,050, according to a research firm, SBM Intelligence. This is nearly ten times the $208 it cost to transport containers from Durban Harbour to the South African warehouse. In Ghana, it cost $285 to transport containers to a local warehouse.

According to Adebajo, it is clear that monetary policy has reached its limits and supply-side structural reforms and fiscal discipline are now required to get the Nigerian economy out of the current stagflation quagmire.

The most urgent structural reform, according to Adebajo, is the immediate removal of subsidies across the economy in particular the fuel subsidy.

Tackling insecurity, improving the ease of doing business and creating an enabling environment are areas the President’s economic advisers recommend the government pay urgent attention to boost economic growth and lift the vulnerable out of poverty.