Recovery from Recession: Too Early to Rejoice?

Recession

Dr Alex Otti, OFR

 

BY ALEX OTTI


The fact is, we’ll never build a lasting economic recovery by going deeper into debt at a faster rate than we ever have before. – President Ronald Reagan (1993)

On February 18, 2021, the National Bureau of Statistics (NBS), released its 4th quarter economic report in which it stated that the Nigerian economy grew by 0.11% from the previous quarter’s growth rate of -6.1%. Readers would recall that the country had been declared to have gone into a ‘technical recession’ by the end of the third quarter, having reported negative GDP growth for the second and third quarters of 2020. The Nigerian economy going into recession was an easy situation to understand in the light of Covid-19 and its devastating effect on the global economy.

In the wake of the pandemic, oil prices came tumbling down and the global supply chain was disrupted. Again, as had been variously reported, the Nigerian economy had been struggling since it recovered from the recession it slipped into in 2016. While recovery took place, economic growth remained minuscule and the economy remained fragile. Given the level of declines, some analysts believed that recovery was going to be hard and slow. Experts had predicted an economic growth rate in the region of -2.0% for the 4th quarter and recovery from the 2nd quarter of 2021. Understandably, the recent NBS report may have surprised them. But were they really wrong in their forecast? What does this latest recovery mean for the economy? Does the economy have much to cheer about, or is this a case of empty growth? Is it like the ball room dance: one step forward, two steps backward? These and more are some of the issues on which we intend to initiate a conversation today.

For proper context, a recession in economic parlance, refers to a situation where an economy witnesses, a negative, (not declining) GDP growth for two consecutive quarters. At the end of June 2020, GDP growth rate was -3.62% and by the third quarter it had worsened to -6.1%. Analysts have described it as the worst recession in Nigeria in over 40 years. Anyhow one looks at it, the recovery of the economy was a great news, particularly because the global economy was also in deep recession at the same time. The recovery of the Nigerian economy was on the back of growth in some unlikely sectors of the economy. The non-oil sector grew by 1.7% when compared to the previous year. This growth was driven mainly by Agriculture, which grew by 3.4% and Telecommunications, which grew by 17.6%. It is also important to note that part of the recovery had to do with the taming of the slide in oil prices on account of OPEC’s production cuts. For the quarter under review, average daily production for Nigeria dropped from 1.67m in the 3rd quarter to 1.56m. We shall return to this shortly.

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Of course, there has been a lot of effort, particularly by the CBN, to encourage growth by pumping money into the hands of consumers and producers to stimulate the economy. As at the end of January this year, the CBN had injected about N2trillion into the economy under the following schemes: The Agribusiness/Small and Medium Enterprises Investment Scheme, The Covid-19 Targeted Credit Facility, The Healthcare Support Intervention Facility and The Creative Industry Financing. All these funds which made their way into the economy were also helpful in stimulating demand and ultimately supporting the recovery of the economy. Most of the loans were actually booked at between 5% and 9% which would help beneficiaries manage their costs and grow their businesses. Like we had pointed out in previous interventions, we subscribe to the school of thought that argues that the fastest route out of a recession is spending. There is no doubt that this approach is exactly what the CBN was pursuing by the interventions which has contributed immensely in helping the economy exit recession in record time.

One thing that we are sure did not contribute significantly to this recovery is oil. With relatively low oil prices and with the attempt by OPEC to cut the production quotas of member countries, we have seen some semblance of recovery recently. As at last week, oil prices had crossed the $65 per barrel mark. We are only referring to this as it is one of the factors that would sustain the recovery, which the Nigerian economy recorded in the last quarter. As we shall demonstrate in due course, it would be our wish to sustain economic growth on the back of non-oil products, but we cannot but underscore the point that oil, which contributes slightly over 9% of the country’s GDP, accounts for about 90% of its foreign exchange earnings and close to 60% of annual government revenues.

As Nigerians savour the news of our economic recovery from recession, we should not lose sight of some important indices that point to the fact that we are not yet out of danger zone. In the first place, the growth number is a mere 0.11%. This number, even though still a growth, is too tiny. Why does it matter? The fact that it is this tiny may imply that we did not grow in the right sense of the word. But the issue of recession, other than depicting a two-quarter consecutive negative growth in the economy does not really convey much. This is because, any country that finds itself in this kind of situation can always get itself out, without necessarily having any positive effect in the quality of life of the populace. Like we had demonstrated in this column in times past, any growth in the economy that has no reference to the change in demographics, particularly population, would have told an incomplete or partial story.

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And that is why even when Nigeria recovered from the 2016 recession with GDP growth rates hovering around 2%, the economy remained fragile, as population growth outpaced economic growth. Therefore, an economic growth that is barely above 0%, while technically is a sign of success, will certainly not cut it. But then we must take some cold comfort in the fact that the measure speaks to positive GDP growth, no matter how small. Subsequently, to the extent that GDP growth continues to be positive, the economy would continue to be seen as having recovered. Even when it becomes negative in a quarter, it will need to maintain that for two consecutive quarters to declare a technical recession. In dealing with GDP, therefore, a more useful measure would be GDP per Capita.

