Recession, economic bubble and Nigeria

Nigeria is officially in recession. The simplest way to know an economy has fallen into recession is if macroeconomic indicators fall. Some of those macroeconomic indicators are real gross domestic product (GDP), real income, employment, industrial production, wholesale-retail sales, etc. These indicators provide insight into the economic performance of a particular country or region, and therefore can have a significant impact on the forex market.

In economic terms, a recession is a negative economic growth for two consecutive quarters. It is also a business cycle contraction, which results in a general slowdown in economic activity; the latter is the case with Nigeria, as it’s now experiencing a general slowdown in economic activities.

A number of factors contribute to an economy’s fall into a recession, but the main cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. In Nigeria for example inflation has risen from 8.9% in January 2015 to 17.10% in August 2016. What this means in reality is that the price of basic commodities are sharply going high, e.g. tomatoe, rice, garri and ugu.

Inflation can happen for many reasons, but the main reason is the excess of demand over supply. In other words inflation cannot occur, unless there is excess demand, made effective by increases in the money supply or purchasing power. Strange though how all these work together leading to recession is bizzare, and that’s why one needs good technical knowledge to understand it.

Let me explain a bit. In an economy when inflation sets in, people tend to cut out on leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. So that’s why I said it’s strange. So actually what people should be doing during recession is spending more, but in real terms people cut spending, and the combination of spending cut, high price, loss of jobs, etc cause GDP to decline,aand economy to begin to contract and recession to set in.

In the last ten years, more countries have fallen into recession than ever before, but almost all these countries have managed to cope and eventually get out of recession. A good example is the UK economy 2008/2009; for about 1 year 3 months UK was in full blown recession. Many sectors were affected including banks and investment firms, with many well known and established businesses having to fold. Manufacturing output declined by 7%, while the unemployment rate rose to about 8.3% (2.68m people).

There were well known causes of the 2008/2009 UK recession including the late 2000s financial crisis, rising global commodity prices, subprime mortgage crisis infiltrating the British banking sector, and significant credit crunch. So, like I mentioned earlier, many people chasing small amount of jobs, chasing small amount of products, and then income coming down all that trigger high prices, leading to inflation, which then leads to an economy contracting, and then falling into recession.

The causes of Nigeria’s current recession are speculative, however they are both historical and immediate. Historical can be summed into poor economic policy direction, including corruption and the lack of political will to save and invest in infrastructure by past governments.

In terms of immediate factors, two years ago, Nigeria was heading to become a global top 20 economy, strong with well informed economic management modelling. However, in just under one year Nigeria has a reversal of fortune, those economic gains withered, triggered by an adverse demand shock and widespread drop in spending.

Here is the reason – if you do not sustain economic management for two consecutive quarters; if you do not have an economic team working as hard as possible in a fast growing economy, the result is simple, you are going to fall into recession, simple. Buhari’s long wait for nine months before forming a government has proved just too costly.

So the recession in Nigeria can be linked to a number of events, namely, the central bank creating an unnecessary financial crisis in the banking and forex sector, which  caused an adverse supply shock. The government jettisoning some of the forward looking economic programmes of the past administrations was not wise. And, more importantly, the timing of democratic change of government did not favour the economic climate, given the interregnum in economic management that existed between the GEJ era and the Buhari era. These are further exacerbating by other factors, including  rising political unrest in parts of the country, the global fall in oil prices, which caused an external trade shock, as Nigeria hugely relies on oil for larger part of its national earnings. All these combine to create an economic bubble.

While recession is unhealthy for any economy, and could have been avoided in the case of Nigeria, the country can still get out of the recession situation with well articulated economic and fiscal policy measures. I’m not sure they can though, given the poor record of the present government in making any impact on economic gains. But if they want to try, those measures must be collective from local, state, and national governments, and all the arms of government.

One thing Nigeria must do is to clearly understand and analyse the real cause of the recession, and then set out stringent measures to address it.

I think there needs to be some kind of emergency ‘interventionary’ measure that prohibits any agency of government (federal, state to local government, legislators, and executives) to not use public money unnecessarily.

Having said that, it’s important to explore a number of expansionary macroeconomic policies that prioritise investment in infrastructure, improving banks capacity to lend, increasing wage and household income, to get money circulating in the economy, and total devaluation to get the economy going again.

How not to do this, is alienating any part of the country. Nigeria needs full-on capital investment projects going on across board, and it needs to borrow now to do this now. It needs to learn from Canada, right away, to improve investor confidence.
In terms of increasing liquid money in circulation, what the UK did well in the 2008/2009 recession was quantitative easing, whereby money was artificially created to buy financial assets to increase bank reserves and to encourage lending again. The other was lowering interest rate to encourage spending, not just saving. Liquidity flow is now very much needed. This is a failure of Buhari’s off the counter forex policy.

To boost household spending, income and wage need to go high in response to currency devaluation, as a stimulus, to household suffering, and to get more money in circulation. N18,000 minimum wage in an economy where a bag of rice costs N26,000 is not only daft, but also insensitive. I will discourage any austerity measure being taken forward.

Again, many commentators have emphasised the need for currency devaluation, this has to happen completely, not partially as it is being done now. Devaluation can promote domestic demand, and exports will become cheaper and imports more expensive within Nigeria.

One action to take is #BuyNaijaToGrowNaija, but the idea of bringing Chinese Yen to overcome dollar demands is absolute bunkers, and indeed chasing shadows.

Finally, how to shape an economy is to create it. Nigeria needs to create an entrepreneurial economy, supporting SMEs and new start ups. They are the engine that will get the economy out of this mess. There is evidence that many major global corporations started during the period of recession. If anything it’s time to bring back the youth enterprise programmes of the past administration. They were sensible. Don’t throw away dirty water with your baby inside.

Iyke is an Economic Development expert in Edinburgh, Scotland

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