Speech Delivered by Dr. Ahmed Adamu at the Katsina Forum held on 25th December 2016.
On 1st week of July, 2016, Nigeria was declared officially in Economic recession, a situation where economic activities or productions decline for two consecutive quarters i.e. six months in a row. These continue to decline up to October 2016, making it likely for the country to face the most prolong economic recession since 1980s recession. A mere decline in value of goods and services produced in a country may sound a mere technicality. Yes, it is technical, because a country can be in recession, but the micro-economies might be doing just ok, and micro-economies might sometimes not be ok, but the country’s GDP growth rate going positive. So, it is sometimes beyond those negative GDP growth rate, it is about some key indicators like inflation (18.84% from 9% on May last year), real per-capita income and wages, access to infrastructure, unemployment (13.3% from 8%), value of currency (N490 from 200) , interest rate (14% from 12%), Foreign Exchange Reserve ($25bn from $37bn) etc. Looking at these indicators, records have shown that, they have not been favourable. These are the indicators people can observe to quantify the magnitude of a recession. If these indicators continue to be unfavourable for a period of up to a year, we can say we are in a depression. Depression is an extreme form of recession.
Therefore, depression is when we have significant increase in unemployment, decrease in access to capital, reduction in output, reduction in trades, currency value fluctuations, large number of bankruptcies. A technical definition of depression is when GDP decline rate exceed 10%, in Nigeria it stared declining by -0.36, then declined by -2.06, and then by -.2.24. So, going by this definition, Nigeria is not in depression yet. Going by the recent trend, the decline increased by more than 400%, but later increased by 8%, which shows the recent decline has increased at a lower rate compare to the initial decline. So, we cannot assume substantial decline up to 10% in a near future. However, if this decline continues for a period of two years, Nigeria can fall into depression. So, there can never be depression without recession, but there could be a recession without depression. A prominent example of depression was the famous 1930 depression. To joke about it, recession is when your neighbour loses his job, but depression is when you lose yours. Demand fall can cause depression (Keynesians), increased money supply can also cause depression (monetarist).
Having looked at theories and facts above, we can see Nigeria is not likely to be in technical depression, but in the economy of many people, Nigeria is already in depression. Sometimes, we have to close the books, and look at reality. When you see people dying from starvation or economic frustration, that’s depression. When you have to go out and beg for food, that’s depression. When you can’t buy dinner for your family, that’s depression. Of course, when you cannot pay for the health and school bills, that’s depression. Now, look at your own economy, and tell me if you are somehow depressed or not.
Well, I know the level and severity of depression differ among individuals, so, some may already be in depression and some may not. In one way or the other, we can all agree that the Nigerian economy is not on the right track going by the indicators. If allowed to continue, we can face the general great depression . However, we can start thinking of solutions to avoid the great depression in the country. First, we have to know the causes of the current economic crisis in the country. Some of the causes were as a result of circumstances, inactions and sometimes as a results of “mis-actions”.
One of the circumstantial causes include the drop in oil price, which drastically reduce the country’s income and its ability to curb the resultant recession. This apparently exposed how vulnerable the country is to a shock in a single sector. This shows that the economy has no shock absorbers, and this was as a result of inaction of not investing sufficiently in other sectors of the economy to prevent severe hit from a sudden shock in one sector. Some scholarly findings have indicated likely presence of resource curse in Nigeria, as a reduction in oil revenue has thrown the economy into a recession. This caused the country to rely heavily on importation of goods and services to meet local demands, because the weak industrial and manufacturing sector cannot meet the demands. This then exposed the country’s currency to foreign shocks and continues depreciation due to increasing currency supply. To shield citizens from this depreciation and currency value fluctuations, the government created the foreign exchange subsidy, making it very comfortable to keep importing into the country to a level that was no longer sustainable. It has reached the level that people and businesses heavily rely on government to fund every foreign investment expenditure.
This made government to remove or reduce currency exchange subsidies, shooting the cost of import high. In addition, due to the low oil revenue, the government removed the petroleum subsidy, and as a results of these actions, the inflation reached the highest level in a decade. It was largely observed that inflation is the major cause of current economic hardship in the country.
