For many Nigerians, it felt like Nigeria never actually exited the recession of 2016, yet they find that they are once again faced with another painful squeeze, one that meets them at a worse point than the previous.
It was always going to take incredible effort to meaningfully justify that the Nigerian economy was expanding again after five quarters of contraction -between the first quarter of 2016 and first quarter of 2017, when average income of Nigerians continued to contract.
It is no surprise that the exit from recession was meaningless to many as it was never broad-based and was driven primarily by increased oil output rather than expansive fiscal policies. This is why several sectors have remained in recession, notable among these is the trade sector that accounts for 15 percent of GDP.
The painful squeeze of average incomes was expected yet again in 2020 with the International Monetary Fund (IMF) expecting the trend to last for another three years.
But then the COVID-19 pandemic struck and the tepid 2 percent growth that Nigeria managed since exiting its last recession was threatened. The National Bureau of Statistics (NBS) would later publish data that showed the economy contracted by a record 6.1 percent in the second quarter as the pandemic took a toll on the economy, before the latest figures show Nigeria is now in recession after the economy retreated by 3.62 percent.
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It is a torrid reading for Nigerians who have grown poorer since 2015, thanks to an economy that has been growing too slowly to create new opportunities for a rapidly expanding population.
What is worse is that they will have to face this year’s recession from a much weaker position compared to the recession of 2016.
This recession will be a lot more painful as it comes when Nigerians have not even recovered from the last one, and rising inflation and record unemployment rate are creating a perfect storm.
This year, the rate of inflation has climbed to its highest level in nearly three years with food prices leading the charge while unemployment rate hitting a record-high of 23 percent with economists forecasting 30 percent by the end of 2020.
It had taken Nigeria 25 years before slipping into a recession in 2016. This time, it took four years, meeting Nigerians at their lowest point economically.
Prior to the recession in 2016, the Nigerian economy averaged growth of 9 percent between 2000 and 2014, with the highest GDP growth rate within the period coming at 15 percent in 2002, while the lowest was in 2012 at 4.23 percent.
This means that the lowest growth rate between 2000 and 2015 doubles the highest growth rate since 2015.
“The pain will be a lot worse this time around,” said Martins John, a Lagos-based commercial banker.
“Everyone is afraid of losing their jobs, which is a typical feeling during a recession, but it is also the worst ever time to go without a job given the high cost of living,” John said.
Economic recessions are typically characterised by high unemployment, falling average incomes, increased inequality and higher government borrowing.
For businesses, it leads to lower sales and in turn triggers the need for the business to cut costs drastically.
Cost cutting is never really complete without laying off of staff. That prospect is what John and the few Nigerians with jobs fear.
For those without jobs, 22 million of them, finding a job will become more difficult than finding a needle in a haystack, as companies cut back on new spending.
Way back to robust growth
Over the course of the past week, BusinessDay surveyed 20 economists who shared their views on how the economy can not only recover from another recession, but also on how to achieve the required growth that engenders shared prosperity.
Simply exiting recession is no longer a sufficient goal for Nigeria. It never was. That is why despite exiting the 2016 recession a year later, average incomes have continued to shrink and Nigerians have grown poorer. At less than 2 percent on average, economic growth in Nigeria after the 2016 recession has been a jobless and non-inclusive one.
The economists surveyed say the goal this time must be to grow the economy by at least 6 percent. The last time that happened was in 2014.
BusinessDay surveyed the 20 economists to get their views on how Nigeria can not only turn the corner on its latest recession but deliver 6 percent growth as quickly as possible.
We carefully summarised five key insights from the responses of the economists:
Re-opening of land borders
Nigerian authorities controversially closed borders with neighbouring countries including Benin Republic and Niger Republic in August 2019 to curb smuggling and boost local production.
Although the blockade encouraged the consumption of locally grown produce such as rice, it hurt factories across West Africa, which rely on Nigeria’s market of 200 million people.
It also hurt Nigerian exporters who have been unable to export to neighbouring countries through the land borders.
The economy has been worse-off since the border closure as food prices soared, partly due to supply disruptions even as businesses unable to export take hits on their toplines.
It is no surprise therefore that ditching the border closure is seen as a way of giving the economy a leg up.
CBN monetary policy
Some foreign investors have admitted their shock to BusinessDay that the Central Bank of Nigeria (CBN) has chosen to travel the same path it did in 2016 in its foreign exchange management.
The CBN has rationed dollar sales this year in a bid to fend off material naira devaluation. It seemed rapid progress was being made towards a full convergence of the multiple exchange rates only for oil prices to recover and the CBN has been silent on finalising the move towards exchange rate unification, which it had promised to do.
