Business Day & Chicago Booth content series – article 2

Response to Recovery: Managing the next phase of Covid-19

The shock of the Covid-19 pandemic has been fundamental. The economic headwinds it has created have led to unprecedented business and societal disruption, with no industry left untouched.

While the cause of the turbulence is the same, the way it has manifested itself has varied across the globe. While there can be no single roadmap for recovery, there are some key principles that can help lay the foundation for economic growth in both the short and longer term.

Central banks play an important role

As a former central banker, I believe that central banks can play a crucial role in supporting economic recovery. However, the specific levers that they pull to assist recovery must be determined by the specific economic context of the country.

In the US, for example, the Federal Reserve has taken steps including offering liquidity to encourage the continued functioning of financial markets; providing funding and loans to support individuals and businesses impacted by the pandemic; and committing to keeping interest rates very low, for a long time, to encourage investment and growth.

While there are certainly some commonalities with the US, the Central Bank of Nigeria (CBN) faces different challenges. Unlike the US, Nigeria faces high, rather than low, inflation. The policies the CBN currently has in place can provide a short-term boost growth but the next step will be for the CBN to implement changes that ensure inflation does not get out of control –otherwise the Nigerian economy will suffer in the intermediate and the long term.

In October this year, inflation in Nigeria increased for the fifteenth month in a row, hitting 14.9%, according to the National Bureau of Statistics. As a result, the CBN is facing the pressing challenge of taking action to rein in inflation and avoid the issues that high inflation can create, such as destroying the value of the Naira.

The most effective way to tackle inflation is to raise interest rates. But it’s important that the decision, and reasons behind it, are clearly communicated and explained to the wider population, not just the financial markets. That is the most effective way to change inflation expectations and behavior, as my Chicago Booth colleague Professor Michael Weber’s research has found.

It is also important to remember that central banks can only do so much. Monetary policy alone can’t be the only lever; it needs to be supported by fiscal policy and structural reforms that go hand-in-hand with central banking interventions.

Fiscal policy needs careful consideration

Nigeria entered the pandemic with relatively low levels of debt – which placed it in a stronger position than many other countries to be able to respond. While it’s true that high levels of spending produce a boost in the economy, policy makers must carefully consider and evaluate where spending will have the biggest impact.

In the short run, providing a safety net for those harmed by the effects of the pandemic is crucial. This needs to be coupled with spending and investment on infrastructure changes that can have long-term benefits far beyond Covid-19.

There are three areas where Nigeria could see a significant return on investment when it comes to infrastructure:

Education and entrepreneurship: Nigeria benefits from a very large population of young people – a recent UN report found the median age to be just 18. Policies that encourage younger generations to start their own businesses and pursue innovative ideas focused on solving local issues could be pivotal in shoring up Nigeria’s economic prosperity in the future. Investing in education is vital for laying a solid foundation for such entrepreneurship. Equally important is reducing regulatory barriers for new entrants.

Productivity: Like many countries around the globe, Nigeria has seen long-term low productivity. This means that it is vital to support the creation of new businesses and enterprises that will help to tackle inefficiencies.

There are two ways to accomplish this; firstly, by increasing competition. This is best done through reducing the role of state ownership and state-owned enterprises, encouraging more privatization, and evolving regulation to support fledgling start-ups.

Second, investment in systems and services is needed to reduce bottlenecks. Tackling the crushing traffic in key cities such as Lagos, is vital groundwork that must be done if progress is to be made on productivity.

Diversification and reform of key sectors: Nigeria’s economy is currently centred around oil and energy. This sector could benefit from more private-sector orientation, competition, and responsiveness to market demand. There is currently positive movement in that direction with the Petroleum Industry Bill, which would transfer the assets and liabilities of the state oil company, the Nigerian National Petroleum Corporation, to a new and profit-oriented enterprise and introduce more competition in the sector.

At the same time, the pandemic has starkly revealed the risks of an economy that is dependent on just one sector. With Covid-19 lockdowns and restrictions severely reducing demand for oil, the Nigerian economy has taken a big hit. Diversifying the economy will place Nigeria in a much stronger position, in the event of ongoing and future uncertainty.

Like so many countries, Nigeria faces continued economic challenges as it heads into 2021. The shockwaves created by the Covid-19 pandemic continue to reverberate, impacting the recovery of many vital sectors and industries. But, with the right monetary and fiscal policy in place to rein in inflation and encourage reforms and investment in key infrastructure projects, Nigeria will be set up for a strong economic future.