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POCKET Economics: Addressing Income Inequality

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Thursday, June 07, 2018 /3:00 PM/ Proshare Research
 

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Executive Summary

Evidently, there has been erosion in growth largely due to years of policy summersaults and uncertainty. As a result, output gaps have been inevitable which led to a recession.  Interestingly, qualitative indicators such as the Human Development Index (HDI) have been weak and have become accentuated in the macro space, as household wallets shifted inwards and real incomes were suppressed. 

Though consumption continues to rise in Naira terms, as the nominal value reflects the new market value of goods and services, actual consumption have slumped by 40% when adjusted for inflation and exchange rate. Currently, 53% of Nigerians live below $1.90 per day, thus underlining the dent in consumption by Nigerians, given the ongoing reality.

 

Fig 1:  Household Consumption per Person 

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Source: NBS, Proshare Research Analysis

 

Given the symbolism of the month of May as a “workers month”; this edition of the Proshare Confidential Report takes a cursory look at how deeply the weakness in HDI has become but far beyond the embers of income.   

While pinpointing the impact on human development, the study found out that at the tail end of 2016, Nigeria had lost 30% of its human index’s due to income inequality. Thus, there is an urgent need to address income inequality, at this point of the cycle. Moreover, the fickle growth have remained largely oil induced and has failed to address the hemorrhage in per capital income. Therefore, it is necessary to unbuckle gross capital formation, as the dynamic of stagnant gross capital formation coupled with substantial high savings is certainly not acceptable; since it is largely due to poor performance of private contribution to gross capital formation. 

Gross capital formation is a measure of investment, thus the stagnant rate of gross capital formation reflects weak investment. A dramatic slant towards an investment model should be considered, as the will so far remains elusive. This can start by removing barriers to private capital formation. 

While it is important to commend the new Company and Allied Matters Act (CAMA) as it tend to provide room for bolstering of physical stock through the creation of a salvaging mechanism; savings pools if not ploughed towards production can become a limitation. Nigeria’s adjusted savings is 11% of GDP, which is considered high when compared to many Frontier and Emerging economies; thus monetary policy must begin to address how to plough such savings to the real economy.

 

Fig 2: Adjusted Net Savings 

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Source: World Bank

 

In addition, the poor stock of infrastructure to GDP has held back both capital formation; therefore there is a need to address them by properly engaging the private sector and building trust. 

It is impossible to carry out outward oriented policies without addressing infrastructural deficit. Moreover such distortions have made the country more vulnerable to push factors. Evidently, foreign capital just like Foreign Direct Investment (FDI) will remain a supplementary form of capital. However, Nigeria’s FDI to GDP is too low to serve as a supplement. Thus, there is a need to drive net inflows into the country at this point of the cycle. 

 

Fig 3:  FDI to GDP           

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 Source: World Bank  

 

It is also important to effectively mobilize both domestic capital and foreign capital in order to address the dent experienced in their income level, while learning from the global economy and how the jolt in the effective rate in the United States is affecting emerging economies. 

In all, the May 2018 Proshare Confidential Report is part of our enlightenment initiative to keep the Nigerian Populace and key stakeholders aware of development issues affecting our economy. 

Do feel free to share your opinions/observations and feedback with us vide economy@proshareng.com and research@proshareng.com
 

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Previous Proshare Confidential Report (s)

1.       The Silent Drug Epidemic: A Gathering Storm - Apr 2018 

2.      Judging IMF’s Position on Development Indices – Mar 2018

3.      Money Market: The Folk Road – Feb 2018

4.      The Headache of Missing Targets – Jan 2018

5.      2018 Outlook on the Nigerian Economy: The Need for an Even Keel – Dec 2017

6.      Nigeria External Economy and the White Noise of Import Dependency – Nov 2017

7.      States and the Rising Weight of Debt – Oct 2017

8.     Money Supply: Reeling from Policy Response – Sep 2017

9.      How Rail and Energy Will Deliver a Robust Economy for Nigeria – Aug 2017

10.  Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017

11.   The Nigerian Debt Conundrum and the Need for Automatic Stabilizers – Jun 2017

12.  Article IV vs. ERGP - The Third Way – May 2017

13.  Lifting The Veil off The Financial Sector – Apr 2017

14.  Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017

15.   FX Utilisation in January 2017-Symptoms of An Opaque Structure – Feb 2017

 

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