Recession: Understanding the present predicament (2)

That the Nigerian economy is in a recession and we seem to have no answer is not surprising. Recessions are hard to manage, especially at this stage when the trough is still far away. That the naira is on a free fall that defies all hedging techniques is also not so surprising. Only economic illiterates expect otherwise for a country that behaves the way we do – buy everything and sell nothing but oil; then hawk the currency on every street corner. What is a complete shock is that while this house literally burns in all directions: financial, economic and security, there was a deafening, distracting and infantile noisebooms from those who ought to scream “silence” and Nigeria stills – the “law makers”. Pray, who will tell our ”leaders” that some of their compatriots still have some pride and shame left in them?

As the economy decays and the poor masses, who hardly have any good story to tell of their lives in Nigeria die of hunger; as hardworking entrepreneurs lose their livelihood and close shops, those they beckoned to help organize their commonwealth are busy fighting over illegal shares of the tax payers’ money. As more Nigerians become economic refugees, ransacking garbage dumps for food (oh yes its happening) one is appalled that some politicians think it is still safe to rub the people’s defeat on their faces.

As the economy sheds the vulnerable and they roll down the dark alleys of lack, pain and death, wise leaders knowit’s time to declare a cease fire, even if temporary, on any act that conveys the slightest impression that somebody is stealing billions from the tax payers who cannot feed their families. We need urgently to call a truce. What we should be doing now is asking ourselves what other nations do in a depression like ours.

Of course the word recession is not of Nigerian origin. This means that those who coined it may have either experienced it or seen others go through it. In other words, there is a pool of knowledge out there to benefit us in fighting depression. Moreover, this recession is not limited to Nigeria. Many countries, especially in the developing world, are experiencing it. And more important,our present predicament was foretold by those who ought to know.

The United Nations in its World Economic Situation and Prospects 2016 predicted a slowing of growth in developing countries in 2016. According to the report, growth in these countries will average 3.8 percent this year, and it would be the lowest growth figure recorded by them since the global crisis of 2009. In terms of intensity, it was also expected to be comparable only to the recession of 2001. This information was available to all before the onset of the crisis.We characteristically did nothing significant to prepare.

In any case, recession is part of the capitalist system’s phenomenon, which economists call the business cycle that manifests in the rise and fall of national output. Economies tend to follow a path of boom, burst and recovery, and boom again. With good planning, companies and governments could minimize the impact of a recession on their entities by taking certain proactive steps. Those who run their businesses properly do certain things in good times to be safe when the unavoidable downturn arrives.

Such companies begin by having a clear outlook of the future. Such outlook would imply the preparation of long term plans. These plans contain projections that recognize the possibility of a downturn. That way, they are not carried away by the good times. Because they have planned against future output falls, they are prudent with their finances. They create reserves and put money away for the future. We call it deferred gratification – the postponement of some present consumption in order to smoothen the consumption curve. As they create and grow their reserves, they keep borrowing and debt acquisition to a minimum. They also ensure they remain liquid. Every country that is run properly takes these same steps.

Recessions don’t begin overnight. The signs were clear as China began to slow. In countries where planning is synchronized with executive action, the slowing of China’s economy was a good warning signal that things could get rough. China, which consumes close to 60 per cent of world output of base metals, is a major market for commodities, including oil, on which Nigeria depends. A proactive country must be interested in the economic health of its major trading partners. The subsequent collapse of oil prices was only a natural aftermath, worsened by output curtailment.

The truth is that many developing countries, including Nigeria, have major issues with their economic planning. They either lack the skills and data or do not implement their plans. Sometimes they plan after the fact. The result is that recession, which has antidotes, is magnified. The first thing they notice is that their reserves are barely enough to fund three months’ import bills. Thereafter, their national currencies come under pressure and become the target of both informed and half-baked economic postulations. Eventually, the currencies get victimised against unrealizable expectations.On the other hand, and because hot money reacts negatively to recession, capital flight takes a new turn worsening the plight of the local currency. It is hard to imagine that leaders could be discussing anything other than recovery at such a time.

The economic crisis of 2008 led to a world-wide decline in Foreign Direct Investment (FDI) around the world and also shifted the flow of FDI away from the more vulnerable economies. Since 2014, developing countries have continued to experience the reversal of the inflows they previously enjoyed. As at 2015, the net capital outflow from developing countries had reached over $600 billion. To stem the outflow of highly needed capital, many developing countries often take the precipitate action of introducing stiff capital controls. Others raise interest rates to stop capital outflows.

Nigeria’s Central Bank recently raised the MPR by 200 basis points to 14 per cent. With inflation now at double digit, it becomes difficult to justify the raise except as a means of stemming capital outflow. Unfortunately, these strategies have proved to be temptations into which developing countries fall at their own peril. Hot money, especially of foreign origins, is implacable at such times.

The monetary authorities must therefore be gentle in using monetary policy to fight the recession, knowing that it may be ineffective for many reasons, including pessimism and the behaviour of the investment curve, in a recession. Also, a government trying to spend its way out of recession may be counterproductive by reducing the capacity of the more efficient private sector to invest in productive ventures. As government often funds its deficit from taxes and borrowing, which withdraw resources from the private sector, it limits private capacity to invest.

Evidently, resolving the dilemma inherent in a recession requires thoughtful balancing acts that promote optimism, brighten the current gloomy outlook and curb the current coexistence of inflation, joblessness and vanishing disposable incomes called stagflation.

Emeka Osuji