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PAGE 8—SUNDAY VANGUARD, NOVEMBER 29, 2020 ‘Why we may not exit recession in first quarter of 2021’ By Peter Egwuatu, Assistant Business Editor A chartered stockbroker and Executive Vice Chairman, HIGHCAP Securities Limited, Mr. David Adonri, in this interview, speaks on how Nigeria got into recession, the implication and possible way out among other things. Nigeria found itself in another recession in five years. Could it have been avoided? Nigeria’s economy is prone to recession due to its fragility. The economy has not been built to last. It has inherent structural deficiencies preventing it from withstanding stress. Recession in Nigeria’s economy is an accident waiting to happen. The last time Nigeria’s economy entered recession was when GDP contracted in 2016. Then, it contracted by - 0.67 percent in the first quarter and fell into recession in the second quarter when GDP contracted by -1.49 percent. At the end of 2016, GDP had contracted by -1.73 percent. The recession eventually ended when GDP grew by 0.55 percent in the second quarter of 2017, after a negative position in the first quarter of 2017. That recession lasted for one year. For the second time in five years, Nigeria’s economy has fallen again into recession. The country’s GDP contracted by -3.62 percent in the third quarter of 2020, after contracting by -6.1 percent. Several factors contributed to the 2016 recession, the most important being crash in crude oil price. The economic boom of 2013, which saw inflation rate at single digit and GDP growth rate of 5.49 percent, fizzled out in July 2014 as a result of crash in crude oil price from USD111.8 per barrel continuously to as low as USD30.7 per barrel in January 2016. That drastic drop put serious pressure on Nigeria’s foreign reserve, causing scarcity of forex, high inflation rate and devaluation of the naira. The tapering of Quantitative Easing by US Federal Reserve Bank in 2014 also complicated issues for the Nigerian economy which was already reeling from the tension soaked build-up to the 2015 general election. The economic decline from 2nd quarter of 2014 intensified amidst laxity by government to take necessary remedial measures to avert the recession of 2016. The current recession is not surprising because of the devastating impact of COVID-19 pandemic. Almost every country in the world suffered COVID-19 induced recession. If the Nigerian economy was more resilient, perhaps the impact would have been milder, considering the slower rate of transmission of the disease locally. Before the onset of the pandemic in February 2020, signs of weakness in Nigeria’s economy were apparent. Due to its fragility, early in January 2020, a global rating agency, Moody’s & Fitch had downgraded the Nigerian economy from stable to negative. The widespread devastation of the pandemic, whose intensity surpasses 2008 global financial crisis, only worsened the country’s steadily deteriorating economy. Other than disruptions to global trade and financial flow caused by COVID- 19, Nigeria’s economy has been terrorised by •Prof. Adonri worsening insecurity and debilitating selfinduced trade containment. Experts have predicted hard times. Would the times really be as hard as they predicted? Recession is a backward movement of the economy from a previous position. It is a difficult time for a country when there is less trade and industrial activity than usual and more factors of production are unemployed. During recession, national and household incomes drop. Non-performing debts escalate. Government, corporations and households are unable to meet their financial obligations. Recession escalates poverty and provokes social unrest. The present case of Nigeria is more pathetic than recession. Simultaneously, the economy is faced with galloping inflation. This terrible condition is known as Stagflation. Inflation rate has risen in Nigeria for fifteen straight months, moving steadily from 11.02 percent in August 2019 to 14.23 percent in October 2020. It is projected to reach 15 percent in December 2020 according to the forecast made in recent Nigeria Economic Sustainability Plan (NESP 2020). Hyperinflation reduces the buying power of money, weakens domestic currency, constricts the disposable income of households, deepens poverty and escalates the cost of projects. Economies crave non-inflationary growth for development to be meaningful. All the adverse consequences of population explosion on the socio economy are already evident How can g o v e r n m e n t e n c o u r a g e production and exports to earn foreign exchange and boost the economy? Stagflation means that the economy is shrinking while costs are increasing. Domestic industrial and agricultural outputs are falling. Nigeria’s fiscal economy (production and trade) has suffered a series of setbacks since independence which has weakened its foundation. It is highly import dependent. Nigerian industries rely heavily on imported capital goods and raw materials to survive. Any time there is shortage of forex, their production is crippled. Nigeria also lacks the engineering infrastructure to sustain the productive momentum of industries and make the economy competitive and internally selfregenerating. This is a structural defect that cannot be fixed overnight. Nigeria’s inflation is essentially caused by her deficient supply-side economy, worsened by insecurity and scarcity of forex. Boosting inflow of hard currency through export may not be immediately feasible as a second wave of COVID-19 hamper the demand for crude oil and diaspora