It’s a painful second recession in five years for Africa’s largest economy which has struggled to muster meaningful growth since 2014.
Nigeria’s Gross Domestic Product, which is the total value of goods and services produced within a specified period, contracted by 3.6 percent in the third quarter of 2020, the government-funded National Bureau of Statistics (NBS) reported Saturday after publishing the data two days ahead of initial guidance for Monday, November 23.
The Q3 contraction comes on the back of a 6.1 percent decline in the second quarter which means Nigeria is in recession once again, even though there’s been an improvement compared to the second quarter as the pandemic-induced lockdown was eased and oil prices recovered.
Read more Nigerians find comfort in booming cryptocurrency market as second recession hits
Nigeria had not fully recovered from the record slump in 2016 before the COVID-19 pandemic struck this year and sent the economy tumbling right back where it came after a period of weak but consistent growth since Q2 2017.
The pandemic played a starring role in the latest recession especially given the impact it had on oil demand and by extension, prices, but the economy of Africa’s largest oil producer has stuttered since 2015 and was always going to struggle this year, pandemic or not. The pandemic only made a bad situation worse.
While headline GDP, until in the last two quarters, painted a somewhat misleading picture of improving economic activity, GDP per capita, a more precise measure of economic output and living standards, has been contracting since 2015. What this means is that the real incomes of Nigerians have been falling for five years now as the economy struggles to grow at a rate that can create new opportunities for the large swaths of Nigerians that are born each day.
The IMF in 2018, well before the world caught a whiff of the pandemic, had predicted that Nigerians will see their real income per head fall every year until at least 2023, and even more painful squeeze for a country with per capita gross domestic product of around $2000.
Five things we learnt from survey of 20 economists
Over the course of the past week, Business Day surveyed twenty 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’s 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 twenty 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 economists.
Re-opening of land borders
Nigerian authorities controversially closed borders with neighboring countries including Benin and Niger 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 neighboring countries through the land borders.
The economy has been worse-off since the border closure as food prices soar partly due to supply disruptions even as businesses unable to export take hits to their toplines.
It’s 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 a 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 surveyed 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’s 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 on 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 to 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 surveyed urged the government to allow the private sector to 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 spending 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 capital 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.
Bismarck Rewane, CEO of Lagos-based, Financial Derivatives Company said an 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 needs 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 a 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 SME activities. FX availability will also need to improve for the trade sector to revert to a 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 spends on health care and education has been below five 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 surveyed.
