Countercyclical Spending, the Remedy for Stagflation



Thursday, October 22, 2015 10.50PM / FDC

The Nigerian economy has witnessed three consecutive quarters of slowing growth and rising inflation, a situation economists refer to as stagflation. Second quarter growth slowed to 2.35% while third quarter growth is estimated at 2%. On the other hand, inflation has increased steadily eight out of the nine months this year to 9.4% in September.

Global oil prices have fallen sharply by over 58% from 2014’s peak of $116pb to $48pb in October 2015. On a marginal cost/marginal revenue basis, margins are down 77%. According to the CBN’s economic report for the second quarter, gross federally collected revenue declined by 27.7%; attributing the decline to shortfalls in oil and non-oil revenue. The external reserves level is also down 12.9% ($4.45bn) to $30.04bn, year to date. The Nigerian stock market has not been insulated from the shocks. The market has lost 13.36% YTD while corporate earnings have been below par; a reflection of declining disposable income, market and policy uncertainty.

On the political front, the long awaited ministerial list has been released and the screening and confirmation of some Ministers concluded. The first thing the Ministers will do after taking up their portfolios is to approve long standing contracts. While this bodes the question- what is the source of funding for this project- this might actually be the remedy the economy needs for the state of stagflation it is in.

According to a well renowned economist, John Maynard Keynes, you spend your way out of an austerity. For Nigeria, this may mean countercyclical spending; government spending on capital projects and key sectors of growth such as construction, manufacturing, agriculture that will yield productivity gains, boost consumer disposable income and ultimately stimulate economic growth. In addition advocating for a lower interest rate will en-courage banks to lend more. So back to the question of funding.

Likely sources of funding for the government include borrowing from the local and international markets, aggressive tax collection, review of tariffs, etc.

The risk of this is a higher inflation rate. But there is no gain with-out pain. If the level of economic growth achieved by the counter-cyclical accommodative policy is significant, the impact of a high rate of inflation may be muted.

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