Nigeria is in a deep recession, a grave economic quagmire, with no respite in sight yet. In 2015, after a decade of impressive growth of nearly seven per cent annually, the economy stalled and went rapidly into a tailspin. There is now palpable and widespread public concern that the recession may slide into a depression. It has led to a massive loss of jobs, increased unemployment, spiralling inflation and infrastructure decay. The macro economy is in complete disarray. The poverty level in the country has worsened considerably as more and more people are falling into the poverty trap daily. At both the federal and state levels the governments have fallen into arrears on salaries and pensions. The FG and state governments are now borrowing to meet their financial obligations. Technically, our country is now almost insolvent. The CBN is reluctant to lend the FG more money.
The long recession, possibly the worst in Nigeria’s recent economic history, has virtually wiped out the limited economic gains of recent years. For most Nigerians the future has never been more bleak or uncertain. The country was already in a recession and a grim economic situation when President Muhammadu Buhari took over in 2015. But he is now in charge and it is his government’s responsibility to end the recession and restore the economy to stability and growth. The buck stops with him. But the recession will not yield to quick fixes. It is largely structural. The solution to it has to be equally structural. The government has got to be more serious about introducing the painful structural reforms now needed. Basically, this task involves cutting imports and increasing non-oil exports. The trade balance has to be restored.
Though baffled that its stimulus spending is not yet working, the Federal Government remains upbeat this strategy will soon begin to yield some positive results. In fact, the Governor of the CBN was reported a few months ago as declaring that the recession had virtually ended, that it had bottomed out, thereby raising false hopes among the people. But this was premature. Recessions do take a long time to resolve. To work effectively the stimulus spending has to be complemented by a range of fiscal and monetary policy instruments that are not yet fully in place. Until these measures are implemented fully, we cannot begin to talk about ending the recession. In its report for the third quarter of 2016 the National Bureau of Statistics announced that the economy recorded a negative growth of -2.24 per cent, down from -2.06 in the second quarter of the last FY. The report for the last quarter of FY2016 is not yet out. But it will almost certainly show that the recession is not yet over. A negative growth of that magnitude cannot be restored in a single quarter. If it does it would be a major economic miracle. So, a lot of work still has to be done by the financial authorities to tackle the root causes of the recession before we can even begin to think of economic stability and growth. This is by no means an easy task. It requires an appropriate, determined and consistent response to a financial crisis caused mainly by external shocks, triggering off maladjustment in the domestic economy. Is the government up to the task?
The Federal Government appears optimistic that the measures and strategies it has introduced for ending the recession will impact soon positively on the economy. A few weeks ago, President Buhari assured the nation that the recession should end by the middle of this fiscal year. We can do with a dash of optimism all round, but this prediction may prove to be premature as well. It is overly optimistic and based more on hope than on the current economic realities in our country. We can forget the optimistic predictions of the religious seers and prophets who, as usual, have predicted our economic recovery this year. They are equally off the mark. These predictions are totally misleading and speculative. They should be totally ignored as voodoo economics.
Now, why do I take a dim view of these optimistic predictions about the economy? Why do I believe that the recession is not about to end soon? It is simply because I believe the fundamental problems and challenges of the economy have not yet been fully grasped and addressed. Basically, we are in a recession because of the sharp fall in oil exports and revenues. The recession will end only when there is full recovery in oil exports and revenues. Earnings from non-oil exports have remained insignificant: less than eight per cent of total foreign exchange earnings. In the short run, earnings from agricultural exports cannot fill the gap in our foreign trade balance and foreign exchange earnings. This will take decades even if there is some expansion in agricultural exports. The much needed diversification of the economy away from its over dependence on oil revenues has not materialised over the years, despite record income from oil exports. This was easier to achieve during the decades of the oil boom. But that opportunity was lost again. Imports grew as rapidly, if not more rapidly, than exports, including the oil revenues. The overall cost of governance also increased significantly due to massive corruption in the public sector, and the half-hearted measures to bring it under control. There has recently been some recovery in oil prices rising from $30 per barrel to nearly $60 now. But this is still far short of our normal oil revenues before the economy went into a recession. This means that we are still short of the financial resources needed to pull the economy out of its deep recession. Without massive spending the economy cannot be pulled out of recession. And Nigeria’s financing gap, even with the record oil revenues of the last decade before the recession, was estimated at over $10 billion annually. With the massive loss of oil revenues, the financing gap has obviously grown much wider. Hence, the massive external borrowing by the Federal Government: another future debt burden.
