Nigeria in recession: A wasted crisis?

John F. Kennedy once said: “The Chinese use two (2) brush strokes to write the word “crisis.” One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but (also) recognise the opportunity.” This piece views the current economic recession from the lens of a crisis. It seeks to articulate where we are, what got us here and how we can get out of the crisis.

High inflation, high interest rates, a weak naira, high unemployment, low investments, low consumption, low consumer confidence, low investor confidence, low foreign exchange reserves, rising government debt – this is where we are.

Recessions occur in the normal course of economic growth and development of any country. To mitigate its effects, political and economic leaders spot the early indicators such as stock market downturns, increased real estate vacancy, rising job losses, persistent fall in oil prices, etc, and promptly put in place well targeted monetary and fiscal expansion measures. It is more likely than not that in the midst of elections, we missed the early signs commencing June 2014 when oil price commenced its sharp decline.

An independent government body such as the Fiscal Responsibility Commission (FRC) could have proactively blown the whistle on the impending recession and proposed clear counter cyclical measures to address it – its legal remit (clause 3 (1) (a) and (c) of the Act) is wide enough to cover such duties.

Inadequate foreign exchange is at the core of the current economic recession. Oil prices are low and will remain so at least over the medium term. The greatest disservice we have done ourselves is not to have robust foreign exchange savings in the general reserve, excess crude account or the sovereign wealth fund or all of them combined. The Norwegian model of sustainable savings and perpetual off shore investment of oil proceeds is compelling and can be applied to Nigeria – but only very gradually over a period of no less than a decade. Norway had saved US$882 billion as at September 2016, which is more than double its GDP. Norway owns more than 2% of shares listed on stock exchanges in Europe and more than 1% of global shares including its largest holdings in brands such as Apple, Nestle and Microsoft. It is invested in 9,000 firms across 78 countries. Why not Nigeria?

Let us painfully build our reserves to US$100 billion over the next three (3) years and add on US$100 billion in steps of three (3) years subsequently till we reach US$1 trillion. If government decides to fully sell down its equity stakes in joint venture oil & gas operations, it could raise no less than US$100 billion. Proceeds should be used to further capitalise the sovereign wealth fund. Our capacity to sustainably build the economy depends on achieving this solid foundation.

Credit to Mr. President for restoring as promised, a higher level of security to Borno and its environs. He also takes credit for successfully reducing our unproductive dependence on petrol subsidy. Notwithstanding, the biggest win that this administration requires is to restore Nigeria to its path of rapid economic growth and development. How? Take a cue from the content of the American Recovery and Reinvestment Act (ARRA).

The general principle is that to reverse a recession, there has to be extra budgetary spending. However, if added spending must remain within the annual budget, then the 3% deficit cap must be lifted by the National Assembly as has been provided for in Clause 12 (1) of the Fiscal Responsibility Act (FRA). The ARRA had three (3) legs – transfers to states (as has been rightly done by this administration having transferred for instance US$2.1 billion to state governments in July 2015), tax cuts and direct spending. The total cost of the ARRA intervention was almost US$1 trillion, which was about 7% of GDP. Hence, we need to do more.

Any measure that results in leaving more cash in pockets of consumers to spend on the economy would restore output and employment. Nigeria needs to increase its tax receipts from its current 2% of GDP to an average of 18% for sub Saharan African countries, but this is not the time at all to increase VAT or introduce a communication tax. Instead, we should consider suspending or reducing VAT for a period of time. Employees who earn income and pay taxes within a defined threshold could be exempt from taxes for a period of time. The low hanging fruit which would put money in the pockets of pension contributing employees for purposes of home acquisition should be urgently implemented by National Pension Commission. Why the delay since 2015?

Due to its impact on large employment of unskilled and semi skilled labour, direct infrastructure spending is great for medium to long term economic recovery. Good progress is being made on road upgrades across the country but there is still a wide gap between current maintenance spending and the US$15 billion estimated by the Nigeria Infrastructure Concession and Regulatory Commission as annual requirement to maintain or upgrade 34,120km of federal road network.

All in all, we cannot be laissez faire in our approach to restoring growth to the economy. If we need to borrow from Africa’s multi billionaires, let’s do it. Wasting more time is costly. A PWC report has implied that instead of Nigeria’s GDP per capita reaching US$10,000 by 2030 we would need at least ten (10) more years to reach that target due to the current economic recession and the way we have responded to it.

We need additional local and foreign investment now and only high market confidence will move investors to invest in us. If the Federal Government wants the financial markets to be less volatile and more confident, it must periodically communicate clearly, promptly and transparently what its coordinated policy objectives and relevant tools for achieving them are. We can do this.

Happy New Year Nigeria!

 

Mayowa Amoo