With recession staring the country in the face in the wake of the Coronavirus pandemic, falling oil prices, and crashing value of the naira, economists insist that only deft steering of the economy to outrun the economic headwinds that are now buffeting the country from the outside could prevent her from landing awkwardly sooner than later
While they also stressed the need for key structural changes and robust interventions to ensure the economy gradually returns to a stable state, they were emphatic that the only successful path forward would mainly require fiscal and structural responses, with monetary policy playing a supporting role.
Recently, the Minister for Finance, Budget and National Planning, Zainab Ahmed, warned that the country might yet again be plunged into another round of recession if the Coronavirus disease persists beyond the next six months.
Ahmed while giving an update on various measures taken by the Federal Government to mitigate the effects of coronavirus on the nation’s economy on a television programme that she appeared said: “We are hopeful that this pandemic will be limited in time,” adding, “If it is an average of three months, we should be able to close the year with positive growth. But if it goes longer than that – six months, one year – we will go into recession.”
She pointed out that the federal and the states’ governments would struggle in terms of revenue, as long as the crude oil price is as low as $30 or below $30 per barrel.
However, the trio of former Deputy Governor of the Central Bank of Nigeria, Dr. Obadiah Mailafia, Partner – West Africa Financial Services, Leader and Chief Economist, PricewaterhouseCoopers (PwC) Nigeria, Dr. Andrew S. Nevin and Development Economist, Dr. Chiwuike Uba, maintain that with sheer economic wizardry, something can still be salvaged before matters get out of hands.
Mailafia, who blamed plunging oil price and the crashing value of naira on the lockdown in Asia and Europe said: “There is yet another geo-political spoiler – Saudi Arabia. The Saudis have boasted that they are prepared to bring down oil prices to $10 per barrel. That has less to do with the pandemic than with their desire to settle geopolitical scores with Iran and the Russians, whom they believe are allegedly encroaching on their traditional markets. If this continues, we may well be heading to a nightmare scenario. As you know, the naira has taken some hard knocks. The other week, it went to as low as N400 to the dollar. It is currently hovering at more than N364 to the dollar. The CBN recently announced that it is now to operate a unified rate for the exchange rate. This is a welcome development. As far as I am concerned, the operation of multiple exchange rates was only a willful form of profligacy that opens the door to rent-seeking and corrupt behaviour. So, better late than never.”
He continued: “I am just so sad that the level of iniquity involved in maintaining multiple rates has done untold damage already. Worsening oil prices and a falling exchange rate will create a further fiscal crisis. Imports will become more expensive and inflation pressures will rise, even as the productive sector continues to wobble. Unemployment and poverty will worsen. Our external reserves currently stand at $36.4b. Governor Emefiele himself had announced a threshold of $30b at the level at which some form of devaluation might be unavoidable. At the rate we are going, we are careening dangerously close to the edges.”
The development economist, who expressed sadness at the untold damage that maintaining multiple rates has done to the country said a lot could still be salvaged if measures to cushion the impact of the pandemic recently announced by Emefiele are implemented.
“All these measures, if fully implemented, will help to cushion the effects associated with the pandemic while restoring business confidence. Going forward, we need interventions that restore confidence and reassure the public. I would also recommend loosening up the Monetary Policy Rate (MPR) so that a lower cost of borrowing will reflect positively on the productive sector. I welcome the fact that the government has approved a reduction in the pump price for petrol from N145 to N125. This will surely help in easing some of the pressures. The president needs to pass an executive order easing debt repayment for at least two months so that businesses owing money to financial institutions will have a bit of breathing space.”
While proffering a way out of the impasse, Mailafia stated: “Economics is the science of alternatives. As revenues dwindle, we must of necessity re-organise our priorities. My biggest worry is that consumption has been the dominant paradigm in our public expenditure system instead of capital projects and long-term investments. We must therefore re-prioritise in the context of increasing scarcity. Secondly, at a time of anxiety and mass panic, the government must preach calmness. Behavioural economics theory shows that panic, fear, and emotions can be more destructive than generally realised. So, the authorities need to come out and reassure the public. Sadly, the president we have has seemingly self-isolated himself as it were. He is not coming out to address the public and to allay their fears. I also expect an announcement of a big intervention fund to make quick injections into the economy to cushion some of the deleterious effects of the fallouts from the global pandemic.”
NEVIN, who described the Coronavirus pandemic and Saudi Arabia’s decision to crash oil prices as two black swan events that have arrived simultaneously to put tremendous pressure on the Nigerian economy at every level, and in every industry, said even though the CBN has publicly stated that it will continue to work to defend the naira, “this will be increasingly difficult as long as low oil prices (currently $30 for Brent Crude) persist. In addition to the forex issues, the Federal Government will have a massive revenue shortfall as a result of the oil shock and will have challenges implementing the 2020 budget, including the much-needed capital expenditures.
