An Ailing Economy in Need of Vitality

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The economy and its managers failed the people in 2019 due to an admixture of incompetence, economic protectionism and fundamentally bad policies. With the same managers on the saddle, the prospect for the economy in 2020 doesn’t look quite sparkly either. Nosa James-Igbinadolor reports

It wasn’t the best of times for the economy in 2019. Truth be told, it hasn’t been the best of times for the economy in four years. 2019 showed that the Buhari administration has no quiver left in its arrow to spur economic growth. Attempts to grow the economy through expansionary fiscal policy, including infrastructure spending and benefits to the poor, failed to achieve its intended outcome.

This has led to an unsustainable accumulated debt profile of about 80 billion, with some 60 per cent of the country’s income being used to service these debts, leaving only 40 per cent for infrastructure and recurrent spending. The government, determined to borrow its way to grow the economy is set to borrow another $30 billion. Buffeted by the vagaries of bad macroeconomic policies, poor investor confidence, debilitating consumer confidence, mixed signals from the central bank such as using monetary policy measures to solve fiscal policy problems and a toxic political environment exacerbated by failed strong arm tactics by the government against perceived opponents, the economy rejected all attempts to ignite substantial vertical movement. Like the previous three years of the Buhari administration, the economy this year, stalled in sub-optimal growth.

A few weeks ago, global credit rating agency, Fitch, downgraded the country’s economic outlook from stable to negative. The firm said the downgrade is traceable to the disruptive macroeconomic policies under the current administration. “The outlook revision reflects the increasing vulnerability from the current macro-policy setting, raising risks of disruptive macroeconomic adjustment in the medium term amid continued real appreciation of the naira,” the firm said.

There is no doubt a strong deficit in understanding and defining a fundamental strategy for the economy. Bismarck Rewane, it was who noted earlier in the year that “the Nigerian government’s policy of economic patriotism and dogmatic holding unto protectionism, is not a valid strategy at this point in time.”

Tilewa Adebajo agrees that the problem of the overall economy has been one of lack of confidence. “If you recall, this government had come up with an economic recovery and growth plan and they had projected that the economy was going to grow at 5 per cent this year and 7 per cent next year. Clearly that is not happening. So, it is important that they need to go back to the drawing board with this new economic management team they have put together and set a new policy direction. It is this lack of policy direction of this government in terms of how they want to manage the economy is what is creating uncertainty. The key really is that we need to grow this economy at 5 per cent at the minimum, 6 per cent at the optimum. If we are not doing that, we will continue to have 100 million Nigerians in poverty.”

The absence of sustainable growth in the economy has become the defining leitmotif of the Buhari administration’s handling of the economy since it was empaneled in 2015. According to the World Bank, “Since 2015, economic growth remains muted. Growth averaged 1.9per cent in 2018 and remained stable at 2per cent in the later part of 2019. Domestic demand remains constrained by stagnating private consumption in the context of high inflation (11 per cent in the first half of 2019)”. This sharply contrasts with data from the bank between 2011 and 2014 which noted that, Nigeria’s short-term economic outlook improved and prospects for continued growth and macroeconomic stability are good in light of increased revenues to the federation, stable foreign reserves and an augmented fiscal reserve fund…”.

The inability of the economy in the last four years to kindle maintainable progress led to Nigeria overtaking India in 2018, as the country with the most extreme poor people in the world. India has a population seven times larger than Nigeria’s. The reality is that growth in the last four years has been too low to lift the bottom half of the population out of poverty. On the contrary, more than eight million Nigerians lost their jobs between 2015 and 2019, adding to the already expansive poverty landscape The World Bank noted that the “weakness of the agriculture sector weakens prospects for the rural poor, while high food inflation adversely impacts the livelihoods of the urban poor.

Despite expansion in some sectors, employment creation remains weak and insufficient to absorb the fast-growing labour force, resulting in high rate of unemployment (23 per cent in 2018), with another 20 per cent of the labour force underemployed. Furthermore, the instability in the North and the resulting displacement of people contribute to the high incidence of poverty in the North-east.” With a quarter of the population out of work and another 20per cent underemployed, the prospects for the economy in 2020 doesn’t look seemingly bright

The agricultural sector was the most widely touted by the President and his political mandarins as the critical magic rod needed to drive economic growth and create millions of new jobs. Agriculture is the largest economic sector in the country, accounting for nearly 25per cent of GDP. Despite this fact, agricultural growth remained below potential in 2019 due to continued insurgency in the North-east and on-going farmers-herders conflicts. 2019 also witnessed the slowest growth in the sector. The Buhari administration launched the Agriculture Promotion Policy (APP) aimed at resolving food production shortages and improving output quality.

