By Dr. Harrison Eromosele
Everyone agrees that 2020 was a peculiar year. Economies across the globe experienced turbulent economic challenges.
In Nigeria, following two consecutive quarters (Q2, 2020 and Q3, 2020) of negative growth, the National Bureau of Statistics (NBS) officially announced that the country’s economy technically entered a recession.
The recession has been characterized as the worst in four decades and second in five years. But beyond the low employment, low consumption and investment spending, economic agents have had to also grapple with another macroeconomic accomplice – the unduly rise in commodity prices in the face of a recession. Figures from the NBS confirms that between June and October alone inflation rose from 12.56% to 14.2% and there are expectations that it will climb higher.
However, a subset of the headline inflation known as food inflation poses a more severe impact on the masses. Food inflation has maintained double-digit numbers since 2017 and unfortunately, food constitutes the most significant share in disposable income of an average Nigerian. Food inflation was around 15.48% as at June 2020. (NBS 2020). Hence, the real economic scenario brings us to an economic condition call stagflation (inflationary recession).
One hopes that these worrisome statistics reveal to the managers of the economy, decision and policymakers in the government circles the untold hardship imposed upon the Nigerian masses.
Now, the big questions are: How did we get here? Are there hopes of changing the narratives? What are the possible projections for 2021?
How did we get here?
A multiplicity of factors is responsible for our current economic disorder. However, we think the major ones are (i) A structurally designed Dutch diseased economy – a consequence of over-reliance on the naturally rich oil endowed reserves. And (ii) Rent-seeking behaviour of few elites.
A structurally designed deindustrialized (Dutch diseased) economy – a product of over-reliance on the rich oil endowed resource.
Empirical studies have shown that most naturally rich resource economies who bask in the euphoria of their natural wealth often create an economic syndrome, an economic condition where due to over-reliance on the naturally rich resource sector, the manufacturing and the agricultural sectors dwindle while there is the emergence of the service sector which flourishes strongly in the face of the infrastructural deficit.
Another variant of the Dutch diseased syndrome is found in the work of Mohammad Amin (2009) called the Nigerian Disease. This variant portrays how the abundance of natural resources causes poorer governance and conflicts. It is characterised by less accountability by government officials to the people, little incentive for institution-building, failure to growth-enhancing reforms etc. This befits the Nigerian economy.
Since the fourth republic, a conscious effort has been on-going to diversify the economic base away from oil and service to manufacturing and agricultural industries which are much more impactful to economic growth. So far, the progress has been very weak as it is very slow.
Rent-seeking behaviour of few elites
Rent-seeking involves seeking to increase one’s share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through poor allocation of resources reduced actual wealth creation, lost government revenue, increased income inequality and (potentially) national decline. (The Audiopedia, (2017)).
The rent-seeking spirit of the nation’s powerful elites permeates in the economic life of the country, constituting bottlenecks in the wheel of economic growth and prosperity. It is seen in virtually all spheres of the business space.
For instance, it can be seen in the multiple existences of the national currency exchange rate as orchestrated by major Bureau De Change front-liners; the business of mopping excess liquidity from the system in the face of budgetary deficit financing; keeping the domestic refineries in comatose; the existence of an oligopolistic stock market structure; an infrastructural deficit in the energy sector; congestion of the Nigerian Port Authority (NPA) in Lagos State; Monopolizing key investments and businesses capable of growing the economy much faster if left to compete favourably; restrictions of export licenses to a relatively few; the dark operations in the NNPC; the ill-designed policy that deliberately or otherwise led to the demises of firms in their hundreds; the vague subsidy policy that is continually used as a tool to siphon financial resources from the public purse into private pockets etc. All of these connotes an element of rent-seeking.
Current Structure and Realities of the Nigerian Economy
The oil sector whose contribution to GDP is only about 8.73% is known to greatly impact on the overall economic activities because it accounts for over 90% of the economy’s foreign earnings and 80% of government revenue which is key in determining budgetary estimation, projection and allocations.
