Healing a Wounded Economy

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The negative economic data calls for policymakers in the country to roll up their sleeves and get to work in order to save the economy from plunging into recession, writes Obinna Chima

The negative real Gross Domestic Product (GDP) of -0.36 per cent year-on-year recorded by the country in the first quarter of 2016 has remained a source of concern to a lot of Nigerians, especially players in the financial market.

There is the possibility of another negative growth in the second quarter of this year, except something dramatic happens. If that happens, it means officially, the economy would have entered into recession.

This, besides the 13.72 per cent inflation rate that was recorded in April as well as the deteriorating macro-economic indicators has heightened the call for policies that would stimulate economic activities in order to save the economy from a likely recession.

The unfortunate development was attributed to the policy vacuum, delay in signing the budget, high level of procrastination in making critical policy pronouncements, the activities of the militants in the Niger Delta, which led to attacks on oil installation thereby affecting the country’s revenue and scarcity of foreign exchange for the importation of basic raw materials.

Indeed, the first objective of the Central Bank of Nigeria (CBN) is to ensure monetary and price stability, a mandate it has been pursuing vigorously. Price stability is a situation where the average change in prices of goods and services is just sufficient to support the growth of the economy. It does not necessarily mean that prices are not changing in the economy, but rather connote a situation where the average increase in the general price level is matched with a corresponding growth in the aggregate economy.

Juxtaposing the latest GDP figures with the Consumer Price Index (CPI) for April 2016 that put inflation rate at 13.72 per cent – far above the central bank’s target band of between 6 – 9 per cent and the strong volatility observed in the parallel market arm of the forex market (which a lot of investors perceive as a true reflection of the country’s exchange rate), shows that there is need for the central bank to adjust its monetary policy tools so as to support the much desired economic growth.

Latest GDP Growth
The country’s GDP growth rate declined to -0.36 per cent in the first quarter of this year (Q1 2016) compared to 2.11 per cent in Q4 of 2015, the National Bureau of Statistics (NBS) revealed. Also, unemployment rate in the Nigerian economy climbed to 12.1 per cent in the first quarter of this year (Q1 of 2016) compared to 10.4 per cent in Q4 of 2015 and 9.9 per cent in the Q3 of 2015. According to the first quarter 2016 GDP estimates, Q1 growth rate was lower by 2.47 per cent from the growth recorded in the preceding quarter and further lower by 4.32 per cent from the rate recorded in the corresponding quarter of 2015. Quarter on quarter, real GDP slowed by 13.71 per cent, the NBS added.

According to the statistical agency, real growth of the oil sector slowed by 1.89 per cent (year-on-year) in Q1 of 2016. This represented an improvement relative to growth recorded in Q1 of 2015 when growth slowed by 8.15 per cent. Growth also increased by 6.39 per cent relative to growth in Q4 of 2015. Quarter-on- Quarter growth also improved by 10.27 per cent, NBS said. According to a report, the number of unemployed in the labour force increased by about 1.449 million persons between Q4 of 2015 and Q1 of 2016 resulting in an increase in the unemployment rate. The NBS report stated that the country was unable to create the 1.5 million jobs required between Q4 of 2015 and Q1 of 2016 to keep the unemployment rate constant at 10.4 per cent in Q4 of 2015. Also, the NBS stated that the active labour population-those within the working age population willing, able and actively looking for work- increased 1.99 per cent to 78.9 million in Q1 compared to 76.96 million in Q4 of 2015 and 75.94million in Q3.

Awaiting FG’s Injection
The federal government’s plan to inject money into the economy is being awaited. This, to a lot of commentators would help stimulate economic activities and also contribute to growth.
The Finance Minister Mrs. Kemi Adeosun recently spoke of the federal government’s plans to inject N350 billion into the economy quarterly to stimulate growth. She said the fund would be released soon after the budget was signed.

“As soon as the budget is signed, we are going to pump N350 billion into the economy in this quarter and we are going to do so every quarter until we stimulate growth. And we would see growth if we spend money on those things that would create jobs,” she added, saying that “there are no quick solutions to fixing the economy.”
“If you have cancer, you cannot take panadol; you have to take proper medication. I don’t want to come here and give people false hope. I don’t want to use the word magic because ministers get into trouble when they use the word “magic”. It has to be done painstakingly,” she said.

