• Thursday, March 28, 2024
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BusinessDay

Recession: Bad policies worsen Nigeria’s vulnerability to external shocks

Weak economic growth

Nigeria’s latest recession is its second in less than five years. In 2016, Nigeria’s economy contracted for the first time in two decades. But after years of anaemic recovery, the country has now slumped back into recession. The economy shrunk by 3.6 per cent in the three months through September, following a 6.1 per cent decline in the preceding quarter. By definition, with the two consecutive quarters of economic contraction, Nigeria is in recession – again! But why?

Well, the government usually blames external shocks. The 2016 contraction was blamed on the oil price crash of 2014, and this latest recession is put down to COVID-19 and the oil price slump. But this systemic-level explanation disguises the underlying causes of the recessions.

Of course, external shocks are inevitable; they happen from time to time. The question is whether a country is particularly exposed to shocks and, if so, whether it has the resilience against them. As a mono-product economy, Nigeria is uniquely exposed to external shocks, but, sadly, it has absolutely no resilience against them.

Yet, one thing we know about COVID-19 is that just as it affects those with underlying health conditions worse than relatively healthier people, it also hits countries with weak economic structures harder than those with stronger economies.

Recently, the managing director of the IMF, Kristalina Georgieva, told the Financial Times: “Countries that have been building strong fundamentals and diversifying their economies are in a better position”, adding: “Countries that are more dependent on one or two sectors and where levels of debt have gone up before the pandemic are in a much tougher place.”

Of course, Nigeria is in the latter category: commodity-dependent and debt-laden. Nigeria has not built strong fundamentals and has not diversified its economy. The country’s structural and policy weaknesses create a self-induced vulnerability to external shocks.

In her book ‘Fighting Corruption is Dangerous’, Dr Ngozi Okonjo-Iweala, two-term finance minister, said: “Nigeria’s economic hardship from 2015 onward, including the recession of 2016, can be seen as something of a self-inflicted wound.”A self-inflicted wound? Why?

Well, she explained that Nigeria failed to diversify its revenue sources and build buffers against the predictable 2014 oil price crash, and that when President Buhari assumed office in May 2015, his government’s policy responses “were inadequate or outright wrong”, including stubbornly and unwisely maintaining a fixed exchange rate that disincentivised foreign investment and caused rapid haemorrhaging of foreign exchange.

Dr Okonjo-Iweala summed up the situation thus: “A disjointed monetary and exchange policy damaged investor confidence, led to capital flight and ultimately led to economic contraction in 2016 – the first such contraction in the Nigerian economy for two decades.”

So, then, Nigeria could have avoided its first recession in 20 years if the government had made the right policy choices, first, by building buffers against an oil price crash and, second, by responding appropriately when the external shock actually came!

But what about the current recession? Should it simply be blamed on COVID-19 or did other factors, endogenous in nature, play a role? Well, it would be disingenuous to dismiss the impact of COVID-19 altogether. After all, the pandemic has actually led to falling commodity prices, suppressed remittance flows and collapse in tourism and investment.

Read also: Nigeria’s recession opens opportunities for innovators, savvy entrepreneurs

Yet, it’s also true that Nigeria was teetering on the edge of a second recession even long before the pandemic. For instance, before COVID-19, Nigeria was already experiencing massive capital outflows, and foreign investment inflows were already drying out. Of course, COVID-19 accelerated these trends, but the fundamentals were extremely weak, making the economy an easy prey for the pandemic.

Now, understanding the nature of this problem, requires, first, an understanding of what a recession is. Put simply, a recession is the decline of economic activity. The Gross Domestic Product (GDP) captures a country’s economic activity, and the size of its economy. So, when a country experiences a recession, it means the size of its economy has shrunk to a negative level. This usually means a significant contraction in each of the components of the GDP, namely: consumption, government spending, investment and exports.

But look at those four components, which of them was not already comatose before the outbreak of COVID-19? Which of them was performing well before the pandemic?

Take, first, consumer spending, which is usually the biggest component of GDP. Does Nigeria have a consumer society to sustain growth? About 90m of Nigerians – nearly half the population – live in extreme poverty – on less than $1.50 a day; the poverty-ridden informal sector makes up about 65 per cent of the economy; and over half the population are unemployed or underemployed. Given such depressing conditions, where are the consumers, with the purchasing power, to drive economic growth in Nigeria?

Then, take business investment, another critical component of GDP. Even before the pandemic, Nigeria was experiencing virtually no private-sector-led or foreign-investment-led growth. In a recent piece, the Financial Times asked: “Has Nigeria missed the manufacturing bandwagon?” It concluded that the obstacles to manufacturing are just too many to make any form of industrial production viable in Nigeria.

Businesses are overburdened in Nigeria: excessive regulations, multiple taxation, shortages of foreign exchange, and other supply-side constraints. According the Manufacturers’ Association of Nigeria (MAN), about 272 firms were forced to close in 2016. But if businesses are closing down instead of expanding, the economy will be on the verge of a recession. Yet, that problem existed in Nigeria before COVID-19 and the oil price crash!

What about exports? This is arguably the most important component of the GDP because when a country’s firms produce manufactured goods for exports, they do not only increase productivity and create better jobs, but they also generate much-needed foreign exchange. As long ago as 1776, Adam Smith linked the exportation of manufactured goods to the wealth of nations. Yet, non-oil exports have declined significantly under the Buhari government, which has pursued import-substitution instead of export-led growth policies.

The last component is government spending. This too is an important element of GDP, but despite the Buhari administration’s much-trumpeted spending on infrastructure and social interventions, government spending in Nigeria was just about 13 per cent of GDP in 2018, which is among the lowest in the world. But where would a government even find sufficient money to spend when the other components of the GDP – consumer spending, business investment and exports – are non-existent?

Certainly, growth is the only antidote against recession. But how? Well, economists argue that there are three sources of growth. First, increase in inputs, such as investment; second, increase in allocative efficiency, i.e, as efficient firms increase their market share while inefficient ones are forced out; and third, increase in technical efficiency as firms use whatever inputs they have to become more productive.

But all sources or drivers of growth can only happen under the right policy and institutional environments. Unfortunately, the drivers and conditions of growth are not present in Nigeria. Think of the border closures, the import bans, the exchange controls, the massive supply-side constraints. Think of the Buhari government’s business-unfriendliness and seeming hostility to, or misunderstanding of, the private sector.

Last week, in his article in this newspaper, Gregory Kronsten, head of macroeconomic and fixed income research at FNB Quest Capital, wrote: “Above all, direct investors of all sizes are looking for a government that understands their needs, speaks with one voice to them, acts quickly on approvals and permits, and delivers on its commitments to them without delay.”

Those points and others highlighted above are what spur growth and help countries ward off recessions. But, despite its utter exposure and vulnerability to shocks, Nigeria lacks the willingness to do the needful! Yet, until it builds resilience against external shocks, they will always prey on its weak economy!