In addition, the Economic Recovery and Growth Plan (ERGP) prioritises food security and aims to achieve self-sufficiency in tomato paste, rice and wheat, by 2017 2018, and 2019/2020 respectively. The ERGP projects that the value of agricultural production would increase by 31 per cent to N21 trillion in 2020. According to PwC Nigeria, “despite these policy interventions, the agriculture sector is still largely underdeveloped, primarily because the focus is on production, rather than on enhancing value addition across value chain segments.”

A recent McKinsey and Co report posited that realising Africa’s, including Nigeria’s full agricultural potential will require significant investment. According to the report, “Sub-Saharan Africa will need eight times more fertilizer, six times more improved seed, at least $8 billion of investment in basic storage (not including cold-chain investments for horticulture or animal products), and as much as $65 billion in irrigation to fulfil its agricultural promise. Much investment will also be needed in basic infrastructure, such as roads, ports, and electricity, plus improvements in policies and regional trade”.

With the Buhari administration perceiving agriculture as nothing more than farming and not a business, and with the incessant crisis in the northern and middle-belt regions, it is more likely that the sector would make insignificant progress in 2020. Progress that would be unable to generate jobs and critical private sector investments.

According to Deloitte, “manufacturing related activities among nations are rapidly evolving. Manufacturing earnings and exports are stimulating economic prosperity causing nations to increase their focus on developing advanced manufacturing capabilities by investing in high-tech infrastructure and education. Nations and companies are striving to advance to the next technology frontier and raise their economic well-being. And as the digital and physical worlds of manufacturing converge, advanced technologies have become even more essential to company- and country-level-competitiveness.

“In fact, technology-intensive sectors dominate the global manufacturing landscape in most advanced economies and appear to offer a strong path to achieve or sustain manufacturing competitiveness. It isn’t so in Nigeria. Manufacturing production in Nigeria is dominated by the production of food, beverages and tobacco, with sugar and bread products generating the greatest value of output.

The government’s industrialisation focus is on small and medium scale enterprises and is one of the five key execution priorities of its four-year Economic Recovery and Growth Plan (ERGP).”

The sector slowed down in 2019 due primarily to increasingly weak power sector, a continuation of depressed growth in the sector over the last four years. The manufacturing sector will hold the key to future growth in Nigeria. The Buhari administration has, however, made no significant and sustainable attempt to encourage either SMEs of greenfield manufacturing FDIs into the economy. There is a noticeable disconnect between the government’s idealisation of industrialising the country through manufacturing and the reality of industrial flight and obvious idea deficit with respect to manufacturing.

The prospect for the sector in 2020 is very bleak. The reality is that as long as the country remains unable if not unwilling to get its electricity production scaled up to accommodate industrial growth, no manufacturer will be willing to invest in Nigeria. In addition, the Buhari administration seems to have given up on the National Automotive Industry Development Plan (NAIDP), designed to stimulate investments in domestic vehicle production and assembly.

The plan, designed by the Goodluck Jonathan administration, had begun to yield dividends when it seemingly lost its steam with the economic crisis of 2015 generated by the new administration’s policy inertia

Perhaps the bright star in the dim sky of the economy is the Services sector. The growing importance of Services has bolstered growth in the economy. The sector accounts for about half of GDP, dwarfing the 10 per cent from oil and 22 per cent from agriculture. GDP from services increased to N6.517 trillion in the second quarter of 2019 from N6.259 trillion in the first quarter of 2019. GDP from services in Nigeria averaged N5.795 trillion from 2010 until 2019. GDP from services is expected to be N7.316 trillion by the end of this quarter.

The World Bank asserts that, “without significant structural policy reforms, Nigeria’s medium-term growth is projected to remain stable around 2 per cent.”

The reality is that the economy cannot afford to remain stable at 2 per cent in 2020. Two per cent cannot and would not make a dent on the scandalous poverty level in the country, nor would it reduce unemployment. Given that the economy is expected to grow more slowly than the population, living standards are expected to worsen.

Unless the government undertakes fundamental fiscal policy changes, growth in 2020 would remain constrained by a weak macroeconomic framework with high persistent inflation, multiple exchange rate windows and forex restrictions, distortionary activities by the central bank, and a lack of revenue-driven fiscal consolidation results. Rising public debt, and increasingly complex policy interventions by the central bank would continue to constrain private sector credit growth. External balances would remain fragile to hot money movements, and fiscal buffers which are already exhausted, would make Nigeria’s economy vulnerable to external risks.