• Wednesday, June 19, 2024
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BusinessDay

Who takes the blame for Nigeria’s record contraction in Q2?

Nigeria-economy

It’s 2020 and the Telecommunication companies that applied for Payment Service Bank (PSB) licenses two years ago are yet to get the nod of the regulator to officially start providing financial services to the millions of Nigerians cut out of their country’s formal financial framework.

That’s an indictment on the government in many ways, not least is that it shows the lackadaisical approach of Abuja to boosting economic growth.

There’s a strong correlation between high financial inclusion rate and economic growth which should make Nigeria fast track reforms with an eye on boosting growth especially now

It’s anyone’s guess why such a transformative reform is stalling in a country where economic growth has been tepid and 38 percent of the population are unbanked.

As good as the performance of the Telecommunications sector, which grew the most of any sector after financial services at 15.09 percent, was in Q2, it’s hard not to think what could have been if the Telcos had obtained the PSB license they applied for since 2018 and have rolled out operations.

The impact would be huge. Not just in terms of boosting the telecommunication sector’s contribution to GDP but the impact it could have on overall economic growth.

Sadly, that’s just one of many reforms that the government has continued to stall on while conveniently hiding behind the COVID-19 pandemic as the chief reason for the economic collapse in 2020.

That’s why it will be inaccurate to absolve the government of any wrongdoing and lay the sole blame of Nigeria’s record 6.1 percent contraction in Q2, the worst since 2004, on the COVID-19 pandemic.

There are also flaws in taking heart from the poor showing by saying it was better than the decline suffered by other countries dealing with the COVID-19 pandemic.

To be fair, Nigeria did better than many expected given that the country also had to deal with an oil price plunge alongside the crippling economic impact of the COVID-19-induced lockdowns in Lagos, Abuja and Ogun, three states that account for over 60 percent of economic output.

A contraction of 6.1 percent pales in comparison to the damage wrecked on other economies, but how many have the low hanging fruits that Nigeria does to boost growth.

In the past few weeks there has been a flurry of GDP data showing countries posting record contractions in Q2.

The US economy contracted by the most since the Great depression of 1930 in the second quarter, after a 32 percent contraction. The UK economy also contracted 20.4 percent in Q2, representing the worst quarterly shrinkage since records began in 1955.

Italy and Germany contracted 12.4 percent and 10 percent respectively, as the Eurozone also reeled from the pandemic.

Closer to home in Africa, none of the big hitters have released Q2 numbers, however a Reuters poll suggest that the South African economy could contract by 44.5 percent in Q2.

These numbers suggest Nigeria is in much better shape than several other countries, a surprise to many who had expected the economy to suffer more than it has.

Even the International Monetary Fund (IMF) may not have predicted Nigeria to record such a relatively modest economic contraction in Q2.

This is because a reading of -3.96 percent (the average growth rate in Q1 and Q2) in the first six months of the year means the economy must now contract by nearly 8 percent in the second half of the year, about double the decline in the first half to achieve the IMF’s projection for a 5.4 percent contraction this year.

A bigger contraction in the second half of the year however looks unrealistic.

The global oil price plunge and the COVID-19 pandemic, which forced lockdowns that stifled economic activity, may have taken a bigger toll in the first half of the year compared to a second half where lockdowns have been eased and oil prices have recovered.

Perhaps this is why some people have been cheering the better than expected Q2 numbers and have been quick to pull up data showing other countries are faring much worse than Nigeria.

That’s however a big distraction for an economy that is now a short crawl away from its second recession in four years. How long the recession will last and what should be done to avert it should be the focus of discussions.

Another distraction is laying the dominant blame for the economic plunge at the feet of the pandemic.

To be clear, the pandemic did take a toll on the economy like it did in other parts of the world.

However, an evaluation of Nigeria’s macro-economic indicators before the pandemic exposes how the pandemic only made what was already a bad situation worse for the economy.

Long before the pandemic started spreading across the globe late last year; Nigeria’s economy had been gasping for breath for five years.

Economic growth in Africa’s most populous nation averaged 1.2 percent between 2015 and 2019. Problem with that is the population grew two times faster at an average of 2.6 percent per year.

Those five years were a painful squeeze for Nigerians who grew progressively poorer, as economic growth was too slow to create sufficient opportunities for a rapidly rising population.

As if Nigeria was not already in a bad place, the COVID-19 pandemic dealt fresh blows to an economy that was always going to struggle, pandemic or not, this year. So let’s not get carried away here.

The real question to ask is whether Nigeria contracted by a lower rate compared to other countries, but about whether Nigeria has pulled all the levers that can boost the economy at a time when the pandemic has placed additional pressure on the government to reform the economy.

Nigeria retains a long list of economic reforms that can unlock economic growth and reduce poverty but have been stuck.

Decrepit infrastructure and the lack of a functional rail system means Apapa, which houses Nigeria’s main port, remains a crying shame.

When transporting imported goods from Nigeria’s Apapa Port to local warehouses, businesses spend an average cost of $2,050, according to research firm, SBM Intelligence. This is nearly ten times the $208 it costs to transport containers from Durban Harbour to South African warehouses. In Ghana, it costs just $285 to transport containers to local Ghanaian warehouses.

There’s still the reluctance to abandon a multiple exchange rate practice that has deterred foreign investment inflows and contributed to an acute dollar shortage that has left several businesses choking.

The country is also yet to pass a long-standing Petroleum Industry Bill that is expected to unlock new investments in the oil and gas sector.

Cost-reflective electricity tariffs seemed ever so close this year, only to appear far away after the same Electricity Distribution companies that had championed the reform blocked it.
Nigeria still sits on N180 trillion worth of dead capital trapped mostly in real estate, according to estimates by consulting firm, PriceWaterhouseCoopers (PWC), which the government has not demonstrated any urgency in leveraging.

There are the low hanging fruits of privatisation and concessions of redundant government assets that have been on the table for years but have not taken off.

The government therefore must take more responsibility rather than hide behind COVID-19 as the main reason the economy contracted deeply in Q2.

It’s not the first time that the Nigerian government has tried to hang its failings on factors beyond its control.

In 2016, the oil price downturn and production disruptions were fingered as the reason the economy entered a recession for the first time in 25 years.

While this is partly true, the government conveniently forgets that its capital controls deployed at the time, which led to a scathing dollar scarcity, contributed to the recession.

Good government policies can play a starring role in averting economic turbulence and one just needs to look at how Nigeria didn’t share in a global recession of 2008 that battered several countries.

In spite of the debilitating impact of the global crisis, Nigeria’s growth trajectory was not significantly impaired.

The real Gross domestic Product (GDP) growth rate which averaged 6.29 per cent between 2004 and 2007 declined marginally to 5.99 per cent in 2008 rising thereafter to 6.9 per cent in 2009. This was attributed to the impressive performance of the non-oil sector, particularly, agriculture and the continuous implementation of sound macroeconomic policies.

Truth is when Nigeria does enter recession by the third quarter it would be more because the government failed to implement sound economic reforms and less of a rampaging pandemic.