To this huge revenue deficit must be added Nigeria’s high import dependency. It is estimated that Nigeria spends well over N1 trillion a year on food imports alone. Its manufacturing industry, based on import substitution, a failed strategy, is also largely dependent on imports. And there is virtually little manufactured exports going on. It is the food imports, raw materials imports for industry, and other imported luxury goods that collectively put the domestic economy under intense foreign exchange pressures. This may seem elementary, but it is a lesson that Nigeria’s political leaders have consistently failed to learn over the years. Nigeria was in a similar dire financial predicament following the oil shocks of 1983-5, and a structural adjustment programme had to be reluctantly introduced by the Babangida military regime to address the problem. The economic situation in 1983-5 was, in fact, worse than it is now. There was a recession then too, far worse than what we have now. Nigeria fell into balance of trade and payments disequilibria as it could no longer pay for its vital imports. It was in payment arrears and its creditors cut it off from further credits. At first, we refused to even consider devaluation as a policy option. But later, when it became clear that we had limited options, the Babangida military government was forced in 1986 to devalue the naira. The strategy worked. It was painful as prices soared, but it worked. It was this painful economic stabilisation programme, particularly the naira exchange rate adjustment that ended the recession. Imports began to fall. Coupled with an increase in oil exports and revenues the economy returned to the path of stability and growth, averaging 5%. But regrettably, once the economy appeared to have recovered, Babangida undermined its future growth by frittering away the gains of the recovery on frivolous public expenditures. This was to hurt the domestic economy very badly.
To some extent, this is what President Buhari has to do now with some modifications to end the recession. As we have no serious balance of payments disequilibrium now, the challenges involved are less serious than those that confronted Babaginda. But Buhari’s economic strategy has to be broadly similar to that of Babangida. He has very reluctantly ended some of the wasteful subsidies in the economy. You cannot pay subsidies with borrowed funds, but from a budget surplus. He was initially strongly opposed to any adjustment of the naira exchange rate, but he has now been forced by compelling circumstances and the realities of Nigeria’s economic situation to come to terms with this measure. But much valuable time was lost by the delay in deciding promptly to allow any devaluation of the naira.
Timing matters in devaluing a currency. In fact, the devaluation of the naira should have begun in 2013 as soon as it became clear that global oil prices were falling. President Jonathan should have started that process. But by that time political pressures in the PDP, then the ruling party, had begun to build up in preparation for the 2015 elections. When a national currency such as the naira comes under exchange rate stress early devaluation as a policy adjustment has to be introduced promptly. By the time Jonathan left office the prevailing exchange rate of the naira was no longer tenable or sustainable. It had become grossly overvalued. It made imports attractive and cheaper and exports unattractive. And right now, the issue of the naira exchange rate is not yet fully resolved. The present inter-bank rate is N305 to the US dollar, while the rate in the parallel market is now close to N500 to the dollar. The gap between the two rates is much too wide and bad for economic planning of any kind. It is speculative and allows for much round tripping. This regime of multiple exchange rates creates financial uncertainties and is bound to hurt the economy badly, as it constrains foreign investment in the Nigerian economy. Already, because of the recession and other economic uncertainties in our country, Nigeria is no longer the first destination of foreign investors in Africa. It has been replaced by South Africa, Angola, and the Maghreb countries of North Africa, where there is far greater economic and exchange rate stability than here in Nigeria. To restore our position as the first destination in Africa of foreign investors, we must bring to an end this system of multiple exchange rates. We should allow the naira to float freely. Yes, costs and prices will go up, but it will also restrain and reduce imports. There is no need for bans as they can be counter- productive. A combination of a unified exchange rate and appropriate tariffs on non-essential imports will stabilise the exchange rate of the naira.
As for the possible impact of this year’s proposed N7.3 trillion budget on the economy and the recession, I doubt whether it can achieve much. Nominally, it is a huge budget. But when discounted for inflation and exchange rate adjustment it is not that huge. The budget deficit is very large with the government hoping to borrow nearly half of the budget at home and abroad. It is unlikely that it can meet either its revenue target or loans. Even if it does there is the perennial problem of budget implementation, the bugbear of budgets in Nigeria. It was estimated that last year only 56% of the budget was implemented due to financial and administrative constraints. It is unlikely that things will be different this year. As for the planned foreign borrowing, the government should instead seriously consider selling off some of its core assets in the oil industry. For instance, it holds 60 per cent in Mobil. There is no longer any need to hold a controlling share there. If the Federal Government sells only 20% of its shares in Mobil Oil, this will immediately yield US$20 billion, which will reduce its resort to foreign borrowing considerably. And this can be used for infrastructure development. The government must put its thinking cap on and be more serious and focused on tackling the recession more vigorously. Otherwise, it will take much longer than predicted for the recession to end