It Hardly Rains, It Pours

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OUTSIDE THE BOX BY ALEX OTTI

“In the US, after the Great Depression, they invested heavily in infrastructure to create a lot of employment. In Germany, after the war, there was the Marshall plan for roads, rail, housing, energy, water and so on. That created massive employment after the devastation of the war and helped them to rebuild the country.” -Raila Odinga
Nigeria is at the centre of a perfect storm! From every indication, almost everything that can go wrong is creeping out of the woodwork. In the area of insecurity, the usual threat of Boko Haram has been exacerbated by the herdsmen and bandit attacks. On the economic front, the picture is as depressing, if not frightening. The challenges are numerous; the most recent being the “Twin Towers” of hikes in the prices of petrol and electricity. Since 2016, the economy has been struggling.

First was the recession, which followed a few a set of economic challenges ranging from oil price crash, foreign exchange crisis and then inflation and unemployment. We managed through 2017 and in 2018, we exited the recession. The level of economic growth post-recession remained lacklustre but we had positive numbers to report. Our growth rate between 2018 and 2019 averaged 2% per annum which by the way actually meant a decline since population growth had averaged 3% within the same period. As if this was not enough, 2020 started with a Pandemic, called Coronavirus. Its devastating effect was only felt in Nigeria in March this year. This was followed by a complete lockdown of the country, just like many other countries. At the last count, close to 1 million people have died and over 30m have been infected worldwide. In Nigeria, over 56,000 cases have been reported with over 1000 deaths. The lockdown has been eased and the fear seems to have receded with people adhering to the protocols and going about their normal businesses.

Some things seem not to have eased up in the country, particularly as they affect the economy, and most of these things seem to be happening at the same time. Recently, the National Bureau of Statistics came out with a report that the economy shrunk by 6.1% as at the end of June 2020. We are not sure anyone would have been surprised about the decline, we had predicted in this column that we were not only going to witness a decline in the second quarter of this year, but that it was going to be followed by another decline by the end of the third quarter in September and by October, we were going to declare the economy, technically in recession.

Nigeria’s encounter with another recession has just begun, except that this time around, the whole world, with the possible exclusion of China, would be affected. The IMF expects the global economy to decline by an unprecedented 49%. Unfortunately, it is no comfort that virtually every national economy is shrinking the same time. This is because beside the Covid-19 which has worsened our situation, we have been fighting many other battles at different fronts. Our economy is still largely dependent on oil for its export earnings.

There was a major scare at some point during the Covid-19 lockdown when oil prices sank to sub-zero levels. Recovery has been taking place but at a very slow place. The implication is a big drop on our revenue and another blow on our foreign exchange earnings. Naturally, with a drop in the volume of foreign currency, our foreign reserves began to nosedive. Our penchant for foreign goods may have reduced, but momentarily, because some of the foreign goods we consume are not easily replaceable with local alternatives.

Once the lockdown eased, our demand for foreign exchange to finance imports and lifestyle increased. This naturally put pressure on the foreign exchange market and the result was that the Naira had to be depreciated at the official market from N360 to N380 to the dollar. In a bid to preserve the foreign reserve and conserve the scarce foreign exchange, a rationing policy had to be introduced by the CBN. The market responded disproportionately, and the black market slid rapidly to settle at N480 per dollar, reflecting a difference of N100 per dollar between the unofficial and the official market rates.

An attempt by the CBN to force rates down by resuming sales of foreign exchange to Bureaux de Change, temporarily proved successful as rates dropped rapidly to N420 per dollar, few days after the exercise. However, this was short lived as the rates have started inching up again to the levels they were before the exercise was implemented by CBN. Trust speculators to make a meal of every situation. We understand some speculators had been stockpiling the dollar waiting for the rainy day.

Conventional economic wisdom would have dictated that inflation would be on a downward spiral with the ongoing deterioration in the fundamentals of the economy, but that is not to be. Inflation has also been going up, pointing us in the direction of what economists call, “stagflation”. As at the end of July this year, inflation stood at 12.8%, the highest in more than 2 years. The August figure recently release by the NBS put inflation at 13.22%. There is no indication that this figure is going to come down soon. This is illogical because for savings and investments to make sense, the returns must be above the inflation rate. Meanwhile, we all know that the average savings interest rates have hovered around 2% in the recent past.

The fixed income market, which traditionally should act as a cushion for investors seeking to preserve their wealth, has left the people who ventured into it, bleeding. Bonds with more than one-year maturity have delivered yields below 7% in the last decade. Treasury Bills with maturities of one year or less are delivering average returns of about 3%. The alternative investment option, the stock market has not been left out of the bashing. The stock market has struggled in the past few years eroding value for many of the people who took this option. You can actually count on your fingers, how many of the stocks that have not destroyed value for investors in the last decade.

How about unemployment? The devastation has been most felt in this area. Unemployment rate, by June 30, 2020 was 27.1% while the underemployment rate was 28.6%. These give a combined average rate of 55.7%. With this level of unemployment in the country, there is enough explanation for two issues that are plaguing the economy. The first is the level of poverty in the country. According to the Word Poverty Clock, as at yesterday, 51% of Nigerians or 105m people, are living below poverty line of $1.90 per day. We seem to have consolidated on our unenviable position as the poverty capital of the world, a position we displaced India and assumed in 2018. The second issue is the high level of social strife, insecurity and banditry in the country.

