As Recession Stages A Strong Comeback

OUTSIDE THE BOX BY ALEX OTTI

‘Out of adversity comes opportunity’ – Benjamin Franklin

On April 27, 2020, in our column titled “Coronavirus: The Morning After” we had correctly predicted another recession thus: “However, while we prepare for extended co-existence with Covid 19, one thing that is clear nevertheless, is that the economy has gone into a tailspin which will ultimately lead us into a recession by October this year. In fact, if care is not taken, it will degenerate into a depression. This is the stark reality and we must begin to think of how to deal with it.”

Our prediction was corroborated by the World Bank in a release on June 25, 2020 where it stated “the collapse in oil prices with the Covid-19 Pandemic is expected to plunge the Nigerian economy into a severe economic recession, the worst since the 1980s”.
Today, Nigeria has made it once again, into the league of economies in recession, with effect from October 1, 2020. Last week, the National Bureau of Statistics released its report for the end of the third quarter 2020, with negative GDP growth of 3.62%. In the second quarter, GDP declined by -6.1%, resulting in cumulative GDP growth rate of -2.48% for the first three quarters of 2020. This is happening just four years after the economy went into a recession in 2016. Even though the economy managed to recover in 2017, growth numbers were very minuscule leading some analysts to argue that the country never actually recovered from the recession of 2016. Technically speaking, economic growth must be related to corresponding population growth for it to make sense. Therefore, the average growth rate from 2017 to 2019 of around 2% per annum versus the average population growth of 3% per annum meant that our economy was growing slower than the number of mouths it was supposed to feed.

The recession this time around is on the heels of the Coronavirus Pandemic. In a way, one can take comfort in the fact that virtually all parts of the world is experiencing economic meltdown at the same time. For instance, just a few days ago, the Indian economy was reported to have plunged into its first recession since 1947. GDP in India fell from -23.9% in June to -7.5% in September 2020. We should note, however, that for economies that were strong before the pandemic, the ease with which they would get out the recession would be different from ours. Secondly, our economy is not helped by our own demons that have been with us for a while. The first one is the foreign exchange crisis which today is assuming a desperate dimension as exchange rates continue to deteriorate at both the official and unofficial markets.

The foreign exchange challenge had been lurking around the corner since oil prices began to slide downwards. Again, before this recession, we had managed to steer our economy into a debt trap. As at half year, Nigeria’s total debt stood at about $86b or N31trillion with its attendant debt service pressure. In the first half of the year, we had spent N1.21trillion just to service debt and all things being equal, we may spend the same amount, if not more, by the second half of the year. This means that about 25% of our 2020 budget of N10.8trillion would go into debt service. Our revenue, on the other hand, remains abysmally poor and its net effect is that more than half of our annual revenue goes to debt servicing. The summary of all these is that we do not have enough elbow room for more aggressive borrowing as we clearly have borrowed to the teeth. Other challenges like unemployment, poverty level, inflation and extremely poor productivity still remain with us.

Government functionaries are positive that recovery would happen as early as next year. In fact, some starry-eyed optimists stridently claim that this will happen within the first quarter of 2021. Truth be told, one does not see the economic, social and political fundamentals that would ensure quick recovery and therefore, we intend to interrogate that optimism and make an attempt at looking at what we should be doing if we want a quick resolution. Many people are agreed that spending is one of the most effective ways of getting out of a recession. As far back as 1945, President Franklin D Roosevelt had proclaimed and demonstrated this in his “New Deal” policy that basically stimulated the post 2nd World War US economy through spending and it worked.

Obama did the same in the modern-day economy, following the sub-prime economic crises. His economic therapy also worked. With these examples, no one would argue with government on spending our way out of recession. The big problem is the gory picture painted above where we tend to be over leveraged. There is a limit to how much we can borrow, especially when one factors in the fact that capacity to repay is a major consideration by lenders when taking credit decisions. There is no doubt that we are almost at unsustainable levels with our debt management profile. Even the resort to ways and means has its limitations given its inflationary effect. With current inflation rate crossing 14%, this option should not be contemplated at this time.

We believe Government needs to do a few specific things to pull the economy back from the brink. It will not be a one-therapy-solution but a bouquet or cocktail of measures. In our opinion, the focus on the foreign exchange market and exchange rate management should stop henceforth. It is our considered view that the CBN should suspend its managed float exchange rate policy now and completely float the currency. CBN should therefore become an active player in a free market where exchange rates will be determined by the forces of demand and supply.

We should assume that we don’t have oil or that our oil reserves have dried up or better still, recreate the lockdown scenario under Covid-19 where no one was willing to buy crude oil from us. Once we have reset our mind in this manner, then it would be easy to go in the direction we are proposing. Any time the CBN has foreign exchange to sell, its dealers would enter the market and sell at the market rate for that day. CBN will also buy directly from the market when it wants dollars. CBN, in the exercise of its regulatory role, may choose to buy or sell foreign exchange depending on the outcome it wants to achieve. If it wants to moderate rates downwards, it would sell and when it wants the opposite outcome, it will buy.

