Recession:  Fears heighten over economy

.          Nigerians doubt Buhari’s ability to restore confidence

The Federal Government of Nigeria has been grappling with the issues of the economy in the last 18 months. But there appears not to be any clear road map on where the economy is headed. Unfortunately, the economy reeled off in the second quarter of 2016 to a recession with the GDP plunging into the red region by 2.1 per cent. The discomforting condition has sparked off deep debate on whether the government has got adequate handle on the economy.

By Okey Onyenweaku

The Nigerian economy dipped into a recession by the second quarter of 2016 as the Gross Domestic Product (GDP), slid by a further 2.1 per cent (after skidding down by 0.48 per cent in the first quarter of the year). Several economists and financial analysts have argued that slide in virtually all major economic indicators in 2016 could lead to a full-blown depression if urgent measures are not taken to stem the tide.

Lately inflation has hit the roof at 17.6 percent from about nine percent a year ago, as the Naira tumbles in foreign exchange markets with the local currency trading at N475.00/$ in parallel exchange markets; interest rates have equally reached troubling heights with domestic lending rates hovering between 27 and 32 per cent.

The price of crude which contributes the highest revenues to the country has dropped sharply from the giddy altitude of $114 per barrel in June 2014 to $32 before settling recently to between $40 and $48 a barrel.

While many industry analysts believe that the nation’s revenues have shrunk, they also note that the ongoing recession in the country has been policy induced.

Some of the policies that experts consider responsible for the hopelessness of the economy include delay in responding speedily to the challenges arising from the oil price drop, such as constituting the cabinet and preparing the budget; the uncertainty created by policy somersault and the fixed exchange rate which has only recently been modified into a flexible exchange rate.

This has continued to keep investors on edge as forex inflows have significantly dropped. Unfortunately, prices of goods and services have climbed hurting both middle and low income earners.

With the Monetary Policy Rate (MPC) at 14 per cent, cost of funds has remained high. Manufacturers and other local investors cannot borrow money from banks to fund their businesses at the rate of 27 or 30 per cent. In the light of this, companies have laid off many workers while others have cut salaries by half and more. It is estimated that more than 4 million Nigerians have been relieved of their jobs in the past one year.

Many industry experts have predicted that inflation may hit between 19 and 20 per cent before the end of year. Unfortunately, ameliorating measures of increasing the MPR to 14 per cent has not curbed inflation as expected by the authorities.

Tight monetary policy has not achieved its objectives and this has been worsened by a supposedly liberal fiscal policy which has also not succeeded in expanding economic output. This has resulted in an economic ‘screwdriver,’ a situation where twists in both fiscal and monetary policies have driven the economy to lower output levels at higher rates of domestic inflation.

Faced with this situation, both the monetary and fiscal authorities seem to be passing buck with the fiscal authorities urging the central bank to reduce rates while the Bank insists that the finance ministry should cut back on fiscal borrowings and raise domestic taxes such as the Value-Added Tax (VAT) to stanch the leak in the budget and fund the deficit.

Torn between the arguments of both economic policy institutions the presidency appears to be in a state of “suspended animation”. The more the presidency tries to fiddle with policy tools the deeper the depth of hardship they seem to inflict on Nigerian businesses and workers.

Yet the measures being taken by the government do signal or give substantial confidence and evidence that the deep depression would reverse soon.

Participants in the recently concluded Nigeria Economic Summit identified critical issues that must be addressed for the nation to come out of current economic recession. They fingered lack of political will to develop the manufacturing sector of the economy as one of the reasons the nation is in recession.

The former Chief Economic Adviser and Coordinator of the National Poverty Eradication Programme (NAPEP), Mr Magnus Kpakol, pointed out that dearth of foreign exchange and high inflation rate in Nigeria is caused by the lack of ability to produce for export.

Nigeria’s currency, the Naira, has continued to decline against the dollar since the nation’s foreign exchange policies made it difficult for importers to have access to the dollar like they used to.

Most of the items in Nigeria are imported. Poor power supply and other factors had stifled manufacturing, with most companies having to generate their own power. The high cost of production has made locally manufactured goods expensive.