remittances wane. Other than crude oil which is the mainstay of Nigeria’s export economy, now in limbo, insecurity has already dented the country’s economy. Additionally, Nigeria’s manufacturing sector lacks the capacity to compete in global market, thus limiting available options for a leap in foreign income. This is why government is running from pillar to post trying desperately to secure foreign survival loans. What could have been done by government to avert recession? The high frequency of Nigeria’s economic bust is not surprising. Whenever the economy is subjected to little stress, be it political, social, trade dislocation, or natural disaster, it falls into immediate crisis. Between independence and the 1970s, Nigeria’s four years development plan cycles planned and built the economy to pro-actively forestall threats in future. They were geared towards the laying of a solid foundation for self-reliance. That objective became a mirage after the fourth national development plan was jettisoned by the next federal administration. The subsequent strategic plans which ended in 2000, 2010 and ending 2020, were more of sloganeering rather than genuine attempts at building a resilient economy that lasts. Nigeria’s economy rests on a shaky structural foundation, hence the resort to short term panic measures to tackle economic crisis. If the necessary economic structures were in place before onset of COVID-19 pandemic, there would have been enough inventory of consumer goods and financial reserve to see us through the period of lockdown. Now, we would only have been grappling with recession like Europe, Asia and America and not the harshness of Stagflation. Credit must be given to government for early lockdown and timely reopening of the economy otherwise, the economic crisis would have been worse. Apart from China, no other country succeeded in averting current recession. China’s world-class engineering infrastructure and early stern measures to curtail spread of COVID-19, enabled the country to sustain its fiscal economy. Although Nigeria was still functioning at low rate internally, drastic decline in demand for crude oil and decline of imports overwhelmed the economy. These are factors beyond the control of government and they are still prevalent. Can the monetary and fiscal policies proposed by government yield positive GDP? The dichotomy between fiscal and monetary policies has almost disappeared in Nigeria. In addition to formulating and executing monetary policies, Nigeria’s monetary authority, Central Bank of Nigeria, CBN, now also formulates fiscal policies presumably to plug fiscal gaps. It engages in formulation of trade policies and dishes out stimulus packages to industries. Government engages in an administrative method which misallocates public hard currency in a manner detrimental to the integrity and efficiency of Nigeria’s macro economy. The federal government said Nigeria will exit recession in first quarter of 2021 while the World Bank maintained that the nation is at a critical juncture… It will be miraculous if Nigeria exits recession in the first quarter of 2021. The headwinds against the economy are not likely to disappear fully in first quarter of 2021. It is not likely that farm security will be restored early next year as Boko Haram, bandits and herdsmen are increasing their rampage. Despite the euphoria surrounding the emergence of effective COVID-19 vaccine, disruptions by the pandemic may persist beyond first quarter of 2021, hampering Nigeria’s crude oil export and affecting diaspora remittances adversely. Agriculture and crude oil are the main drivers of the economy. Their probability of recovery in early 2021 is remote. There is also no indication that the land borders will reopen soon to facilitate intra African trade. Nigeria’s structural deficiencies cannot be corrected within such a short period warranting an optimistic view that manufacturing can close any gap. The social environment remains charged as law and order have broken down in parts of the country. Consequently, the basis for government’s optimism that the economy will exit recession in first quarter of 2021 is difficult to understand. Government appears to be concerned only about recession. They are oblivious of the dire consequences of galloping inflation. What options do you think should be explored? Nigeria’s economic crisis is deeper than recession. It is Stagflation which is a deadly crisis that is difficult to eliminate. The macroeconomic policies so far enunciated by government are principally targeted at combating the recession but may also intensify the galloping inflation. The situation can degenerate into a serious hyperinflation if CBN’s expansionary monetary policy fails to stimulate production. Stagflation is not an economic crisis you can just spend your way out from. It requires careful identification of the specific factors slowing the economy and those fueling inflation and acting to eliminate them one by one. This is an opportunity to address the long term structural deficiencies and imbalances that make the economy fragile and import dependent. If we do not start addressing them now, the environment that provokes recession will continue to hound the economy. A critical imbalance in the economy is the ever increasing demand pressure piled by uncontrolled growth of the population. Purpose of economy is to meet the needs of people. Between independence and now, Nigeria’s population has increased by 390 percent. All the adverse consequences of population explosion on the socio economy are already evident. Excessive growth of population has orchestrated consumption and hampered savings accumulation in the economy. Incidences of recession can be minimized in Nigeria if demand management through population control is also factored into macroeconomic policies.
