BusinessDay

Govt spending overtakes private investments, exports for first time since 2010

For the first time in more than a decade, the government has become the second-biggest propeller of economic activities in Nigeria, according to data by the National Bureau Statistics (NBS).

Household consumption remains the largest contributor to GDP but has always been followed by private investments and net exports, while government expenditure contributes the least. But that changed in the second quarter of 2020 with government spending overtaking private investments and exports.

The rise in government’s contribution to GDP signals how much the economy has fallen on hard times that a government with limited resources is the second biggest driver of the economy at the expense of private investments and net exports.

It is also a sign that badly-needed private investments are thinning in a country that needs to create jobs and grow the economy.

“It’s an anomaly for government spending, which is microscopic, to be the second largest contributor to GDP at any point; it shows just how much Nigeria must work to boost private investments and exports,” an economist with a development institution said on condition of anonymity as he was not authorised to speak publicly on the matter.

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In 2020, the combined budget of the federal government and state governments was less than 15 percent of GDP.

In Q2 2020, the government expended N2.35 trillion, 122 percent higher than what it spent in Q1, whereas investments by private businesses and proceeds from net exports fell by 20.8 percent and 69.7 percent to N2.2 trillion and N710 billion, respectively.

Private investments and net exports have been battered by the coronavirus pandemic this year but there has been a long-held perception by critics of the government that it showed little urgency to attract private investment and created little incentives for exports.

According to the NBS, net exports, which represented 21 percent of total real GDP in Q1 2020, declined considerably in Q2 to 7 percent, while gross fixed capital formation which accounted for 17 percent of real GDP in Q1 fell to 14 percent in Q2 2020.

In their place, the government’s contribution doubled in Q2 to 15 percent, compared to 6 percent in Q1 2020.

Household consumption, the largest contributor to GDP, has been shrinking since the first quarter of 2019, with real growth contracting to 0.08 percent.

The economy slipped into its second recession in five years in 2020, extending a painful run of declining GDP per capita. Household consumption, the biggest contributor to GDP, has been hammered by rising inflation and higher unemployment rate which have weakened purchasing power and are tipped to throw an additional 5 million Nigerians into the poverty pit this year.

“Nigeria’s bet on making a quick recovery from the economic recession would depend on how policymakers can increase household income to stimulate consumption, and also increase private investments and boost exports,” one economist told BusinessDay.

Net exports which show the difference between exports and imports shrank by 61 percent in the quarter from a growth of 18.15 percent in the previous quarter.

Similarly, real growth in gross fixed capital formation – which includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings – contracted by 26.13 percent in Q2. That’s a massive drop in investment when compared with the 3.64 percent growth in the first quarter and a 13.34 percent growth in the same period last year.

“Consumption expenditure in Nigeria is very high compared to the size of the GDP, hence if there are any problem affecting consumers, it will tell badly on goods,” said Omotola Abimbola, a macro economist at Lagos-based Chapel Hill Denham.

“In Q2 we had a lot of restrictions that affected household income and as income fell so did consumption, dragging down the growth of the entire GDP and crowding out the support seen from the government,” Abimbola said.

The gross domestic product measures the total value of monetary services within a specific period. However, unlike the output approach which measures the supply side of the GDP, the income and expenditure approach gives a clear insight into the demand side of various economic agents.

It explains that the GDP or output is a function of household consumption, government expenditure, investments and net export indicated as Y= C + G + I + (X-M).

Even though the growth of the GDP would likely be at a faster pace when increased activities are recorded from all the three economic agents, the elephant in the room has been the driving force of growth from an expenditure point of view and has been spending and consumption of households, accounting for more than half of Nigeria’s GDP. Thus, when household consumptions are affected, there is a higher chance that the overall GDP will be affected as well.

This is followed by net exports, accounting over 20 percent. Next on the line are investments by firms and businesses, accounting for more than 17 percent of GDP.
Once household consumption recovers, growth will improve, according to Johnson Chukwu, MD/CEO, Cowry Asset Management Limited.

“If you don’t invest, then your productive base as an economy will be challenged. So you are not able to grow,” a Lagos-based economist said.

“To spur growth is not just about spending but about creating a stimulus through fiscal means. Nigeria needs to use fiscal tools to stimulate the economy in a state of crisis, not just monetary tools,” the person said.

Since the 2016 recession caused by a collapse in oil prices and an agitation in the Niger Delta region that led to the bursting of crude oil pipelines, household consumption has remained largely squeezed and subdued.

This is evident in the increasing commodity prices, rising unemployment, negative growth in GDP per capita, deepening poverty, falling income, widening inequality, among others. Little wonder the growth in household consumption has remained in the negative territory.

The country has also failed to attract the much-needed private investment that will complement the government in creating jobs and reducing its labour force who are currently unemployed.

This is because a rise in investment should contribute towards higher aggregate demand (AD) and also increase productive capacity that would translate to higher economic growth in the long term.

But worst of this is the fact that the government has chosen to shut its land borders, inflicting pains for companies targeting international markets to do legitimate businesses.
The government is betting on exiting the recession by the second quarter of 2021. But this must mean moving beyond the rhetoric to boosting household income and consumption as well as creating an atmosphere that would translate to increasing private investments.

Analysts say with three of the country’s biggest economic agents largely subdued, it might slow the recovery expected of the economy.

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