Growth Matters
There is now but an official confirmation that Nigeria’s economy has entered recession for the first time since1991. The first strong indication had come from the Finance Minister Kemi Adeosun when she appeared at the Senate last week Thursday. This was quickly followed by the comments by the Minister for Budget and National Planning Udoma Udo Udoma that confirms that the Nigerian economy has entered recession. This was at the public consultation for the Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF / FSS) two days ago.
For the remainder of the year, the expectations of Nigeria’s economic performance are mixed. The World Bank expects growth of 0.8% for the year, down from an earlier projection of 4.6% in January, while the International Fund (IMF) expects the Nigerian economy to contract by – 1.8%. What is clear is that any growth before the end of year will be very welcome. However, to experience this growth, we must guard against the complacency that got us here.
And that is the motivation for this piece. Following the much expected release of the figures for the first quarter of 2016 that showed that growth has entered negative territory, I expected a fiscal urgency to avoid the recession, which we have now experienced. Let us recall that the first quarter of the year was characterised by continued subdued oil price, disrupted oil production, poor power supply, nonexistent government expenditure due to falling oil revenues, continuous foreign exchange constraint, which constrained inputs, and poor harvest of some food items, which resulted in significant price increases, and the inability of many states to pay workers salaries, reducing real income and consumer spending. So, it is no wonder that the GDP declined by over 2% compared to Q4 2015 figures.
However, after the release of the poor figures, the urgent response that was required in order to avoid a recession did not materialise. Indeed, the only difference between the experiences of the second quarter of the year compared to the characterisation painted above for the first quarter is the absence of the gridlock we saw between January and March. After the budget was signed into law on 6th of May 2016, the release of the variously mentioned N350 billion to priority sectors already identified by the government did not materialize. The capital releases from the 2016 budget only started in the last few weeks, and this is the single most important reason we are in recession. We may have possibly avoided recession if those releases started immediately after the budget was signed into law, as we were promised.
The lack of urgency inadvertently provides the suggestion that growth does not matter. But, not only does it matter, it greatly does. So, contrary to widely held view due to the ignorance of underlying implications of growth figures, let us spell out some of the ramifications of the recent poor economic performance. This is important in order to guide us against complacency in the future.
The first thing to note is that flat growth and worse still, a recession means the average Nigerian is now poorer, compared to December 2015, when we last had growth. For instance, estimating GDP for 2016 by assuming a growth rate of – 0.5% for the year (average of the World Bank and IMF forecast), and converting that value to dollars using an exchange rate of 300 Naira to the dollar, GDP per capita falls to $1,318. This is down from a level of $2, 302 for 2014 (using an exchange rate of 168 Naira to the dollar). This assumes a constant population of 173.6 million for the period. This is the most dramatic consequence following the fall in oil price and the poor economic performance that followed, just in a matter of two years.
Second, following poor economic performance, the Naira continues to depreciate against major currencies around the world. There are severe implications of this continuous depreciation that accompanies poor economic performance. Nigeria’s public debt portfolio in dollar terms is increasing dramatically. It was US $64 billion as at Q4 2015 but now the exchange rate adjusted debt stock is now US $91.5 billion and followed by an increase in the debt to GDP ratio from 12.5% to 18%, which itself will constrain the ability of the economy to continue to expand debt. Also, the dollar debt service continues to rise.
While there has been some momentum in the last few weeks, more needs to be done to address all weak areas that are contributing to poor economic performance. It is clear, following the Central Bank of Nigeria (CBN)’s monetary policy committee meeting yesterday that the monetary policy authorities have exhausted the options to play the role of kick starting Nigeria’s economic growth, but this should be anchored on fiscal policy and expenditure. The increase in the benchmark rate to 14%, from 12% is striking a very difficult balance between pursuing growth and tackling inflation. Indeed, the Governor admitted that tightening liquidity will only serve to worsen the prospects of growth in the near term.
In conclusion, growth matters greatly and everything must be done to avoid the trajectory of the 1980s that saw us experience six years of recession. I thank you.
Ogho Okiti