SUNDAY VANGUARD, NOVEMBER 29, 2020, PAGE 9 RECESSION: Quick implementation of fiscal policies needed for recovery —Prof.Uwaleke By Peter Egwuatu, Assistant Business Editor Professor Uche Uwaleke, a Financial Economist, is the President of Association of Capital Market Academics of Nigeria. In this interview, Uwaleke speaks on Nigeria’s plunge into recession and the likely paths to recovery Do you agree with the reasons given as being responsible for this recession? Unlike the recession of 2016 chiefly caused by the sudden crash in crude oil price resulting in a significant fall in government revenue to the extent that several state governments could not pay salaries thereby weakening aggregate demand, the current economic recession in Nigeria is the result of twin shocks coming first from the health crisis occasioned by COVID-19 and government attempts to contain it by imposing restrictions in movements and lockdowns. As you know, international flights were banned by most countries including all forms of public gatherings. Expectedly, there were disruptions in supply chains, production and exchange which hurt several sectors of the economy such as manufacturing, agriculture, transport, trade, construction, hospitality and education to name just a few. You recall that even schools were shut due to COVID-19. The second shock came from the collapse of crude oil price given the country’s dependence on the oil sector. I must equally mention that the OPEC+ cut agreement in response to the fall in crude oil price, led to a reduction in the country’s daily oil production. You recall that the 2020 budget was predicated on an oil output of about 1.8 million barrels per day. The real GDP contraction of -3.62 per cent recorded in Q3 of 2020 was partly caused by the poor performance of the oil sector which witnessed a reduction in average daily oil production to 1.67 million barrels per day. So, in summary, this recession was caused by COVID’19 and collapse in crude oil price. I say this because before the pandemic, the economy was already on the path of growth recording about 2.27 per cent in 2019. What is the implication of the recession for the ordinary Nigerians and the country as a whole? Recession as you know is simply the downturn in economic activities. Even before the release of the NBS report, it was obvious even to government that the economy, like many other economies of the world, was in a recession. The NBS report merely gave it an official status since the economy had gone through two consecutive quarters of negative growth in GDP. Unlike in many other countries also in a recession, that of Nigeria is made worse by the fact that the inflation rate is also on the rise. So, in the Nigerian context, it is actually stagflation. Against this backdrop, the implication is grave for the common man and for Nigerians in general who have been grappling with high cost of living, lower living standards, and for firms’ high cost of production and weak productive capacity. I wish to note that the disappointing performance of the agriculture sector in Q3 2020, at a mere 1.39% growth, worse than the Q2 growth rate, gives cause for concern. The negative impact of food prices is capable of worsening poverty and the health crisis occasioned by poor nutrition. So, by and large, the twin impact of recession and rising inflation otherwise known as stagnation will only impoverish the common man. Inflation is on the rise, a foreign reserve is dropping and the manufacturing sector is shrinking. How can government encourage production and exports to earn foreign exchange to boost the economy? Inflation rate was on the rise even before the pandemic hit the economy primarily due to the continuous border closure, increase in Value Added Tax, VAT, and pump price of fuel as well as the scarcity of forex. As you know, inflationary pressure is coming more from food index due in part to insecurity in the food-producing areas of the country. As you rightly noted, the country is experiencing foreign reserves depletion. This is due largely to the point I mentioned earlier about the collapse in oil revenue as well as the exit of foreign investors and reduction in capital importation. Not surprising, therefore, the manufacturing sector, in particular, challenged by lack of forex to import raw materials, is underperforming. For several months now, except for this month, the Purchasing Managers Index, which is an indication of manufacturing activity, has been below the 50 point threshold. Therefore, to answer your question against this backdrop, government can encourage production and exports by investing in infrastructure, especially power, roads, rail and IT infrastructure in partnership with the private sector. The current plan by the government to have a N15 trillion Infrastructure Fund to be financed by the Central Bank of Nigeria, CBN, AFC, Sovereign Wealth Fund, SWF, and other private sector players, is a step in the right direction. It is also important that the insecurity which hampers production, especially in the agriculture sector should be tackled. Doing so will help diversify the revenue sources and attract foreign investments which will ultimately shore up foreign reserves. Was this recession avoidable? Regarding what the government could have done to avert the economic recession, it is my opinion that given