Policy Options for Addressing Nigeria’s Economic Crisis

Proshare

Wednesday, October 12, 2016 1:48pm / Preston Consults

Present Condition
It is now common knowledge that Nigeria is in a recession, as evident in the decline of her GDP in the first two quarters of this year. According to the National Bureau of Statistics (NBS), the country’s GDP posted negative growth rates of -0.36% and -2.06% in the first and second quarters of 2016 respectively. This is the first time in over a decade that the country will witness a recession, after enjoying an average 7% annual GDP growth rate between 2004 and 2014.

As is typical in a recession, Nigeria’s declining GDP has been accompanied by other debilitating factors such as high inflation and unemployment. Recent figures from the NBS show that inflation rose to 17.6% year-on-year (y-o-y) in August, up from 17.1% y-o-y in July and 16.5% in June, the highest in over 10 years.

This rising inflation has had a huge impact especially on the millions of Nigerians in the informal sector. In addition, over half a million jobs were lost in the first quarter of this year alone. Also, foreign investment has witnessed a significant slump with inflows falling to $1.4 billion in the first half of 2016 compared to $5.3 billion in the first half of 2015.

How did we get here?
Full year GDP for 2016 has been revised down from the 3% forecast by CBN to -1.8%. This downward revision is due to rising inflation given that the budget was estimated based on a projected inflation of 6% – 8%. The divergence between projected and actual GDP and the resulting hardships are due to so many factors, the most important being our over-dependence on oil.

Nigeria’s oil wealth has been mismanaged over the years by successive governments, resulting in serious structural problems in the economy. Oil revenues have typically generated more than two-thirds of government income, while the share of agriculture and manufacturing has steadily declined.

With the current weak global oil prices, our revenues have experienced a significant decline from the projected values. This has been aggravated by the militancy in the Niger Delta region of the country, which has resulted in a fall in production from 2.2 million barrels-per-day (bpd) to about 800,000 bpd. Oil-sector GDP, thus, contracted by 1.89% and 17.48% in the first and second quarters of 2016 respectively.

The nation’s external reserves have fallen to a ten-year low of about $24.3 billion in October 2016, a 30% decline from the October 2014 figure, reflecting the effect of lower oil prices, falling production volumes and dwindling foreign investments. This has put a strain on our import-dependent economy given that it is foreign reserves from crude oil sales that are used to finance our import purchases.

In a bid to diversify the economy and address our over-dependence on imports, the government has been implementing a number of policies, some of which have failed to achieve the desired results. For example, it initially tried to limit access to foreign currency for the importation of some products in order to persuade people to buy Nigerian goods.

However, this harmed many businesses as well as the manufacturing sector which relies heavily on imported raw-materials, resulting in widespread loss of jobs and a hike in the prices of those imports. Also, government’s initial insistence to peg the naira to the dollar led to a wide spread between the official and parallel market rates, which contributed to a rise in inflation.

Recommendations
1) Fiscal Stimulus
To guide the economy back to the path of growth, it is imperative that we apply the basic principles of Keynesian economics which advocates for the use of expansionary monetary and fiscal policies to increase consumer demand in order to encourage investment. An increase in investment implies that more people will be employed to produce the goods or services invested in, thus addressing the unemployment problem. This has worked successfully in the past to bring economies out of recession. In line with this, the federal government should:

  1. Consider bail-out loans (at concessionary interest rates) for big indigenous distressed companies, so as to stimulate their production activities and generate more employment.
  2. Create incentives targeted at growth-inducing and job-creating sectors such as agriculture; solid minerals; and micro, small and medium enterprises. These incentives should include single digit interest rates and longer gestation periods for loans.


2) Quantitative Easing
The monetary authority’s move to attract foreign investment and boost external reserves through high interest rates is counter-productive for the following reasons:

  1. During recessions, low interest rates are needed to stimulate domestic investment and boost GDP. The government needs to leverage on the private sector to get the economy out of recession, and they in turn need the right incentives to do this. Low interest rates are critical if we are to successfully support private sector development, diversify our economy and develop critical infrastructures such as power, road and rail networks.

 

  1. The CBN should not adopt a tight monetary policy stance during a recession. This is because, not only do investors now have to borrow at higher rates, banks’ costs of meeting short term obligations will also rise, thus, negatively impacting their balance sheets and profitability. The financial sector needs to support the real economy at this critical time by lending more to it at reasonable interest rates.

 

  1. High interest rates only serve to attract hot capital which would remain in the country for a short period of time. What the economy needs at this time is long term investment, and long term investors respond to strong fundamentals such as sound socio-economic policies, democratic governance and good growth prospects.

 
 3) Revenue Enhancement and Cost Reduction 
In the short term, avenues of increasing government revenue and reducing cost should be explored to help reduce the budget deficit. This can be done through:

  1. Broadening the tax base by simplifying the tax system and enhancing tax collection and administration with minimal enforcement cost. This will also improve governments’ accountability as tax payers will then be more likely to demand accountability on how tax revenues are spent. FIRS’s recent announcement of amnesty for non-compliant companies and individuals willing to start complying is commendable.

 

  1. Concessioning of some assets with the option of buying them back. This will limit government’s control over these assets and probably lead to higher capacity utilization and efficiency.

 

  1. Further reduction of public expenditure through the value for money approach.


4) Fast-track Critical Legislation
There is need for the Executive to work closely with the National Assembly to expedite action on some priority legislation needed to spur economic growth. These include the Petroleum Industry Bill, Land Use Act, Companies and Allied Matters Act, Federal Competition and Consumer Protection Bill, Secured Transactions in Movable Assets Bill, National Development Bank of Nigeria Bill, Customs and Excise Management Act, Investment and Securities Act, Nigerian Ports and Harbours Authority Bill, National Transport Commission Bill and Nigeria Railway Authority Bill, among others.

5) Clear Policy Direction
There is need for greater clarity and consistency with respect to government’s policy direction. There is no gainsaying that our current economic woes were to some extent caused by the absence of economic policy leadership and confidence.

Government must therefore urgently develop and implement an economic reform programme that will signal a bold commitment to business-friendly economic policies which will help to attract local and international investors, generate employment and diversify the economy.

A key component of this reform programme should be the determination to improve the country’s unfavourable business environment given that Nigeria is currently ranked 169th out of 189 countries in the World Bank’s Ease of Doing Business Index.

6) Improve Security
Government must sustain its efforts to end the Boko Haram insurgency in the North East and urgently begin the rebuilding of that part of the country. This will include adequate care for the security, health, education and economic wellbeing of internally displaced persons. The militancy in the Niger Delta must also be resolved through dialogue, while the menace of herdsmen across the country should be contained. It is evident that no business can thrive in an insecure environment.

ConclusionNigeria has been acknowledged as one of the largest economies in Africa with a maturing political system. While these features should ordinarily attract investors, they come at a time when the external environment has changed with oil prices and capital flows being less supportive. In addition, the combination of insecurity, lack of a clear policy direction, private sector vulnerability, and rising inflation have continued to dampen business and investor confidence.

What we need in order to turn the tide are sound economic policies and clear strategic plans that address both the structural problems in the economy and the security challenges. For Nigeria to remain globally competitive there is need for liberal and business-friendly monetary policies as well as fiscal discipline. It is also imperative for an enabling environment to be provided in sectors such as infrastructure, manufacturing and micro, small and medium enterprises.

Implementing the aforementioned recommendations will boost investors’ confidence and help get the country out of recession with a better-structured, more diversified and more resilient economy.

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