This indicator measures output per head in the country, over a period of one year. Nigeria has a current GDP per Capita of about $2250. It would be revealing to compare this number with current GDP per Capita of some African countries. For instance, South Africa has a GDP per capita of $5,300. Botswana’s is $7,230; Gabon’s $7,400 and Equatorial Guinea’s $12,400.

Clearly, while Nigeria has an absolute GDP that places it ahead of other African countries, it trails those countries when measured per head. Looking at Nigeria of today and Nigeria of 6 years ago when GDP per Capita was $3,100, it will be clear that the country has been growing its population much faster than it has been growing output. Simply put, on the average, Nigerians have become poorer!

As a corollary to the GDP per Capita is poverty index. If indeed the economy is recovering, it should translate to less poverty. The facts point to a different outcome. It is not surprising therefore that Nigeria has remained the poverty capital of the world with close to 90m or 43% of its population living below poverty line of less than $1.90 a day. This is a big challenge in the country which is not helped by a combination of structural issues and current concerns including heightened insecurity, illiteracy, and limited economic opportunities. The people under this bracket are not affected by the economic recovery that the rest of the economy should be celebrating. In a country of serious divides, there is little impact that these statistics will have on their lives.

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The economy may have recovered but there are many parts of the same economy that cannot be said to be making any attempt at recovery. Recent reports from the Debt Management Office (DMO) indicate that the country owes some $86b as at the end of June last year. In order to understand the full implication of this, you must add the fact that this is in addition to the budget support of Ways and Means from CBN in the neighbourhood of $26b. This is a big threat to the economy. How can government rein in costs, manage within its means and cut down on servicing of debt? In 2020, out of a total expenditure of N10 trillion, government was only able to raise a revenue of N3.9 trillion, leaving a deficit of N6.2 trillion funded by borrowings. We had reported that the government spent over 60% of its revenue to service debts in 2019. By last year, the situation had deteriorated such that government spent 85% of its revenue to service debt. This also means that government would continue to borrow even though it is approaching unsustainable levels. Ordinarily, borrowing should not be a problem, as it is one of the recommendations to cure recession. However, the challenge lies in what would happen when the loans become due and there is no revenue to pay back.

While thinking about the debt profile, another important index that must be thrown into the mix is inflation. Inflation in an economy has the same effect as hypertension in the human body. Once they creep in, if they are not tamed, they do not stop until they kill their host. Inflation simply reduces the value of money in one’s wallet without touching the money. In the latest report of the NBS, inflation was put at 16.47% as at the end of January 2021, as against 15.75% in December 2020. A major contributor to the rising headline inflation is food inflation which also rose from 19.56% to 20.57% respectively. Put simply, every year, the N100 in your pocket will lose N16.50 of its value and all things being equal, in about 6 years, it will be worth nothing.

How does the average household protect itself from this erosion? I believe we can now understand the reason for the poverty level in the country. Will exiting recession cure this cankerworm? As we are debating inflation, we should not forget its twin brother, unemployment. In fact, economists have a different name for negative GDP growth occurring alongside inflation and unemployment. This is called “Stagflation”. I believe that is what has been happening in the Nigerian economy. The debate about the rate of unemployment in the country has continued to rage as there seems to be no agreement on the reliability of data. However, the NBS put the unemployment rate as at end of 2nd Quarter 2020 at 27.10%. Some other sources, particularly international, have insisted that the figure is closer to 32.5%. Whichever data you choose to rely on, the level of unemployment is extremely high compared to countries like Ghana at 4.5% within the same period.

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Our approach is understandably not exhaustive of the key indices to indicate a recovering economy. While contending that more attention be paid to these indices, we would not be doing justice to this issue if we do not point the debate to other headwinds that will complicate the recovery process. The first and probably the most important one is insecurity. With the level of banditry and killings in the country, it will be impossible for normal economic activities to take place in several parts of the country. Farmers are unable to attend to their farms and movement on the roads have been severely hampered. The government must address this with a view to bringing it down to the barest minimum. The imminent petroleum products price increase in the light of increased crude oil prices is another threat that would reduce disposable income and disrupt consumption which would in turn impair business and the productive base of the economy. This is also true of increases in electricity and other tariffs. While one is not advocating subsidy here, it is important to point out that any action that reduces disposable income in the face of a fragile economy, would have an adverse effect on economic activities in the country and that is not what the economy needs at this time.

In conclusion, what we have done today is to stir a conversation and get us thinking once again about the economy and what exiting recession means to each and every one of us. May I therefore request that we let the discussion continue.

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