The sad reality is that these days our youth roam the streets in search of non-existent jobs and the more they are not sure of where the next meal will come from, the more they are easily susceptible to recruitment into crime.
To add to our national woes, our debt profile seems to have engaged the auto pilot gear. We have grown our national debt from $79.3b (N28.6t) in March 2020 to $86b or N31t by the end of June 2020. There is no doubt that this is not a desirable position to be considering that we do not generate enough revenue for our day to day expenditure, not to talk of repaying this huge debt, which unfortunately, continues to grow.

Before anyone will accuse us of scaremongering, we must point out that all these worrisome statistics are not death sentence. We must also state that it depends on how these crises are managed. It therefore becomes very important that we do not squander the lessons of these crises. In our last but one column, we wrote extensively about oil subsidy and what we think the government should do to truly deregulate that market. We still maintain that the government has no business fixing prices in a deregulated market. The hullabaloo about fuel subsidy removal could have been avoided if the government had paid heed to this advice. The same goes for electricity tariff and its Multi Year Tariff Order (MYTO). Government should hand over these industries to the private sector and just play supervisory and regulatory roles.

If properly managed, economic downturns and crises, can give way to recovery, growth, and prosperity. From the ashes of every destruction emerges a new structure which may engender better designs, new technology, better engagement of men and materials and therefore more productivity. Again, it’s easier to grow from a low base than from a high base. Putting it simply, growing from N1b to N2b doubles the size, but the difference is just N1b. On the other hand, moving from a higher base of N50b to N100b also doubles the size but the difference here is N50b. By the same logic, when the growth rate is in the negative territory, any positive addition is a growth. In the positive territory, while any addition is still a growth, the impact of the movement is not felt as much as a positive movement on a negative growth. That explains why the impact of growth on welfare of the people may be lost even when there is nothing fundamentally wrong with the numbers.

How long this recovery takes will depend solely on the solutions and measures adopted by the managers of the economy. The Pandemic may be novel, but the other crises are not new and solutions are easy to implement. They are not rocket science. We have documented our thoughts on how to deal with a post Covid economy and are glad to refer readers to our column titled, “Coronavirus: The Morning After” (Thisday, April 24, 2020). There are tried and tested solutions that have worked and we shouldn’t attempt to reinvent the wheel. Economists advise that when faced with a recession, the first place to look is consumption. For increased consumption to happen, there must be production, and for production to take place there must be employment.

Out of employment comes wages and such wages are deployed to either consumption or savings. Even when savings are made, they will eventually approximate investments which would further give rise to production, employment, and more consumption. Anything that will stand in the way to distort this flow must be removed by government. Therefore, taxes, tariffs, cut in government expenditure, cut in investment in infrastructure and the likes, are things that the government should not contemplate as it will be like a man who found himself in a hole and continues digging. His rescue will be difficult. So, this is not the year to increase taxes but to reduce them.

This is not the year to take money from the populace but to put money in their hands. This is the year to support businesses, any type of business that will generate employment. The Central Bank’s policy on bringing interest rates down is very sound and should be encouraged. The second policy of encouraging banks to lend by setting a threshold on loan-to-deposit ratio for banks, is also logical. The only thing working at cross purposes with these policies is the subsisting very high inflation rate.

Dealing with inflation in isolation cannot work. In a growth mode, a certain degree of inflation cannot be ruled out. However, when inflation outstrips growth, there is a big problem. We must therefore make deliberate efforts to grow the economy. An economy in which over 55% of the population is not productively engaged, is cultivating a tropical storm, if not a hurricane. To avert this, all efforts should be geared towards the creation and protection of jobs, even if government must support the process with money to achieve this. We just need to get people working and earning income.

We must prioritise the industry to support. With this level of unemployment, we should support fast growth and labour intensive sectors of the economy. We also need to look more critically at industrial production, services and trade sectors first for local consumption and later for exports. We know that we have been focusing on agriculture for a while now and we have no problems with this as we need food security to defeat hunger and save scarce foreign currency. But how many of our people do we want to throw into this sector? Statistics shows that out of a total workforce of 80.2m people, 40m, that is half of the labour force are involved in Agriculture.

From what we know, most people who are involved here practise subsistence farming and are therefore underemployed. A lot of mechanisation has also been introduced by large scale farmers. While we may not have all the numbers, we strongly believe that agriculture has become an industry where unemployed people hide but remain in poverty. As we continue to work towards raising our people from poverty, one sector we cannot continue to ignore is education. Like we had argued in the past, education is a major instrument for lifting the people out of poverty. As we promote industrialisation we must ensure that the skills required by that sector are available. We should have a serious educational programme with funding arrangements properly made in our own interest. Its never too late to start. It was H.G. Wells (1866-1946) who said “Human history becomes more and more a race between education and catastrophe”. We must avoid the catastrophe.