The economy has suffered terribly with each delay to the FX reforms.
The economists urged the CBN to focus on how to boost FX supply rather than be so fixated on controlling demand. A ready option placed before the CBN an IMF stand-by facility of $10 billion.
This would shore up the FX reserve and give comfort to foreign investors, especially direct investors, who a developing economy like Nigeria’s can’t do without if it must boost growth significantly.
Nigeria already tapped the IMF for $3.4 billion this year but more money is needed. The offshore money would however not come without a credible reform of the foreign exchange market.
Private sector-led push
It is almost as though the government’s default approach to managing the economy is state driven with President Muhammadu Buhari managing the economy on similar principles as he did during his first stint as military head of state in 1983.
The government is however incapable of driving growth in its own when the country’s annual budget is less than 10 percent of GDP and government tax take is 7 percent of GDP.
The government’s constrained resources showed up when it came up with a fiscal stimulus plan that was too little to make an impact in the thick of the pandemic, as it was less than 1 percent of GDP.
With oil and non-oil revenues dwindling, the government has never come face to face with more pressure to allow the private sector lead the economic recovery charge while it creates an enabling environment.
The option of borrowing to maintain spending at a time of low revenues is fast thinning and looks unsustainable with Nigeria servicing its debt with almost 100 percent of its lean revenues.
The economists urged the government to allow the private sector drive investment in infrastructure. After all, the capital expenditure of the government has been consistently dwarfed by recurrent and non-recurrent spending. The government’s low revenues have taken a toll on the capital budget, which has underperformed for four years now, as actual spend remains stuck at an average of 50 percent of the budgeted capital spend.
Nigeria is estimated to require billions of dollars in annual investments to bridge an infrastructure deficit that is holding back the economy.
“Private capitals both international and domestic have to be relied upon if we are going to spur investments in any meaningful way,” said Doyin Salami, a member of the president’s economic advisory council.
“The country needs roughly 19 million jobs, and must grow at 6 percent annually in the next decade to tackle poverty and unemployment; and private investments must be at the heart of that growth,” Salami said.
Economic diversification and investment-led growth
Nigeria has struggled to diversify its economy without much success. Although the economy looks diversified at first glance, with agriculture contributing 25 percent and about five other sectors contributing around 10 percent each, the overbearing influence of the oil sector on the economy exposes Nigeria.
About half of the budget is funded by oil revenues and oil exports account for the single largest source of foreign exchange into the CBN coffers.
To move to an era of robust growth, the government would need to seek investment-led growth rather than oil-fuelled growth.
According to Bismarck Rewane, CEO of Lagos-based Financial Derivatives Company, investment-led growth strategy is the most effective for developing countries, and this has been proven in various countries including Singapore and Indonesia.
The average level of gross fixed investments in Nigeria is 15 percent of the total GDP of $450 billion, which is too low in Rewane’s view. He said the country needed investments to be at 30-40 percent of GDP.
“If you invest any amount in the private sector, you will get a 6.25 lift, which is the multiplier effect, against keeping or leaving it with the government. It will also create jobs and help in reducing income inequality. Over 60 percent of our gross capital formation in the country is stranded. Rather than raising debt, we need to sell those assets. This is because debt sustainability undermines fiscal consolidation,” he said.
Ayodeji Ebo, senior economist and head of research at Greenwich Merchant Bank, focused on why Nigeria needs to expedite diversification efforts.
“Nigeria needs to move away from dependence on oil revenue for survival to avoid these frequent fluctuations,” Ebo said.
“There needs to be more coordinated national development plan, which will focus on providing the necessary infrastructure for businesses. The manufacturing sector needs to be well positioned for Nigeria to benefit from AfCFTA. Infrastructure development will create significant employment opportunities as well as boost SMEs activities. FX availability will also need to improve for the trade sector to revert to growth trajectory,” Ebo said by email.
A new approach to idle government assets
The government needs to find a way to better utilise its idle assets whether it be through privatisation or concession.
PWC estimates that Nigeria has N180 trillion trapped in dead capital especially in real estate. That’s more than the country’s 2019 GDP.
“The government should go into some sort of public-private partnership or concession of these unproductive assets to some private organisations or companies so they can bring in the needed funds, capital or liquidity needed to revitalise the economy,” said Abiodun Keripe, head of research at Afrinvest Limited.
Increasing public investment in health care and education was also tipped as a crucial determinant of whether Nigeria taps its largely youthful human capital to make economic gains.
Nigeria’s public spend on health care and education has been below 5 percent of the annual budget for more than a decade when peers in Africa spend 30 percent.
The government would need to redirect wasteful spending to these critical sectors after years of neglect if the economy is to grow sustainably, according to the economists.
