How Greece got out of recession and what Nigeria can learn

So, for the second time in eight years, Greece is out of a recession.

Greece first came out of a six-year-long recession in 2014, but soon plunged back in.  On 15 November 2016, it was announced that the Greece economy grew by 0.5% for the three months ended September 2016. It had already grown an estimated 0.2% for the three months ended June 2016.

However, Greece economy is still far smaller than before the recession and is still expected to contract by a minimum of 0.3% this year before growing by 2.7% in 2017. It is still a tough road ahead for that cradle of democracy.

Greece has been making several tough decisions in the last eight years to get out of a recession, which has been one of the worst periods in the country’s history.

After agreeing on a bailout with the International Monetary Fund (IMF), Greece has had to implement a lot of harsh austerity measures including cut in salaries of government workers; cut in benefits going to the unemployed; cut in pensions, which has led to a lot of street protests from pensioners; loosening of employments’ rights and making it easier for companies to fire and hire staff; relaxing of mortgage rights; and sales and privatisation of government assets including airports, highways, real estates, licences, increase in taxes and cuts in social allowances.

The reforms have not been politically popular but the government has been forced to implement them, and most of the time under severe pressure from external bodies like the European Union and the International Monetary Fund (IMF).

Some of the decisions have had unpalatable consequences. A 25% cut of health spend between 2009 and 2011 led to some medicines becoming unavailable in hospitals, rise in infant mortality rates, increased cases of HIV infection among drug users, the return of malaria, and an increase in suicides, a study by experts from Oxford, Cambridge and the London School of Hygiene and Tropical Medicine (LSHTM) found out.

What can Nigeria learn?

Be careful about excessive accumulation of debts

Though Nigeria is nowhere near the level of debts that plunged Greece into a financial crisis and eventually a recession, the country should be careful about the quantum of debts it takes on and especially its capacity to repay those debts. Debts can accumulate very fast especially when payments deadlines are missed.

Nigeria’s total current debt is US$61 billion, which is just about 15% of the country’s GDP, but Nigeria is also currently spending an estimated 24% of its 2016 budget on debt servicing. Debt service and sinking fund obligations in the 2016 budget actually represented 38% of 2016 federal government revenues and about 26% of total revenues for the country. The N1.48 trillion budget to service debts in 2016 is just slightly below the N1.59 trillion capital expenditure for 2016. Technically, Nigeria still has headroom to borrow but what we borrow for becomes very important since the country’s capacity to repay its debts is entering the red zone.

Overcoming recession is possible but hard decisions have to be made

Greece got out of recession by making a lot of hard and unpopular decisions. These decisions have led to a lot of social turmoil in the country but gradually it is taking the country out of recession.

Nigeria may have to take a similar path if the country needs to get out of recession and this path would include an appropriate pricing for the naira, a cost reflective pricing for fuel and power, concession of critical infrastructure as well as sales of assets, improving the business environment, among other policies.

But the elephant in the room is appropriate pricing of the Naira

Appropriate pricing of the naira is now the elephant in the room. What is the true value of the naira that will encourage optimal productivity in the Nigerian economy? This is the million-dollar question that needs to be answered in Nigeria currently. Interestingly, Greece did not have to answer this question because it is part of the European Union and therefore did not have control over its own currency since it uses the Euro.

For Nigeria that is not the case. We have control over the value of the naira and its exchange rate with other countries. So the question is what exchange rate works best for the country to derive the most benefit from its relationship with its global trading partners. The current exchange rate is obviously not working as many manufacturers are on the verge of closing down because they cannot have access to dollars, which is the preferred currency for international trade.

Egypt did it

Egypt, which has also been facing similar challenges like Nigeria, on November 3, was forced to float the Egyptian pound after months of negotiation with the IMF. The Egyptian pound initially plunged after the float but has since stabilized at a new level and for the first in years, companies are beginning to see significant improvement in their access to dollars again, while dollar inflows is now more than dollar outflows for the first time in years.

Egypt has also been able to secure a US$12 billion deal with the IMF, which significantly improves dollar liquidity in the country. Though these measures in no way solve Egypt’s economic problems immediately but it has gone a long way in setting the Egyptian economy on a new growth path.

Yes, no one is sure of what happens if Naira floats but…

If Nigeria decides to really float the naira, like Egypt did, we are likely to see a plunge in its value. But that plunge will likely trigger increased dollar inflows from abroad, which would boost dollar liquidity and also strengthen the naira. No one can say, at what price the naira would eventually settle with a float, but it is going to settle at a price that reflects effective demand and supply in the economy. If a float is followed by key reforms in the oil and gas sector, then we may see significant inflow of investments that could even strengthen the naira beyond our expectations.

Our take

Greece has shown that getting out of a recession is not an easy road but that it is possible if tough political and economic decisions are taken. Nigeria needs to take some hard lessons from Greece and also Egypt. Sadly, it is either the decisions are willingly taken early enough or we are forced to eventually take those decisions because there are no more options. Either way the hard decisions would eventually be made. Interestingly, both Greece and Egypt waited and dilly-dallied but they eventually did make the hard decisions but when they had little options. Nigeria should not exhaust its options before making the hard decisions.