The causes and solution of economic recession in Nigeria has become the major topic of discussion on the lips of major actors in Nigeria and beyond. Recall, Bloomberg republished its report suggesting that South Africa took over from Nigeria as Africa Largest economy.
The International Monetary Fund (IMF), as well as the Central Bank of Nigeria (CBN), have all agreed that Nigeria economy has plunged into recession. They assert that Nigeria’s economy may not regain stability until early 2017 with low growth rate of 1.5%.
In this article, I will be highlighting few causes of Nigeria recession, a lesson to be learned from it, and the possible way out. Let start by quickly understanding what recession is about.
WHAT IS ECONOMIC RECESSION? The National Bureau of Economic Research (NBER) defined a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in a real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales.”
Economics recession can also be define as a negative real GDP growth rate for two consecutive quarters (say first and second quarters). Judging by the above definition Nigeria is experiencing economic recession currently, since her first and second quarters growth in 2016 are -0.36% and -1.5%. Although, the second definition a times might be mis-leading because recession can quietly begin before the quarterly Gross Domestic Product reports are out.
Furthermore, Nigeria fourth quarter for 2016 is 0.8% growth rate. The country cannot say it have conquered recession because of the positive value.
HOW DID NIGERIA GET HERSELF INTO RECESSION?
I will try to be objective in this discussion as much as I can. Before I explain how Nigeria got herself into recession, let me explain the general causes of economic recession in any given economy.
Causes of Economic recession
The major cause of economic recession in any economy (lesson from great depression, 1981, 1991, 2004, 2008-2009 global economic recession) may include:
- High inflation, a general rise in price of goods and services – leading to low purchasing power.
- Accumulation of debt servicing especially foreign debts.
- High-interest rate – discouraging investor
- Fall in aggregate demand, fall in wages, income.
- Mass unemployment, and general loss of confidence on the government due to economic indices.
Causes of economic recession in Nigeria
- Poor economic Planning: Poor economic planning and no concrete implementation of her economic planning is the major cause of Nigeria current recession – budget delay, exchange rate policy. Yes the government has proclaimed the usual generalities that every government indulges itself in about
- Diversifying the economy,
- Improving manufacturing/mining sector,
- Raising agricultural output,
- Encouraging foreign investment, among others, yet no concrete evidenced strategic plan for growth.
No doubt, the government has taken some steps like the elimination of dollar purchase privileges for importers of 40 items such as – rice, cement, toothpicks, private planes, poultry, meats, margarine, wheelbarrows, textiles, and soaps.
The government has, on the other hand, caused serious poverty in the land by herself. Let me explain, the government through her policy widen the gap between the rich and poor – creating more economic hardship.
For instance, when the CBN was selling dollars at N315 and people were buying at N480, the highly placed individuals in the country were putting call across the banking industry to get dollar at the official rate. This they later resell at the parallel market rate of N480.
Think of how much some of them were making. An individual can make as much as N1billion naira without doing anything according to the former CBN governor (Lamido Sanusi).
The people that were profiting from this were people that were telling the government that if it didn’t devalue the Naira people would suffer. The poor paid the price of a devalued currency and the rich schemed off the profits. Remember, Nigeria currency was devalued when crude oil price in the international market was very low and crude oil export was largely affected by the activities of Niger-Delta militants as such the policy was useless since Nigeria is a mono-product economy.
For example, should you take dollars, for every $1 billion taken from the Federation Account and sold by the CBN at N200 to the dollar, the states were losing N100 billion that could have gone into salaries, agriculture, healthcare.
Yet, the states were going to borrow from the same government on a bailout when the government was selling dollars cheaply to a small group of people. This incidence is still ongoing and the government is doing nothing about it.
- High Inflation rate: Government banning the importation of certain essential agricultural products like Rice without considering gestation period is error. Removal of fuel subsidy shouldn’t be simultaneous with the banning of these agricultural products. Major Causes of inflation; Speculation in stock market due to budget delay, rise in domestic oil price due to subsidy removal, fall in the global crude oil price deteriorating Nigeria exchange rate, almost the household price skyrocket as seen in the image below.
Nigeria inflation rate currently stands at 18.63% that is extremely high the highest for past last decades.
- High-Interest Rate: Interest rate is between 26.77-27%. Is extremely high for investors. This high interest rate is discouraging investors. The poor investment culminate into high rate of unemployment in the country, reduction in aggregate demand especially from the households.
- High Taxation: It is only in Nigeria that I see government charging high tax rate during economic recession. Small businesses are slaughtered with high interest rate. Both high interest and tax rate has lowered Nigeria aggregate demand.
- Policy conflict: The economic policies appears conflicting. How? High-interest rate, high tax rate are tight monetary policy measures. But government told the public it is adopting expansionary policy – budget deficit.
It should be noted that the fall in oil price and production is not the major cause of Nigeria economic recession. Yes! Oil only account for 15% of Nigeria GDP. And an economic recession is measured on the basis of GDP growth and some other economic performance indicators, though is part of the cause. For the want of details, I won’t go further on that analysis.
Possible Economic Policy Measure to End Economic Recession in Nigeria
Given the high level of economic pain, policymakers need to pursue stimulus policies that work. Keynesians school has suggested measure of ending economic recession. The major measure which is to reduce tax rate and increase aggregate demand. Let elaborate on this.
- Reduction in tax rate: Government should reduce tax rates on individuals, small businesses, and corporations by lowering the tax rate by at least 10 percentage points.
