Why CBN’s warning on economy should be taken seriously

At the end of the Monetary Policy Committee meeting on 26 July, Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) warned that the Nigeria could easily reverse the current fragile economic recovery and fall back into a recession unless urgent monetary and fiscal policies are implemented.

His warning comes at a time the country is celebrating that its exiting its first recession in three decades. Even though the exit from recession has not been confirmed, there are enough economic indicators that show that the country will record marginal growth in the second quarter of this year.

The first obvious indicator is the fact that the Purchasing Managers Index (PMI) has been positive in the whole of the second quarter of 2017, consistently reading above 50 points, which indicates an expansion in the manufacturing sector.

Economists with preliminary access to data on the economy also note that strong recovery in four key sectors of, among the six major sectors that make the largest contribution to the Nigerian economy, namely; agriculture, manufacturing, telecoms and oil are likely to drag the country out of recession by returning to positive growth in the second quarter of 2017. Two other sectors, real estate and trade are expected to still record negative growth.

However, the expected GDP growth in the second quarter is not expected to be significant. Most economists expect a growth below one percent, well below the average population growth of 2.5 percent. This means that the growth will largely not be felt in the larger economy.

In fact, economists note that Nigeria needs growth rates of between six to 10 percent over several years to make a dent on the high poverty rate in the country. A less than one percent growth is therefore insignificant, except that it also signals that we are no longer falling into a hole.

Emefiele’s warning that the country could easily slip back into this hole should therefore be taken seriously. It would be recalled that before the country slipped into a recession in the second quarter of 2015, the CBN had also warned about it. For the fact that growth private sector credit is still negative shows the fragility of current economic growth.

All over the world, there are countries that have gotten out of recession and slipped back in easily again into an even more protracted recession. So slipping back into recession after getting out is not far-fetched.

Besides, the current economic recovery is largely independent of government policy decisions. Oil prices and production has recovered in the international markets, boosted government revenues and foreign exchange earnings, strengthened the spending capacity of the government and also helped the CBN increase foreign exchange sales which in turn has boosted economic activities. If there is a reversal of crude oil production and prices, the fragile economic growth has no legs to stand on and that risk is real.

Emefiele has rightly suggested, that as a strategy to strengthen the fragile growth we are seeing, “fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year must be pursued relentlessly.”

This is good advice but it is not new. The question has always been on how to make this happen and the political will to make it happen. That is what has been in short supply in the country. Political considerations have always trumped economic considerations and so the hard economic decisions have never been made creating distortions in in the economy that retard growth. For example, subsidies in the downstream petroleum segment continue to kill aspirations of a robust downstream oil industry even as lack of a clear regulatory framework for the upstream has retarded its growth in the last 16 years.

Real economic recovery cannot be wished into existence or built on political rhetoric, real work must be done to make it happen. It is great that the government has thought it fit to introduce the Ease of Doing Business initiative. It is an initiative that must be given all the attention it needs so it is also great that it is under the direct supervision the Acting President. If we really seek to diversify the economy, this is an initiative that must succeed.

Before now, the country could afford the luxury of high oil prices to cover inefficiencies in the economy. That luxury is now no longer available as prospects of high oil prices are dim with the advances in technology by Shale oil producers in the US and push for renewable technologies in the advanced world. Governance built around sharing oil revenues instead of stimulating economic activity that drives production will not lead anywhere in the face of current global realities. If we must avoid a protracted recession, we must disengage the economy from auto-pilot fuelled by crude oil.