The National Bureau of Statistics (NBS) released the second quarter GDP data last week and the numbers were disappointing. GDP growth rate slowed to 1.94 percent despite a more than five percent growth in oil GDP. The non-oil sectors slowed to 1.64 percent. The slowdown was present in almost all key sectors from agriculture to manufacturing to trade to finance. The slow growth combined with Nigeria’s high population growth means that real income per capita has declined for four straight years.
To put that in simpler English, Nigerians on average have been getting poorer since 2015. We have not gotten unemployment data since the third quarter of 2018 and have not gotten poverty data for years but the fact that the slowdown was across major job creating sectors like agriculture, trade, and manufacturing means that we are likely not making progress on those fronts. All of which should make our policy makers very worried.
So why is our economy struggling?
Well, we are suffering from textbook problems. That is, problems that are in the textbook with some solutions that are also in the textbook. I cannot describe all here, but we can focus on the macroeconomic stability problem.
When an economy is hit with a commodity term ‘trade shock’, a scenario where the value of its exports suddenly drops relative to the value of its imports, policy makers are faced with two choices. Either choose between allowing the exchange rate to adjust to absorb the shock or have the economy decline to absorb the shock.
Ok, in practice it is not as straightforward and simple as that as there are things involving timing and frictions but that is the broad gist. It’s either exchange rate or economy. If policy makers choose to let the exchange rate adjust, then the economy and inflation might take a hit but then after the adjustment things go back to normal. If the policy makers choose to sacrifice the economy for exchange rate “stability” then the economy declines and may be stagnant for years.
This brings us to the Nigerian economy. In 2014/2015 we suffered a classic terms of trade shock, no thanks to a rather dramatic collapse in the price of crude oil followed by a drop-in production. What did we choose? We choose the exchange rate. We implemented all sorts of policies under the auspices of conserving foreign exchange to prevent the currency from depreciation. From the demand management policies to others designed to attract foreign exchange at all costs.
The result? The economy collapsed. We grew some sense after things got really bad and opted to choose the economy over the exchange rate for a while. Recently though it looks like we are back to our unfortunate default mode of sacrificing the economy at the altar of exchange rate stability. We are back to demand management, closing the borders to prevent smuggled imports, and are heading back to a higher interest rate environment to attract foreign portfolio funds to keep the exchange rate stable.
Our economy is already dancing like this and like that. This is all textbook stuff really.
To be fair there are lots of other things that count besides the exchange rate and the macroeconomic policy environment. If your capacity to move goods across the country becomes more difficult because everyone is afraid of being kidnapped, then the economy suffers. If people lose confidence in their ability to settle disputes and get justice in an orderly manner, then the economy suffers. If businesses have their bank accounts arbitrarily frozen for simple tax related reasons that could be resolved more easily, then the economy suffers.
If investors fear that the returns on their investments will be seized over technicalities, then investment suffers, and the economy suffers. If people expect a currency devaluation and opt only to invest in short-term risk-free government instruments, then the economy suffers. If government spends its scarce resources subsidizing fuel as opposed to building roads on investing in education and health, then the economy suffers. I could go on and on.
All these are not things which no one has seen before. These are not things that are brand new to Nigeria. These are challenges that others have faced and dealt with.
In short, these are things that are in the textbook with solutions also in the textbook. So, can we just go back to doing textbook policy. Too often we yearn for “Nigerian solutions to Nigerian problems” and are urged to “think outside the box.” Based on our GDP numbers and economic trajectory perhaps we should just stick to the textbook for now and go back to thinking inside the box.
Nonso Obiliki
Nonso Obikili is chief economist at BusinessDay.