In agreeing with Emefiele and Ahmed that the country risks another recession, the PwC chief said: “The CBN Governor was quite correct that Nigeria requires some key structural changes to prevent future economic crises, reduce unemployment and alleviate poverty, including diversification, improved business environment and increased investments from Nigerians, the Diaspora, and Foreign Direct Investors. Unfortunately, while there has been progress by both the Federal Government and some states on the key issues, the pace of change has not been fast enough to outrun the economic headwinds that are now buffeting Nigeria from the outside… Addressing the economic challenges will require great economic leadership from everyone in the Federal Government, the CBN, NNPC, states, and all Nigerians pulling together to help the country weather this storm.
On pragmatic steps that the government can take to arrest the situation, he said: “The Federal Government might consider three types of actions – selective fiscal stimulus in areas that will have an immediate uplift for economy (an example might be paying arrears of FG contractors); simultaneously, given the severe fiscal constraints, the Federal Government will have to cut back on some other areas, particularly when it sends a positive signal about being serious about improving the business environment (an example might be addressing the high cost of governance). The Federal Government can also take some difficult structural decisions (e.g. reducing the number of MDAs) that would send a very positive signal to investors that it is serious about taking advantage of the economic crisis to take some hard decisions that will help the Nigerian economy in the medium term.
While commenting on what monetary policies that could be tinkered with presently, Nevin said that the “CBN has been a very effective manager of monetary policy for a long time. However, there is a limited amount more that can be done with monetary policy. Globally the economy is facing both a massive supply shock and demand shock, something unprecedented. Also, as an oil exporter, Nigeria faces additional challenges from the oil price shock. The only successful path forward will mainly require fiscal and structural responses, with monetary policy playing a supporting role.
UBA, who is of the view that the country commenced the journey into recession in early 2019, long before the advent of the COVID-19 and its collateral damages resulting in the plunging of oil price and crashing of the naira, explained that the socio-economic indicators present a bleak future for Nigeria’s economy.
According to him, “with an already existing poor/low growth in the non-oil sector, the drop in the oil price to below $30 per barrel would lead to higher fiscal deficit and with dire economic consequences on economic activities and growth. Don’t forget that our economy is naturally structured for consumption; the reason we use the word, sharing when the states converge on Abuja to share the monthly FAAC.
On whether the Federal Government has done enough to stem the tide since signs of an imminent recession began to show, he said, “I would say that the Federal Government has not done enough to avert this outside the usual government orders and policies, which come without an adequate and implementable action plan. I would commend the CBN for the interventions it has made to boost the economy so far. To ensure the economy does not go into recession, the CBN made loans available through the loan-to-deposit (LDR) policy to revive some comatose sectors. In addition to other interventions, the CBN and other money deposit banks set aside five percent of their annual profits to fund projects at a single-digit interest rate in the country. Painfully, the government, despite the promise to diversify the economy to boost non-oil growth has not put in place any concrete measures to address challenges facing the economy. The infrastructure deficit, perennial clashes between farmers and herders, and the unending Boko Haram insurgency, which were identified as constraints to domestic production and contribution to food inflation have received little or no real attention from the government.
Currently, Nigeria has an uncompetitive and unproductive economy that is not innovative but saddled with poor infrastructure, poor human capital and education, and poor welfare. Therefore, there is an urgent need to abandon the current protectionist trade policies and tightly managed currency regime to encourage investment. To improve the business environment and address some of the challenges of urbanisation, it important to have the longstanding projects completed, such as the rail lines and major roads.
“Also, the current public debt is unsustainable and Nigeria is already in a fiscal crisis; hence does not need to accumulate more debts. What we need is an innovative and cost-effective measure to increase revenue and a quick approach would be to have a graduated VAT; say from five percent up to 20 percent depending on the goods and services. Most of our elites avoid tax, with graduated VAT rates, they would be brought into the tax net. Furthermore, it is important to recognise that comparative advantage is dynamic. Local production of staple foods is still below consumption. Therefore, it is important to lift the ban on food importers from foreign exchange markets. The ban contributed immensely to the increase in food prices with an attendant implication on Nigeria’s inflation rate.
Uba, who also believes that it is important to lift the ban on forex imposed on some goods, said whereas the ban encouraged local production of staple foods, which of course is still below the national consumption requirement, it also contributed to the increase in the prices of the foods by over 50 percent. The poverty level in the country is already so high; therefore, it is inappropriate to subject the citizens to further hardship with the current policy. The CBN is already doing so much in the provision of loans to businesses. Nevertheless, it is important to have a policy that mandates money deposit banks to give out a certain amount of money as loans to small businesses in a year, at an interest below six percent. This ultimately would result in higher investment and the purchase of consumer durables. (The Guardian)
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