Dr. Ahmed Adamu’s Responses to Economic Recession Questions on Facebook.

Someone (Com. Ibrahim Bature) on Facebook asked me the following two questions relating to the current economic recession in Nigerian and these are my answers:

What is recession?

I will try and explain in lay terms. Recession is when country’s production level reduced in two consecutive quarters. For example, In Nigeria, the level of production of goods and services within its territory has declined by 0.40% in the first quarter of 2016 and further declined by 2.06% in the second quarter of 2016. Therefore, theoretically, Nigeria is in recession. This is the first time Nigeria entered recession in more than a decade. This can be further substantiated looking at the major economic indicators. Nigerian inflation currently stands at 17.1% the highest in a decade, unemployment rose to 13.3% the highest in six years, the value of Naira lost its value by 59.30% in just a year, and the Nigerian Foreign Exchange Reserve declined to $26 billion, the lowest in a decade. These indicators confirmed the technical recession in the country. In terms of Microeconomic, the purchasing power of disposable income has reduced, courtesy of the inflation, consumption have reduced, investment have declined, and households are willing to hold cash for fear of unknown rather than invest. Generally, the poverty has become endemic.

Leaders may make decisions that may not necessary be popular or result to immediate benefit to people. There are times when tough decisions have to be made to avoid bigger catastrophe. There might be some difficulties in turning the economy around, from commodity based to product based, and from infrastructural deficit to surplus. There has to be sacrifices, but people have to endure and do their parts. The economic condition in the country is the ramification of the past neglect of the real sector and reliance on the too much importation. So, we have to pay the price if we have to make it right.

How can we manage it, What are the quick solution to it?

Short term: Government must embark on rigorous and inclusive social investment through capital incentives and production grants, interest rate must be reduced to allow access to capital, Banks cash reserve ratio should be reduced, and importation of goods and services that are locally available should be discouraged especially through additional penalties. There should be incentive for importation of basic factor inputs. Individuals must stop unnecessary travels for health, educational and tourism purposes, and maximise utilization of local services.

We should encourage foreign investment through temporary tax holidays. There has to be reduction in government expenditure and save more for capital and social investment (I suppose this is ongoing). Specifically, convenient public transport systems have to be provided to reduce the total demand for petroleum products, so that people will drop their cars and use public transports. This will reduce the total demand for petroleum importation (the largest share of Nigerian import), it will also relieve households of the need to buy their own transport systems and save for other expenses and investment.

People have to adjust their expenditure and standard of living temporary. Unnecessary personal expenditures must be replaced with investment. Government should set deadline for the stoppage of importation of certain products and act rigorously toward sufficient and efficient production of these products within the country. However, the government must open land borders for importation of rice temporary until when sufficient local production capacity of the rice is achieved. Mechanisms to checkmate corruption at land borders must be provided, which might include reward and punishments for performance and lack of it respectively.

It is a good development to see how electricity supply is improving and relative security achieved in the country, this will encourage investment and reduce cost of production. Even though government intend to implement 30% of its budget for capital projects, it should simultaneously implement the recurrent expenditures. What the economy needs is financial liquidity in the short run. The current inflation is cost push inflation, not demand pull inflation, and if the ability of individuals to purchase goods and services is improved, the marginal cost of production will reduce, and eventually help reduce the inflation. However, the CBN has to watch the money supply and the prices to avoid possible resultant demand pull inflation.

Export promotion have to be made priority, which underpins the need for the development of the real sector, through subsidised production and standardisation of products. Lack of honesty and trust have killed thousands of businesses. Many people have started business, but have to close down due to lack of trust and honesty from the workers. Some investors have to delay or forfeit investments due to risks associated to lack of trust. Lack trust have also added to the cost of production, because, more staff have to be employed to ensure accountability and/or new machineries have to be acquired to checkmate flows of income. So, there is need for social reorientation.

Long run: finally, there has to be structural economic change, where exports will be higher than import. To achieve this there has to be establishment of more factories and refineries. Diversification of the economy is necessity to avoid being vulnerable to shocks in one sector. Agriculture and solid minerals development can be explored. Real sector production of textile, machineries, appliances, vehicles, processed foods, etc. has to be emphasized and incentivised. Tax collections should be a major source of government revenue, and this can be achieved if everyone is back to business, and that is the time when people will feel part and parcel of the government, because they have paid their taxes. And this will eliminate corruption, as people will demand accountability of the taxes they paid, and leaders will not waste people’s hard earn resources.

Dr. Ahmed Adamu,
Petroleum Economist and Development Expert,
Pioneer Global Chairperson of the Commonwealth Youth Council,
University Lecturer (Economics) at Umaru Musa Yar’adua University Katsina.