Buharinomics: Before Recession Leads to Depression -By Majeed Dahiru

The latest figures from the Nigerian Bureau of Statistics (NBS) for the second quarter has affirmed that Nigeria’s economy is indeed in a recession having recorded negative growth in two consecutive quarters. The grim statistics indicated a decline in GDP growth rate of -0.36 percent in the first quarter to -2.06 percent in the second quarter. The Consumer Price Index also indicates the inflation rate as increasing from 16.5 percent in the first quarter to 17.1 percent by the second quarter. It was also revealed that most sectors of the economy experienced a decline in the second quarter GDP growth rate. The worse hit is the manufacturing sector which slumped to an all-time low of -1.02 percent. The financial services sector also declined by 2.8 percent and so did construction at 3.77 percent. The transport and real estate sectors declined by 6.18 percent and 2.2 percent respectively. The oil and gas sector did not fare better. As result of activities of insurgents in the oil producing region of Niger Delta, crude oil production was disrupted and output declined by 0.42 million barrels per day to 1.69 million barrels per day. Low oil production and a relatively low bench mark price of crude oil has further depleted Nigeria’s foreign reserves by 0.4 percent to $26.42 billion. Capital inflow by way of portfolio investment remains low at $647.1 million representing a record decline of 88.76 percent. The economy is further weakened by a thoroughly depreciated national currency, the naira, which currently exchanges 420 to the dollar.

The consequences of the economic recession are clearly manifested in massive unemployment and underemployment, widespread poverty and misery. Over 70 percent of Nigerians are barely existing and not living. There has been a drastic decline in the standards of living of Nigerians across board. This situation has led to a near collapse of social order as a result of moral decadence and a surging crime rate. Our country is gradually sliding into socio-economic anarchy. This current economic crisis has sparked a debate about the actual cause of the problem. The Muhammadu Buhari administration has put the blame, as usual, on PDP’s sixteen years of misrule and a wasteful style of governance. They also point to the fact that oil prices have plummeted thereby severely depleting the government’s revenue base, which is worsened by the lack of adequate savings by the Goodluck Jonathan administration during the oil boom days. A lot of people agree with this position.

However, a careful study and analysis of the situation reveals some other fundamental causative factors of the economic recession which are largely the making of the Buhari administration. The crash in oil price could not have automatically led to recession. The most far-reaching impact of low oil prices would have been a slowdown in the GDP growth of the economy as a result of the cut in spending by government. The current recession is as a result of the policy choice in some key sectors of the economy which caused a massive shock to the system, eroded investor’s confidence, pushed up the cost of production and reduced the consumer spending capacity drastically. Before “Buharinomics” takes Nigeria’s economy from recession to depression, certain steps must be taken to save the economy from total collapse. Some key policy initiatives of the Buhari administration need thorough review and, where necessary, adjustments or outright reversal may be necessary to resuscitate the near comatose economy.

The first of such policies which should be reviewed is the total implementation of the Treasury Single Account (TSA). Laudable as this policy is, the hurried implementation, rather than in phases as originally conceptualised, has led to a massive shock in the financial system. With a liquidity squeeze arising from the migration of government funds into the consolidated revenue account with the Central Bank of Nigeria, deposit money banks have been left gasping for breath. Expenditure MDAs, which include universities, hospitals and armed services, are no longer able to transact businesses with ease and speed. The inability of commercial banks to support small and medium scale enterprises, coupled with the bearish business activities in the MDAs, is what has led to a decline in the growth of the GDP in the services sector. TSA should be reversed immediately in all MDAs, with the exception of revenue generating agencies. The money should be returned to the deposit money banks to ease the liquidity squeeze in the financial system.

Another policy that has pushed Nigeria’s economy into recession is the total withdrawal of subsidy from the pump price of petrol (Premium Motor Spirit, PMS). This commodity is a major input across the production processes in all sectors of the economy. From transportation to an alternative source of power, due to acute energy shortages, PMS is very key to the running and sustenance of Small and Medium Scale Enterprises (SMEs). The increase in the price of PMS has increased the average cost of production and a corresponding increase in the prices of goods and services in a classic case of cost push inflation. It is generally agreed by economists that the government is supposed to spend its way out of recession. The first place to start that spending is by restoring subsidy back to petrol. By subsidising PMS, government is subsidising production and not consumption because the commodity is the live wire of Nigeria’s production base. A resumption of subsidy on PMS will drastically cut back the rate of inflation.

The principle of fixing interest rates above inflationary rate is a practice that has compounded Nigeria’s economic problems and must be discontinued. This policy is only applicable when there is a demand pull inflation, as a result of excess cash in circulation and the tendency of consumers to spend more for less value of goods and services thereby pushing up the costs artificially. However, when experiencing a cost push inflation, as we do now, the high cost of goods and services are real and can’t be lowered, because of the high cost of production. Therefore, the reasonable thing to do in the present circumstance, is to recalibrate CBN’s monetary policy, by reducing interest rate to single digit not above five percent. The affordable lending rate will ease the pressure on businesses, lower the cost of production and help revitalise the manufacturing sector, save and create new jobs.

To substantially enhance these measures, lowering taxes and granting tax holidays as incentives to investors and small business startups are highly recommended. Furthermore, tariffs on the importation of crucial industrial and manufacturing components should be lowered and, in some cases, waived all together. These measures are some practical short term solutions to immediately pull us out of recession to a path of modest growth. The real challenge confronting our economic development as a nation can only be tackled effectively by a medium and long term strategic development master plan. We need to re-think our economy, outside the box.

Majeed Dahiru, a public affairs analyst, writes from Abuja and can be reached through dahirumajeed@gmail.com.