EFFECTS OF ECONOMIC RECESSION: THE NIGERIAN PERSPECTIVE
By: Abiodun Oyekan
Tags: Recession, Nigeria, Investment, Governance, Economy

The Nigerian economy has slipped into its second recession in five years after two consecutive quarters of contraction in GDP in real terms. Although the Nigerian economy exited the 2016 recession in second quarter of 2017, real GDP growth has been weak averaging 1.64% (2017–2019). This muted growth cannot be separated from the forex crisis that have rocked the country since 2014, plunge in global oil prices and constrained household spending exacerbated by the rising inflation rate.

The recovery of the Nigerian economy from the 2016 downturn was halted by the double shock of COVID19 and the dwindling fortune of oil price triggered by the Saudi-Russia trade war and further worsened by generally low demand led by the Asia majorly due to lockdown of the Chinese and Indian economy .

Although the immediate causes of this recession has been liked to falling oil prices and COVID19 Pandemic, it can also not be separated from years of structural decadence as a result of policy mismatch and the lack of deliberate attitude of the government to increase the earning capacity of the Nigerian economy.

EFFECT OF RECESSION

Unemployment: According to the report released by Nigeria Bureau of Statistic, as at Q2 2020, over 55% of Nigerians are either unemployed or underemployed. The unemployment rate rose to 27.1%. The estimated labour force of Nigeria is 80.2 million. This means that about 21.7 million Nigerians are unemployed, a figure greater than the population of 35 out of the 54 African countries. The contraction of the economy can further exacerbate the situation as companies might have to downside in order to keep cost in the same direction with revenue.

Poverty: According to the 2019 report on poverty and inequality in Nigeria released by the Nigeria Bureau of Statistic, over 83 million people earned below poverty line of $381.75 per year, affirming the nation as the poverty capital of the world. The contraction in GDP while population keeps growing is an indication of reduced standard of leaving as measured by GDP per capital. This means more Nigerians will enter poverty by 2021

Increased Debt Profile: the total debt profile of Nigeria stood at 31 trillion as at June 2020 and 3.1 trillion will be used for debt servicing in 2021 based on the 2021 budget. Currently the 2021 budget deficit stood at 3.62% of GDP which is greater than the 3% threshold stated in the Fiscal Responsibility Act of 2007. The lower economic output will transfer into lower oil and non-oil revenue for the government in the wake of increasing expenditure. Therefore, the budget deficit is expected to be wilder than government projection. More borrowing is expected from government to augment the declining revenue.

Reduction in economic output: During recession, economic output will decline. This is underpinned by the decline in aggregate demand in the economy. Recession constrained spending as people has less to spend. The high inflation rate has also changed the spending patterns of economic actors. Expansionary expenditure is also constrained by the harsh economic condition and the illiquidity in the forex market.

Reduction in Value of Assets: some assets lost value during recession. The value of assets like real estate reduced during recession due to the illiquidity in the economy at that point in time. Also stock of companies reduces due to the reduced performance of those companies and less incentives to investment at that time.

FUTURE OUTLOOK

The sole dependence of the Nigerian economy on crude oil makes it vulnerable to the global oil market. The happenings in this market will shape the economic outlook of Nigeria.

After rebounding from the April low, oil prices has been stable especially in the wake of successful Vaccines. The second Wave of the COVID 19 pandemic causing partial lockdown and curfew in major European and American cities has made global oil demand expected decrease for 2020 to increase to 8.8mb/p and an expected increase of 5.8mb/d in 2021. OPEC and its strategic partners have been cutting production to drive increase in price and this is expected to continue into 2021. Oil prices is expected to increase in 2021 but still below the pre-pandemic level due to the long lasting effect of the pandemic on life style.

The emergence of the Democrat in the American presidential election might mean a significant policy shift in America which might lead to further distortion of the global oil price with the possible lifting of Iran sanction. The possible lifting of the Iran sanction coupled with Libya’s nationwide ceasefire which has led to a robust recovery in oil production in Libya might cause supply glut as they are not bounded by the OPEC+ agreement.

The recovery of oil price to pre-pandemic level is dependent on the duration of the pandemic, the speed at which Vaccines are developed and distributed and the full recovery of transportation industry which accounted for over 2/3 of oil consumption. When this will happen is a rhetoric question that can only be answered by the test of time.

The Nigerian budget for 2021 is expected to underperform in line with historical trend and the revenue crunch caused by the global oil price plunge and COVID 19 pandemic. The recession will also mean reduced tax revenue for government and the effect of these is expected to widened fiscal deficit which will lead to increase borrowing. The devaluation of the Naira is expected to continue as increase pressure is expected on the Naira due to the import dependent nature of the Nigerian economy. The parallel market and official rate disparity is expected to widened further as the illiquidity in the forex market continues.

RECOMMENDATION

The government has the opportunity to accelerate the pace of structural reforms to build an institutional and policy framework capable of reducing the overdependence of Nigerian economy on oil sector and create enabling environment to support the sustained growth of the non-oil economy. This can be achieved via;

True Federalism: The lingering economic crisis in Nigeria has a political root that must also be corrected in order create an enabling environment for businesses to thrive. The concentration of power in the central and the sharing economy advocated in the 1999 constitution hinders regional prosperity. The sharing of crude oil proceeds among the three tiers of government has made regional government to rely on the central and economic activity that can create wealth at the regional level has been neglected for free money coming from the federal coffers. Thus been said, it is imperative that the restructuring of the economy be done to make regional governments to be self-reliant.

Diversification: The Nigerian government has not been deliberate with diversification as the economy is still solely dependent on crude oil. The Nigerian economy is import dependent with only crude oil the major source of foreign exchange. The agricultural and manufacturing industry should be encouraged as a viable means of earning foreign exchange in the wake of the African Continental Free Trade Agreement. Insecurity in the Northeast has threaten Agricultural activities and epileptic power supply has been affecting the manufacturing sector, government must solve this lingering issues to strategically position these sector for investment.

Growth Friendly fiscal policy: The fiscal policy of the country should be geared towards improving revenue and tightening spending on consumption. The government should enforce the Integrated Revenue Monitoring System and put in place mechanism to block revenue leakages in revenue generating agencies. Government should also spend more on priority areas such as provisions of infrastructure in order to increase earnings capacity.

Accountability and Transparency Initiative: Government at all levels should be held accountable for their actions and transparency should be embedded into the system. Government expenditure and revenue generation should be closely monitored by the citizens to ensure that funds are used for the right purpose. This will further enhances the uses of borrowings to create additional capacities in the economy and ultimately lead to better management of the government fiscus.