Prescriptions for Growth
The Managing Director, Financial Derivatives Company Limited, Mr. Bismark Rewane pointed out that the amount of stimulus required to reset the economy would be profound.
“In the first quarter of this year, we had no budget and we had no spending. Meanwhile we blocked leakages. Although we sterilised cash, we did not jumpstart the economy with spending. On the other hand, we had no exchange rate policy.

“So, the consequence of all of these put together and the complete evaporation of international investors from the market, affected the economy in the first quarter of 2016. More than anything else, the vandalism of pipelines all came together to create the storm.
“So, the amount of stimulus required to reflate the economy and the policy management would have to be much more profound for us to get the desired effect,” he added.

He however acknowledged that with policies such as the removal of fuel subsidy and the path to downstream deregulation, the economy was on the right path, just as he maintained that Nigeria needs to adopt a flexible exchange rate policy.
“These are inevitable and if not done, it would be catastrophic and damaging to the economy. This is crunch time as far as I am concerned for Nigeria,” he added.
To analysts at CSL Stockbrokers Limited, the poor manufacturing data recorded in the first quarter of the year meant that the non-oil sector saw negative growth (of -0.2%) for first time since the data series began.

“If any more evidence was needed that the Central Bank of Nigeria’s foreign exchange policies are not working, the massive decline in manufacturing and increase in unemployment in Q1 surely provide that evidence,” CSL stated.
On his part, a Senior Lecturer at the Department of Economics, Pan-Atlantic University, Dr. Bongo Adi, called for a proactive approach to policy implementation. According to him, delays in taking policy decisions also have its consequences on the economy.

“One of the stabilisation policies they have done is the removal of subsidy on petrol that the government has already done. That means that the government would have some money to spend on capital expenditure. But there are other pressure mounting on government like the blowing up of pipelines by militants in the Niger Delta. Oil production is at an all-time low and that remains a challenge for us all,” he said.

But in order for the country to effectively address most of the developmental needs of the country, Adi, stressed the need for increased focus on competitiveness.
“What is the basic determinant of competitiveness? It is nothing other than the skills and competences of people and citizens. In order to improve your competitiveness, you need to invest heavily on education.

“If people are well educated, they can add value to others or add value to themselves. The problem in Nigeria today is that we have a huge-mismatch between what people claim to know and what they are able to do. That is one problem. The second problem is that we lack the adequate skills to transform our economic system.

“From one discipline to the other and from one department to another, you will notice this huge gap in education and we need to bridge that gap by investing in quality education from the primary, secondary and tertiary levels. We have to invest in research and development. Now, this is not about singing the mantra of research and development over the years. If you break down research and development, what you get is education.

“People need to have advance skills and you can’t get advanced skills if you haven’t developed certain fundamental skills. So, competitiveness is all about improving the skills of the people,” he explained.

On his part, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, argued that the country’s monetary policy regime remains detrimental to its growth. Yusuf insisted that the current monetary policy environment brings about unfavourable economic conditions such as depressed economic activities and ultimately results to low sales, weak consumer demand, huge inventories by manufacturers, liquidity squeeze and tight cash flow conditions in the economy.

The LCCI boss listed other consequences of a monetary policy regime not favorable to the manufacturing sector to include high risk of loan defaults, poor access to credit, weak financial inclusion, limited capacity of firms to retain or create new jobs, crowding out of domestic investors by foreign investors as well as influx of hot money into the economy.

“What is paramount at this time is the stimulation of the economy and that is the norm globally. Affordable and long-time finance may not be a sufficient condition for economic growth, but it is a necessary condition. Cash is the life blood of business! We acknowledge the structural and institutional bottlenecks in the economy and their impact on economic growth,” he maintained.

All in all, if Nigeria’s policy makers don’t act boldly and swiftly, a bad situation could become dramatically worse. Clearly, the medicine the economy needs is a stimulus package that would boost employment and drive investments in critical sectors of the economy. Also with the situation at hand, it is important that policy makers prioritise growth above price stability.