The government instead of reducing tax rate to increase purchasing power, rather increased the tax rate killing so many small scale business who cannot meet up with the cost of doing business. Foreign investor will be encouraged with reduction in tax rate. This will increase inflow of dollar to Nigeria economy, and ultimately increase investment cum standard of living. And this will solve the problem of high exchange rate.
2. Effective Spending: Mere increase in government spending will not solve the problem of recession. Yeah! It is strategic spending in area with high multiplier effect such as agriculture and manufacturing sector that increase aggregate demand.
Nigeria need to expand her export earnings and production base through wise investment. Otherwise might likely end up in a classical Malthusian situation, where the resources cannot support the population.
Injecting more funds into the economy is not bad, but there is need for diversification, allowing free flow of Naira and stabilizing the oil sector, modernizing agricultural sector. Yes, Nigeria can spend her way out of recession wisely.
3. Enhance access to credit.
For instance, total consumer credit in Nigeria stands at less than $10 billion dollars in about $500 billion economy, this corresponds to about 2% of her GDP. Look at some developed economies, consumer credit ranges from about 20% (USA) to 50% of GDP (Brazil).
South Africa, Africa’s largest economy by PPP has a consumer spending to GDP ratio of 66%. Nigeria should aim for a consumer credit to GDP ratio of about 10% over the next 5 years. This would be the equivalent of injecting a stimulus of $50 billion per year into the economy.
Consumer access to credit will speed up the economy. The CBN recently raised the real interest rate of Nigeria. Am of the view that this policy should be evaluated. The max interest rate at 26.93% is too high. The economic policy indices should be re-evaluated.
4. Nigeria government should increase her expenditure on skills: This is one point that most Africa countries had always neglected. It is only skills that lead to production. People are looking for problem solver.
So the government should invest in skills acquisition in IT, telecommunication, agro-allied, sports among others. The training should be 80% practical. There is needs for multiple competences, particularly among youths as a measure to curb increasing global joblessness.
The greatest challenge today in Nigeria is unemployment. The government should partner with private organisation to organise entrepreneurship and skill acquisition programme for the youth.
There should be high level of transparency in the programme to ensure the best candidates are picked. This way Nigeria will soon see herself on top of the fastest growing economy in Africa. You may want read my post On Africa fastest growing economies 2016.
5. Increase agricultural produce and export
In the 1960’s, agriculture is the main base of Nigeria, in terms of GDP, foreign exchange earnings, and employment. Today, Nigeria spends about $10 billion a year on the importation of agricultural products.
Nigeria government led by Buhari should stop talking and start working. Enough of talk, people want to see actions. The youth like I earlier stated should be encouraged to go into farming. They should be trained free on various agricultural sector.
Yes the government major policy is on agriculture development but a better mechanism should be put in place to grow the sector, the government should empower the youth to go into the sector, government should bumper harvest store to store agriculture product excess. Government should also go into farming on the many lands lying fallow.
Agriculture should be all year round, irrigation programme pursued in all the states in Nigeria.
6. Increase manufacturing produce and export
Sanusi Lamido (2016) during the economic submit on “The Search For A New Growth Model,” noted that Nigeria should learn from country like Ethiopia and then Meles Zenawi, the late Prime Minister.
Ethiopia keeps growing year after year at 11-12 percent. And what did Meles do?
“Like Nigeria Ethiopia is facing insecurities; yet took advantage of her recourses. For instance, coffee originated from Ethiopia in the world. But, Ethiopian farmers, before Meles, would get 10 percent of the value of coffee from their crops“.
The Etiopia would just produce the coffee and sell to companies, and the companies will take their coffee into Latin America and have it improved and dried and packaged. And Zenawi just asked: “Why can’t we produce coffee in Ethiopia that would go straight from Ethiopia to the coffee shops in Europe?”
And all sorts of responses came. “Well, you know your weather is good for growing coffee. Your coffee is very good, but your farmers have bad farming practices.”
So he said: “Why don’t you teach them?” So, he got in touch with the IFC (International Finance Corporation), got a loan, organised Ethiopian coffee farmers into cooperatives, taught them how to grow the coffee, how to dry, prepare and package it.
Today, if you go to coffee shops in Europe and take a cup of coffee that came straight from Ethiopian farm. And Ethiopian farmers are now getting 70 percent of the value of the coffee, from the former 10 percent.
So, he tells Aliko Dangote, come and build a cement manufacturing plant here. I am going to give you electricity at three cent per kilowatt hour. For a cement manufacturer, that is all the incentive that you need.
So, Dangote goes, builds the most sophisticated cement plant in Ethiopia, gets electricity almost for nothing and cost of cement drops by 60 percent. Wow!
The construction industries gets boosted. Roads are being built with cement. Jobs are created. And new industry has taken off.
He said to the Chinese, “I don’t like this your idea of coming to buy hides and skin and leather from Ethiopia and sell us shoes. Why not set up the factory here.”
Is Nigeria the only country experiencing economic recession? No! As seen in the image above, but Nigeria is not doing much to resolve its own. government should:
- Invest in the energy sector,
- Engage the Niger-Delta militants in a dialogue,
- Reduce the tax rate or regulate same to avoid double taxation,
- Borrowing from both domestic and foreign should be invested more on infrastructure, funds should be sourced more from the domestic economy than the foreign investor to avoid the incidence of capital flight,
- The government should work with the legislative body to endure speed execution of her project,
- Commodity price and raw material price should be regulated through consumer protection agency to avoid further inflation,
- The government should learn from Ethiopia and other developed countries.
- The government should grow Nigeria economy and should kindly allow the naira to be. Let the forces of market control the value of the naira.
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