the structure of I would like to see speed and a sense of urgency, especially concerning the implementation of fiscal policies •Uwaleke the Nigerian economy, which you well know is a legacy issue, the present economic recession was inevitable. No one doubts the fact the pandemic and the sudden collapse of oil prices were unexpected. In particular, the pandemic caught many countries including Nigeria unawares. Expectedly, these countries, both developed and developing, have recorded bigger contraction in real GDP growth. I think government through the Central Bank responded swiftly with various stimulus packages and interventions which have gone a long way in reducing the size of the recession below projections by international agencies including the International Monetary Fund,IMF. I must mention that a number of economic policies being implemented now, such as the increase in VAT could have been deferred till 2021 due to its impact on aggregate consumption and inflation. Recall that I said earlier that the real challenge the economy faces now is stagflation. There is also the issue of insecurity bedevilling the country, which I think could have been better dealt with. On the part of monetary policy, I think the right steps were taken. Can our monetary and fiscal policies yield positive GDP? I think, overall, fiscal and monetary policies are in the right direction. In response to the pandemic, government has scaled up the social investment programmes. It has also provided cash support to some households that were seriously affected by COVID-19. In addition, government came up with an Economic Sustainability Plan, outlying bold measures aimed at helping economic recovery including mass agriculture, housing and investment in infrastructure, especially solar energy. The major challenge now is its implementation to ensure a quick return of the economy to the growth path. On its part, the CBN has been deploying its development finance function, beyond the use of the traditional monetary policy tools, to support economic recovery. I think the policies are in the right direction. I would like to see speed and a sense of urgency, especially concerning the implementation of fiscal policies. Do you agree with federal government that Nigeria will get out of recession in the first quarter 2021? I am quite optimistic the Nigerian economy will weather the storm and pull out of recession by the first quarter of next 2021. My optimism is predicated on the fact that unlike in Europe and America, the country may not have to grapple with a second wave of COVID’19 on a scale similar to what was experienced in Q2 2020. Consequently, I don’t foresee another round of nationwide lockdowns and movement restrictions. Secondly, the economy is fast opening up and business confidence is gradually returning. I am sure you are aware of relative improvements in the Purchasing Managers Index which has now crossed the 50 point threshold. You must equally be aware of the current boom in the stock market, especially in recent times. Indeed, the entire financial sector has been resilient with positive performance as indicated in the NBS Q3 2020 report. Again, the early submission of the 2021 budget proposal and the expectation that its implementation will commence in January hold a lot of promise for economic recovery. As I mentioned earlier, the impact of the raft of COVID-19 interventions by government should begin to manifest from the first quarter of 2021. Also, the implementation of the government Economic Sustainability Plan will go a long way in assisting economic recovery. It is equally important to mention that a critical assumption in all these is that the economy will not experience any major shock either coming from the external sector such as another crude oil price shock or another crisis in the magnitude of the one witnessed during the #End SARS nationwide protests. Is government getting it right in the area of diversification since the petroleum sector still accounts for the huge revenue earned? With respect to diversification of the export base and creating multiple sources of revenue for the country, this government, like many others before it, has articulated the roadmap in the Economic Recovery and Growth Plan. The key challenge has been the implementation of the lofty ideas contained in that plan especially in the area of diversification especially through Agriculture, Solid minerals and Tourism. This is not unconnected with bottlenecks in revenue generation for the purpose of executing developmental projects. In what ways do you think government can do better to take the country out of recession? Government projects the economy to recover next year with a real GDP growth rate projected at three percent. While I have no doubt a positive GDP growth rate will be recorded in 2021, I think a growth rate of three percent, though desirable, appears a little ambitious given the present state of the economy. To quicken economic recovery, the implementation of the 2021 budget, especially the capital component must start quite early next year. A lot more attention should be paid to the agriculture sector, which contributed about 30 percent of GDP in Q3 2020 but recorded a very weak performance. The CBN can also scale up its interventions in the agriculture value chain as doing so will not only bring down food prices but will also support economic recovery. Above all, government should move fast to tackle insecurity in the country, which is detrimental to the production and exchange of goods and services.
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