On the verge of recession

The recent Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) raised an alarm that the Nigerian economy is on the verge of entering a recession. The alarm was informed by a key indicator that the country has recorded two consecutive quarters of negative growth in its Gross Domestic Product (GDP). According […]

The recent Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) raised an alarm that the Nigerian economy is on the verge of entering a recession. The alarm was informed by a key indicator that the country has recorded two consecutive quarters of negative growth in its Gross Domestic Product (GDP). According to CBN Governor Godwin Emefiele, “In the first quarter of 2016 the economy suffered from severe shocks related to energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand among others.”
Other factors he identified include inability of investors to undertake new investments and or source fresh raw materials, as well as the energy crisis of the first five months resulting in increased power outages and higher electricity bills, fuel shortages and business closures in many cases.  Beyond CBN’s prognosis, the tell-tale evidence of recession is here with us as the high level of unemployment and its associated complement of problems, escalating inflation and mismatch of monetary and fiscal policies.
The blame for the incipient recession has been placed on several factors, one of which is the low level of economic activities in the country following the slow start-up of the governance machinery of the present administration which dovetailed into the delay in passing the 2016 budget. The prolonged budget impasse denied the economy the timely intervention of complementary monetary policy measures to stimulate it. The Buhari administration spent as much as six months after its inauguration to set up a cabinet of ministers, while the 2016 budget draft was presented to the National Assembly in December. After the Assembly passed it in April, another protracted tussle between the two arms of government ensued before the president assented to it. Now we are all paying the price.
Even before the needless delay of the 2016 budget, previous budgets had not fared better, with the best performing ones among them recording about 30% implementation. The weak budget management culture over the years created loopholes in the economy which was exploited by unscrupulous elements to siphon public funds into private pockets. Given that government expenditure drives over 90% of the country’s economy, the import of delay and mismanagement of budgets is easy to appreciate. Delay in passage of 2016 budget accentuated an already bad situation.
CBN has now adopted a stimulus package comprising a cocktail of remedial measures to save the economy from slipping into a recession. It is maintaining the key interest rate at 12% which is below the current inflation rate of 13.72%. Linking of the two rates is intended to balance their effects on the economy and prevent further slow-down as well as provide funds for businesses and entrepreneurs to operate. In addition, CBN is also moving towards a convergence of the parallel foreign exchange markets to stop the present practice whereby some people buy forex at N200 to the dollar from the official market and sell it at N320 or more at the parallel market.
While CBN’s response is timely, its ultimate utility will depend on the follow-up action by the government. Right now the economy remains outside the effective control of the administration. President Muhammadu Buhari recently said the administration came on stream at a difficult time. It therefore needs to speed up its pace of intervention especially with respect to the 34 point agenda. A recommended proactive style should incorporate the prescriptions of the CBN towards reflating the economy to increase productivity and a better life for the people. Its ultimate testing ground is the economy, where Nigerians largely identify its compact with them.
Beyond this, the need exists for an early preparation of the 2017 budget in which the administration has another opportunity to assert itself more meaningfully on the economy. An early presentation and passage will prove that lessons have been learnt from the experience of 2016 budget.