The present danger of relapse into recession
After five quarters of economic contraction (Q1 2016- Q2 2017), Nigeria exited recession. With a % positive 0.72% GDP growth in Q 2 2017, economic recovery has been slow and grinding, reaching 1.9 % in Q1 2018 and declining to 1.5 % in Q 2 2018. Consequent on this, the economic wellbeing of many Nigerians has been unsatisfactory. Indeed for many, there is actually no evidence that the recession was over. And this is understandable because unemployment and underemployment continued to grow reaching 40% in Q2 this year (unemployment =18.8%: underemployment = 21.2%). Because inflation, though moderated remains at double digit, combined with the high unemployment rate to precipitate a misery index of 30% (the eight highest in the world, behind Argentina, Kosovo, South Africa, Mozambique, DRC, Yemen and Venezuela).
Indeed, the difficulties in the economy are logical, giving that a GDP growth of 1.5% against a population growth of 2.5% can only result in decline in GDP per capita, and therefore many Nigerians will naturally continue to feel that the recession was still subsisting. The modest and tentative recovery from recession occurred mostly because of the recovery in the price of crude oil in the international market. In January 2016, a barrel of crude sold for $29. 78 per barrel but by October 2018 the price had recovered to nearly $80 per barrel, with projections it could hit 100 dollars per barrel. The Economic Recovery and Growth Plan (ERGP) of the federal government is expected to be supported by the recovery in oil prices. Certainly the significant rice in our foreign exchange reserves from about $24 billion in Q4 2016 to nearly $44 billion in November 2018 derives essentially from this recovery in global price of crude petroleum. The arrest of the devaluation of the Naira from about 500 Naira to about 360 Naira against the US dollar was made possible by the significant improvement from price of oil. That became a major factor coupled with the CBN tight monetary stance in reigning in the inflation which had reached nearly 20% in Q4 2016, but today is under 12%. Despite these improvements in macroeconomic indicators, the government has had to face up to the unrelenting growth in unemployment and underemployment. The current efforts at social spending, including conditional cash transfers (CCT) to the poorest of the poor, some support to the industry and micro financing need more time and sustained intensity to show significant result.
But the hope for sustained recovery is facing three threats. One is the changing focus to politics, and the diminishing focus on good governance. With the ringing of the bell for the resumption of political campaigns, all gloves are off and soon governance may go on auto-pilot while the politicians focus either on remaining in power or returning to power. If you are looking for evidence that this is true, kindly consider the fact that a serving economic minister is made the DG of a Presidential campaign organization and the leader of the Nigerian Legislature is the chairman of a party campaign council. With the very low level of national productivity, any prolonged distraction from the levers of good governance will further imperil the fragile economy. Most government officials (at the centre and sub-national levels) will only discuss issues with you if only it will help them or their party win the forthcoming elections. If you bring up any other issue, you are asked to wait till after the elections. Secondly as if taking cue from the political officials, many investors (local but especially foreign) have put most investment decisions on hold. They claim it is part of risk management on one hand and a hedge against Nigeria’s notoriety for policy inconsistencies. An agreement with one government can easily be repudiated by another government, even if both belong to the same political party. So new investments may be slow in coming for the next 6 months at the least. This certainly will take a toll on a country that is in dire need of investments. Investments create jobs. Jobs create wealth. And wealth drives away poverty!
The third and perhaps more troubling threat is the unpredicted fall in oil prices. It was hoped that Trump’s trouble with Iran was going to push oil prices higher up to $100 per barrel. Prices that picked at $ 80 dollars in Sept/October have inexplicably been going down over the last several weeks, reaching a low of $50.93 last week, a huge 22% decline in November alone. Nigeria remains, despite all pretensions to the contrary, an oil dependent economy. And so, our economy moves in sync with the movement of oil price. If the price goes up, Nigeria’s economy goes up and if the oil price goes down, Nigeria’s economy takes a dive. That is the way it has been since Oloibiri. But traditionally there has always been some reasonable gap between the swings, allowing sufficient recovery before a new burst. Before the June 2014 burst, GDP was over 6% and had been at such high levels for nearly a decade, which helped us sail through the global Economic crisis of 2008-2010 (of course helped by our excess crude savings). But here we are, just labouring to achieve a GDP of 2% and after about only an 18- month recovery time frame, we are faced with the present danger of another sustained decline in oil prices and a possible relapse into recession. I just pray that the effort of OPEC to cut output will help stabilize prices and perhaps reverse the decline. If we are borrowing our entire 2018 capital budget with the improved level of oil prices and production output in the last two years or so, I am scared about what will happen if the prices go below today’s level. I hope that I am not the only one worried!
Mazi Sam Ohuabunwa OFR, FPSN