Professor of economics, Pat Utomi, and a former Deputy Governor of the Central Bank of Nigeria, Dr. Obadiah Mailafia, emphasised the need to improve involvement in agriculture and manufacturing in the nation that had depended largely on crude oil sales for revenue.

Agriculture was the mainstay of the nation’s economy before the discovery of crude oil.

Similarly, Anita Champion stressed the need to have a policy that encourages production, processing and export of agricultural products. The economic downturn and increasing distress i the real sector has compounded  unemployment problem which has exploded in recent time.

According to the National Bureau of Statistics, Nigeria’s unemployment rate rose from 12.1 per cent in the first quarter of 2016 to 13.3 per cent at the end of the second quarter.Despite the situation, experts at the conference believe that right economic policies that encourage private investments could turn the situation around.

There seems to be a consensus that our problem is what analysts call concentration risk. This means that because we relied on a single product for virtually all our foreign exchange earnings, the drop in the international price of that product led to a massive reduction in the quantum of foreign exchange available to us.

Besides, we have been forced to shut down some of our oil production as a result of the activities of militants in the Niger Delta. This is worsened by the fact that what we spent the hitherto available foreign exchange to buy from other countries have not reduced. Given this scenario, we are forced to either ration the scarce foreign exchange by allocation to only a few areas or sell to only those who can afford it, leading to a more expensive foreign exchange regime.

To tame the slide, at least in the short run, some actions have to been taken, former Managing Director of Diamond Bank, Dr. Alex Otti had said in a published article recently.

‘’The fundamental problem is the absence of a productive economy. Two most important aspects of this challenge are power to support the growth of a productive, manufacturing industrial economy, on the one hand, and removing the obstacles international trade policy places on our industrialization prospects by stemming the viability of our local industries, on the other.

Cheaper foreign manufactures have easy access to our markets. Conversely, our own manufactures are unable to access foreign markets because value-added goods from our country are blocked by high tariffs imposed by our trading partners (but our raw materials for their own industries are welcome and attract low tariffs!). Quality standardization concerns also dog Nigerian exports,’’ said Dr. Kingsley Moghalu, President of Sogato Strategies LLC, and former Deputy Governor of the Central Bank of Nigeria from 2009-2014.

Also at the summit FG revealed a few of her plans to tackle the failing Nigerian economy head long.But there are doubts that the government has the capability to revamp the dwindling economic fortunes of Nigeria.

Managing Director of Financial Derivatives Company limited, Mr. Bismarck Rewane believes that potential risks to the Nigerian economy includes terrorism and insurgency, economic crisis may deteriorate into social unrest, labour unrest and wage increase demand; exchange rate risk, political squabbles and lack of consensus, policy delays, among others.

He projected that the Nigerian economy was expected to recover in 2017 with growth forecast of 2.2 per cent.

“Troubled oil sector and crippling infrastructure impede growth potential. Inflation may average 16 per cent in 2016. Inflation expected to average 15.4% in 2017 and 11.5% in 2018. Moderate improvement driven by relative currency stability and increase in global commodity prices. Oil production is to average 1.64 million bpd in 2016,” he predicted.

Former Minister of Finance, Dr. Kalu Idika Kalu, has also expressed fears that Nigeria was still unable to identify her problems let alone solving them.‘’We are still struggling with identifying Nigeria’s problems’’, he said.

Commenting on the Issue, Dr. Vincent Nwani, Director, Reseach and Advocacy, Lagos Chamber of Commerce and Industry (LCCI), says the government has stated that it recognises there is a problem with the economy. And it is working to tackle the problem given what they have told us it appears they have what it takes to reverse the present situation.

‘’What we are hoping to see is the translation of the words to action. What we continue to do is to insist that government address the issues affecting business in the country’’, he said.

On his part, Dr Boniface Chizea, Managing Director, BIC Consultancy Service Limited opined that the government would have to change its approach if it intends to improve economic situation in the country.

“What has been happening was that we don’t seem to have a defined focus on where we are going. Once we have a plan of where we are going and implement the 2016 budget, the economy would rebound,” he asserted.