Actions or inaction of every government must definitely have short and long term effects, and it is the responsibility of policy makers to take responsibility of any current economic challenge by identifying what was responsible so as to know the genesis and solutions. Despite the rising inflation, investments and productions keep declining, which push us near stagflation (persistent inflation and unemployment). Even though, it is common that political transitions cause delay or suspension of investment decisions, but lacklustre economic policies and decisions can help compound the crisis. Investors want to see clear short term and long term economic plans and strategy, and it is upon this they make their decisions. Nigerian economic policy indicators are not easily predictable, a times they come as a surprise. This makes aggregate demand to fall, due to low investments. Withdrawal or slow flow of income within an economy causes leakages out of the circular flow, which causes continues fall in aggregate demand.
Economic problems are natural, the pattern of the economy is always up and down, there are periods of stability and periods of stagnation, but what’s more important are the fiscal and monetary policies set to sustain stability or curb downturns. We now have to look at other fiscal policies that the policy makers put in place to address the economic recession. Spending more especially in critical infrasture and social welfare are very important. Borrowing money may be an option, but it has to be strictly for funding infrastructure projects capable of generating revenue that can be used to service and repay the debt. The decision to operate a single government account created traffic in the flow of income, causing sluggish growth of demand in the pace of fast economic downturn. Despite its economic advantages, the treasury single account ought to have been clustered by sectors or suspended till period of stability.
Fiscal policy has direct impact on the economy, as such it requires very careful study but very quick in period of stagnation. Being very protective and suspicious of generous policies will not help in getting out of the situation. Closing land borders against importation of rice and cars are two important fiscal policy that we have to talk about when assessing the economic recession in the country. In period of economy, the economy must be relaxed and let free relatively to revert to equilibrium. Banning these importation are tantamount to exacerbating inflation and unemployment, leading to severe depression. Importation of rice and cars will automatically be stopped when Nigeria produces its quality cars and rice. It is not true to say until when we have no option that we will produce what we need, if we have to be this so lazy, many would have fall into depression. Despite all the options, we have to set target and strategy to replace all imported products with local ones. This is time to support local and big businesses, not to discourage them.
The monetary policy on the other hand has been targeting the inflation by raising and sticking the interest rate at 14% (from 12%), and Cash reserve ratio to 22.5% (20%), which reduces access to finances to reduce willingness to spend. However, the fiscal policy is doing everything to increase the willingness to spend and access to finances. This shows inconsistency between the two policies. The CBN must be willing to reduce the interest rate and increase money supply. The inflation we experience is not demand pull inflation, and once productions are subsidised and average cost reduced through provision of infrastructures, competition will increase and prices reduced.
Despite the monetary and fiscal measures, individuals have to play their roles of being patriotic and selfless. Market abuse or rent seeking is instrumental in aggravating depression. Everyone has to pitch in and sacrifice to make life better. People take advantage of inflation and Naira devaluation to exploit consumers, and if this continue, the Fiscal and Monetary Policy will not be effective.
Another important factor in analysing the economic depression is Population, a proxy for labour. Great depression can be imminent if more than half of country’s population are inactive due to their gender or poor background, and this is in addition to large percentage of unskilled labour force. Nigerian productivity rate per hour is $3.24 per hour, while in USA is $64.1 per hour, applying the same amount of labour inputs in an hour, Americans will produce output worth $64.1, while Nigerians will produce output worth $3.24. adding more unproductive population amidst shrinking resources lead to great depression. Women empowerment, skills prioritization (not qualification), reward for innovations and dedications, access to quality education and infrastructure will help Improve efficiency and productivity, and until then, we cannot be proud of the size of our population.
Finally, over dozing economy will make it sick again, what is more important is to identify the linkages between every sector and implication of every policy. One variable can be controlled, and others have to be let free. That is why engaging and involving experts in decision making is inevitable for effective economic policies. To avoid further depression, there should be consultations prior to implementation of new policy, and necessary indicators have to be identified to measure success or otherwise of every policy. We have to be ready to take difficult and vigorous policies, not necessary the lazy options, but enduring and careful policies.
Thank YoYou