A few things would naturally happen if we did this. The first is that exchange rates would go up but would not stay there for long as the forces of demand and supply would regulate them towards some equilibrium. Second, CBN will no longer worry about managing exchange rates as market forces would take over. The third is that speculators would go out of business as there would no longer be uncertainty in the market. Fourth, the real price of the currency and imported goods and services would be clear as any hidden subsidy in foreign exchange would have been removed and the otherwise distortionary situation would be gone for good.

The fifth is that CBN, and therefore government, would start receiving appropriate value for its foreign exchange earnings because it would be selling at the prevailing market rates which, to all intents and purposes, would be higher than the present official rate that is managed and therefore contrived. Sixth, the multiple exchange rate regime; another recipe for distortion; would have been permanently eliminated. Seven, consumption of foreign-made goods and services, would be reduced to necessaries to the elimination of luxuries, as it is today. The reason for this is because imports would thus become more expensive since their price would be denominated in the foreign currency. The converse would also happen for local consumption and production as foreign goods would no longer engage in an unfair competition because of the subsidy they hitherto enjoyed. This is the eighth thing that would happen.

The nineth one is that, because the unfair competition would have been eliminated, local production would become more attractive and jobs would be created as a result. There is no doubt that it will help to suck up the large reserve army of the unemployed and restless youth. The tenth is that with more productivity and more local consumption, the economy will begin finally to grow again in real terms and GDP will begin to head north. It is only then that we can boldly bid recession goodbye. Finally, as the CBN begins selling its foreign exchange holdings at real market rates, it would raise more Naira for every such sale. This difference can be deployed in stimulating the economy without resorting to borrowing or printing money. This surplus can also be used in paying local contractors. Once they are thus paid, they would spend same in the economy, thereby increasing economic activities and whittling down recessionary pressure.

Like we said earlier, there are other things that would help in our economic recovery efforts. We had extensively made recommendations in previous interventions on cutting down cost of governance and they remain imperative, even more so at this time. Heavy government spending does not stimulate the economy, rather it turns into a complete drainpipe that must be plugged by all means. Government must also identify priority areas to support to help the economy come out of crisis. In our case, agriculture remains a top pick for so many reasons. It is a sector that guarantees food security and this does not need to be overemphasised, particularly in a country where more than 50% of its population lives below poverty line of less than $1.90 per day. It is also an area that has the capacity to mop up a lot of idle labour to reduce unemployment, especially the youth. Agriculture and its value chain can pioneer our positioning to play a key role in filling the supply chain gap created by the Pandemic. Even if we cannot be key players on the global scene, we can at least help rebuild our own supply chain and economic buffers.

Manufacturing is another sector that has been dealt a serious hand by the neglect of successive governments in Nigeria. Maybe because of cheap petrodollars and the resultant laziness, we hardly produce anything locally. Times were, when cars and trucks were assembled by companies like Peugeot Automobile Nigeria, Volkswagen of Nigeria, Mercedes Benz (ANAMMCO), Leyland and the like. These companies which not only employed thousands of Nigerians in their heydays, are comatose and virtually non-existent today. Tyre manufacturers like Dunlop, and Michelin relied heavily on our locally grown and processed rubber to make tyres locally that satisfied much of the demand of the domestic market and even some export. It is as if we went on a de-industrialisation voyage.

Gloomy as it may seem, we prefer to look at the unfolding scenario as a dark cloud that offers Nigeria a silver lining. This recession offers us an opportunity to start re-industrialising the country once again. A crack team could be set up by government to look at the possibility of getting some of these industries back on stream and where impossible or relatively expensive on account of antiquated technology or processes, new ones should be set up immediately and as a matter of priority. This would be followed by the setting up of research institutes, which may be attached to serious tertiary institutions. Such institutions should be supported to act as technology hub for industry, healthcare, agriculture and other concerns that depend on technology.

Due to the low attraction of such institutions to the private sector that are focused on returns to shareholders, these could be executed by government. However, once viability is established, it should default immediately to the private sector for commercialization and even privatization. This is an area that is so useful in view of the argument that the world has learnt a bitter lesson with the disruption of the global supply chain by the Covid-19 Pandemic. Many developed countries realised that they were running a concentration risk by relying solely on China for supply of their needs. Some of the more perceptible countries are now seriously looking to diversify their supply markets to other parts of the world.

Two major world powers seeking such replacements are the US and Japan. Our belief is that with serious rethinking of our policy framework geared towards making Nigeria a manufacturing hub, we stand a good chance of benefitting from the new policy shift. We are positive that we are well positioned to do this, once the will is there. We have a private sector that can rise up to that challenge, given the right package of incentives and support by government.

Necessity they say, is the mother of invention. Most innovations in history come from the need to adapt to a crisis. Solutions are so called because they are a response to a need or a problem. We have operated as if we have no problems for a long time, but the truth is that we sure do have problems. Economic recession is not unusual so, we need not panic. In fact, the ease with which a country slips into a recession may also be the ease with which it would get out of it, if it does the right thing.

Besides, because recession points to two consecutive quarters of negative GDP growth, any number that is above zero amounts to a positive growth and the country would have exited recession. However, just like we had demonstrated here, you can exit recession in theory but remain therein in practice. That is why it becomes imperative that we do not waste the unique opportunities that this recession offers, like we had done in the past. We have no doubt that if we do the right thing, out of this recession, may emerge a stronger and more resilient Nigerian economy.