As a major determinant of the country’s foreign earnings, the oil sector remains the most powerful sector that also determines the country’s currency exchange rate.
Now, it also influences the form, the monetary policy design will take in regulating the banking industry given the traditional nature of survival in the industry which is strongly tied to the oil or government revenue deposits and subsequent mopping of same in the form of excess liquidity by the CBN. To this extent, the interest rate in the industry is determined by the oil revenue earnings.
The existing infrastructural deficit remains a huge drag to production activities. The excessive appetite by Nigerians for foreign products which makes Nigeria heavily import-dependent constitutes inlets of doses of imported inflation. Now, due to the government over-reliance on the oil sector, we have so far been able to identify that the oil sector can determine three important leading indicators: exchange rate, inflation rate and interest rate.
Today in Nigeria, the exchange rate is a much more sensitive leading indicator relative to inflation and interest rates.
Economic Forecast for 2021
The monetary authority is much likely to do more of the macroeconomic task in ereas of inflationary recession.
Hence, we forecast that monetary policy will continue to remain accommodative and there are tendencies that MPR will be lower further for up to the Q4 of 2021 if the second wave of the global COVID 19 pandemic terminates at the end of Q1, 2021.
Such policy simply aligns with the theoretical underpinning that provided interest rate remains low, positive growth will ultimately emerge. Other complementary components to the policy such as cash reserve requirement (CRR), liquidity ratio and the asymmetric corridor around the MPR will continue to be maintained at 27.5%, 30% and +200/-500 basis points respectively.
• One of the modular refineries in the country will commence operation in 2021. This will ease the pressure of importation-n of the petroleum products and thus free resources for other government spending that hopefully re-circulates wealth in the economy
• Exchange rate will climb higher to about N420 if oil prices continue to hover in the neighbourhood of $35 to $45 per barrel globally as oil production (mbpd) is below 1.5m, and as domestic economic activities recover more strongly.
• The inflation rate will rise to about 19% in the Q2, 2021 if the second wave does not continue to devastate the global economy. But rise to 22% if it does in the Q1, 2021.
• Food inflation will likely remain high as essential industrial inputs are set as a priority over rice and poultry to access foreign exchange via the CBN widow. In principle, rice and poultry related products remain banned at the moment. However, the headline inflation can partly be curbed from the supply-side of the economy. In the short run, we recommend that the ban on rich and poultry related products be lifted in the interim to disinflation food inflation and by extension headline inflation.
Contextually, in as much as a significant share in government borrowing will continue to be from external sources, the yields from domestic debt instruments (e.g., bills and bonds) will continue to remain low in Nigeria.
This will mean tougher days yet ahead for the banking industry given that it partly survives on the significant investments in these debt instruments. A few banks may not be able to manage the possible frenzy that will befall them resulting from the rush to create credit assets with the real sector thus creating the tension of sticky loans and subsequent downsizing with contagious impact on others.
• Fraudsters are very much likely to seize this moment with rebrand versions of Ponzi schemes.
• Unemployment level in the informal sector will fall moderately with the temporary reopening of the borders in the Q1, 2021 as trade constitute the second largest employer of labour in Nigeria. (SBM Intel’ 2020).
• Oil production (mbpd) will scale up to around 1.65 to 1.8, ceteris paribus.
• GDP will average of 460 billion dollars in 2021.
• Given that yields on money market debt instrument (treasury bills) and capital market instrument (bonds) are below existing inflation, it becomes difficult for the monetary authorities to lure FPI a source of capital inflow into the country. On this premise, more capital outflow will occur in 2021.
• Given the impressive purchasing manager’s index data in the Q3, 2020 and other fiscal stimulus packages, the Nigerian economy will pull out of recession in the Q2, 2021 with oil prices stabilizing around $47 per barrel.
• Positive economic growth in the Q2, 2021 will be non-impactful until 2022.
Dr. Harrison Eromosele, Department of Economics and Development Studies, Federal University, Otuoke, Bayelsa State.