Traders at Mile 12 Market, Lagos

By Uche Chris

For an economy to go into recession should not be an issue of great concern; recession is a natural economic cycle. But what makes the current recession alarming, having been described as the worst facing the country by the World Bank, is its depth and expected longevity. What makes it the worst recession and how did it come about?

According to the World Bank, the economy is about to enter a three year recession that may be worse than ever, unless needed reforms are introduced and implemented.”In the next three years, an average Nigerian could see a reversal of decades of economic growth and the country could enter its deepest recession since the 1980s”, the Bank warned in Nigeria Development Update, released on Thursday December 10, 2020.

Entitled, “Rising to the Challenge: Nigeria’s Covid responses”, the report said that this path could be avoided if progress in the current reforms is sustained… Nigeria is at a critical historical juncture, with a choice to make”, said Shubham Chaudhuri.

“Recovery in 2021 is simply uncertain, while food scarcity or insecurity will increase; as about 15-20 million people will join the extreme poor in the country”.

Why is the country going into such a severe recession, when other countries also affected by the Covid 19 pandemic are already exiting recession and moving toward recovery? There are two straight answers to the question:

The first is the increasing deficit budgeting as a result of shortfall in revenue exacerbated by the equally increasing rate of debt service as a result of the increasing borrowing by the government; and secondly, the lack of definite reforms, which the World Bank alluded to, by the government to reverse the import dependency nature of the economy and the pressure it imposes on the value of the naira.

Both are related and reinforcing: The increasing rate of borrowing and fiscal deficit are the direct cause of the pressure on the naira because we are printing money without production; consequently, the currency will continue to come under pressure as more and more naira continue to chase fewer goods and dollar.

Government supporters rationalize this problem as a direct consequence of the fall in oil price, which is the main revenue source of government. Whereas this explanation may sound plausible and even logical, it is economically untrue. Economic wisdom demands that when revenue is down, expenditure should equally reduce. If it is so in personal and business life, it is even more so in government.

The challenge here is that this government has refused to live within its income and revenue earning capacity, choosing, instead, the route of borrowing and, in the process, has created the three most debilitating economic conditions – deficit, debt and inflation.

Since April, the supply of dollar to the forex windows has dropped by over 60 percent, from about 48 percent in April to between 12-23 percent currently of demand, with almost $3 billion of unmet requests waiting repatriation. As bad as this may seem, the greater challenge is the rising level of debt service, which will always mitigate revenue earning capacity to fund forex demands.

Deficits, debts and inflation all add up to economic chaos because shortsighted leaders tend to address the problem by creating more deficits, debts, and inflation. As a result, for the first time Nigeria has joined the Trillion Club when the naira is falling in value and the poverty is rampaging.

Why then, is our budget ballooning, when poverty is rising and people are suffering? Where is all the money going? At least, having more money in the economy presupposes that the people and the economy will be better off?

The fact that government and economists are beginning to think only n terms of trillions when everything is falling apart indicates a bad sign; it suggests to us that the economy is being filled with monopoly money – wealth without production – a government Ponzi scheme, which may sooner or later come crashing like every of such scheme. This is what the World Bank is warning about.

Despite what politicians and money manipulators would like us to believe, inflation is not simply higher prices. That is only a symptom of inflation. Knowledgeable people are well aware that inflation is an increase in money supply. Nothing more and nothing less! The more money the central bank prints and pumps into the economy, either through deficit or debt, the higher prices will rise.

Larry Bates in his book, The New Economic disorder, describes the nexus between hot money and inflation. Hyper-inflation robs money of its value. Pre-Hitler Germany provides a classic case of the devastating effects of inflation. At first, inflation may stimulated production; but it annihilated thrift and made reform of the national budget impossible for years, as is also the case with Nigeria.

It destroyed incalculable moral and intellectual values and provoked a serious revolution in social classes – a few people accumulating wealth and forming a class of usurpers and national property owners, again as we have in Nigeria; whilst millions of individuals were thrown into poverty…

Deficit is the root of inflation because it is a condition where government has to either print money or borrow to fill the gap in its revenue. Money is a function of production. Printing money or borrowing do not constitute wealth creation through production and can only fuel inflation by increasing prices.

While we are lamenting the scourge of inflation, we are also encouraging the very source of it, which is printing money. When we are calling on government to do this or do that when it does not have the money, we are simply asking the CBN to print money; and once money is printed the value goes down because prices go up. This is the reason for the constant liquidity mop up operations of the CBN.

Nigeria is facing the worst recession ever, according to the World Bank because it has entered a vicious cycle, where the economy has little or no policy options to respond to the present recession. High debt service has completely decimated its potential revenue earning capacity necessary to reduce deficit and the possibility of hot money – ways and means.

Without improving revenue, the deficit would persist and the country will continue to resort to either printing money or borrowing, which, in turn, further diminishes the value of the naira through inflation.

No country has survived the presence of these three economic musketeers and harbingers of chaos; and the World Bank is not only right to warn us of the impending possibility of default and the urgent need for reforms. We are suffering the consequences of planning for the short term with little regard for the long term.

Government must cut its expenditure, especially the size of government. In business, when the revenue or cash flow is short or inadequate, there is cost cutting. However, in government, it is to increase cost, which challenges and tasks the logic and thinking of those in power. Of course, there are mitigating interests to consider; but the question is, what happens to the country generally in the long term?

Lord Maynard Keynes once quipped, “In the long run we are all dead.” The truth is, if we do the right things today, obviously some people will be hard hit but we will not definitely all be dead; but without thinking of the long run and doing something about it, definitely we shall all be dead in the long run.

Not doing something is very tempting because it is a gamble that something may happen to change the situation; sometimes, they do, like oil price improving; but in most cases they don’t. And the possibility of that happening is usually much higher and the consequences much dire!