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How Wrong Policies Threw Economy Into Recession

It is a tale of hunger, anguish, mass job losses, low purchasing power, factory closures and bankruptcy as Nigeria battles with its arguably worst ever recession. OYETUNJI ABIOYE examines major economic policy timelines and reports that the gruelling recession was avoidable

Mr. Shola Adekunle was living a good life until June this year when he lost his job in the banking sector. Life became unbelievably difficult for him as the economic recession made efforts to create something for himself pending when another job opportunity comes fail like a bowl of water poured on the back of a duck.

Adekunle is just one among over 8,000 workers (with at least six dependents each) who have lost their jobs in the banking sector in the last one year due to the biting recession.

His case appears better. Mr. EmekaNwasha and his wife, Christy, lost their jobs almost the same time in the third quarter of the year. While Emeka lost his manufacturing sector job in August, his wife lost hers two months later in a real estate firm.

Getting other jobs has not been easy for the Nwashas. Efforts to start a small business failed as Emeka could not even get a small loan from any bank to jump-start it.

The wife has since been the breadwinner for the family since Adekunle lost his job.

With the economy recording three consecutive quarters of negative growth (indicating sharp slowdown in economic activities); gross erosion of consumers’ purchasing power owing to the drastic jump in inflation rate from single digit to a high of 18.4 per cent in November; and a gale of massive job losses, the economy is said to be in a mess with millions of Nigerians in severe anguish.

Virtually all the economic sectors have recorded mass job losses running into several thousands, as the excruciating recession continues to ravage the economy.

Apart from the banking sector, which has recorded over 8,000, the manufacturing sector has also been worst hit with an estimated job loss of over 15,000.

The gale of job losses in 2016 has been unprecedented. The oil and gas sector is estimated to have lost over 10,000 jobs, while food and beverages companies have similarly axed thousands of jobs.

The Nigerian economy, which grew at an average of six per cent in the last 10 years, suddenly fell into negative growth in the first quarter of this year, 10 months after President Muhammadu Buhari took office.

The economy recorded -0.3 per cent growth in the first quarter. By the second quarter, another negative growth of -2 per cent was recorded, and the country was officially declared to be in a recession. This continued until the third quarter with -2 per cent negative growth. The country is set to record another negative growth in the fourth quarter. Already, the International Monetary Fund has predicted that Nigeria will record a full year of negative growth.

Nigeria, which earns over 90 per cent of its foreign exchange from crude oil sale and over 70 per cent of revenue from the same product, can trace its woes to June 2014 when the price of oil crashed globally from over $100 per barrel to less than $50/barrel.

This led the economy to start facing several challenges. Economic growth started to drop gradually because of low activities in the oil and gas sector. Also, the country’s external reserves, began to drop gradually.

Nigeria depends on forex for the importation of raw materials to run manufacturing plants, and finished goods to keep the economy going, As a result, the government started devising means to keep the external reserves at a healthy level that could guarantee forex for the importation of petrol, raw materials and finished goods.

However, since a possible increase in oil price cannot be guaranteed as this depends on global or external factors that are beyond the Federal Government’s control, the Buhari administration was advised by experts to introduce policies that could get foreign investors to retain their investments in the country.

These investments form part of the country’s external reserves.

However, experts and economists conclude that the government has failed in this area, and this has led to the acute shortage of forex with the myriads of attendant negative economic situations of job losses, rising inflation, low consumer confidence, low purchasing power and the other challenges bedevilling the country at the moment.

“The fall in oil prices was not our main problem. The way we reacted to it with wrong policies led us to the recession and the problems we are having today,” an economist and Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, says

He adds, “Because we could not come up with a foreign investor-friendly policies, JP Morgan removed Nigeria from its global bond index in 2015. Shortly after that, foreign investors started moving out their forex from the country.

“Some of them actually waited long after the removal of Nigeria from the JP Morgan index to see if we will come up with policies that will make them to stay. Specifically, they wanted Nigeria to adjust the dollar-naira exchange rate, because they felt the existing rate was not the actual market rate based on the forces of demand and supply. They did not want to bring in their money and lose it.”

Like Chukwu, several other economists are of the opinion that the recession facing the country was avoidable if Nigeria did not make mistakes in its policy choices, especially those regarding forex.

According to them, the nation’s forex policy, especially its decision not to adjust the exchange rate in line with the forces of demand and supply, led to acute shortage of foreign currencies in the country

According to the CEO of Cowry Asset, the lack of forex to acquire major raw materials and manufacturing inputs led to slow economic growth that culminated into the recession.

Rather than adjust the exchange rate or allow the forces of demand and supply to determine the appropriate rate, the Central Bank of Nigeria banned importers of 41 items from accessing forex from the official market.

A senior associate in investment banking at Afrinvest, Mr. Ayodeji Ebo, says the ban on the 41 items and the scarcity of forex generally have made many companies to visit the parallel market for their forex needs. This, he explains, was the foundation of the huge gap between the official market and parallel market exchange rates.

This huge gap, he says, has created myriad of arbitrage problems that the CBN is struggling to curtail.

For the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, if the country was to experience recession at all, it should not have been as deep as what is currently happening.

Rewane says, “We failed to adjust the exchange rate and implement certain forex policies that would have helped our economy on time. If this has been done, the recession will not be as deep as it is now.

“The market has to be allowed to determine the exchange rate. If that is done, we won’t have a situation where the official exchange rate is N315 to the dollar, while the parallel market rate is N490. So, the delay in allowing this led us to where we are.

“But the way forward is that we have to overhaul our forex market and policies. We need an efficient forex market to get us out of the problems we are in now. Right now, people who need forex cannot get it. The manufacturers and other companies seeking forex for production purposes and other economic activities cannot get it, and this is creating problems in the economy. If the forex market is efficient, they will get it.”

Experts believe President Muhammadu Buhari was wrong to have insisted he will not devalue the naira. They say comments regarding monetary policy should be made by the CBN. Buharis comment, they say, scared investors away. The Chief Executive Officer, Afrinvest, Mr. Ike Chioke, also believes the country needs to review its exchange rate policies and adjust the exchange rate, otherwise 2017 may be worse than the outgoing year.

The recession was clearly avoidable. The decline in oil prices was already there even before the current government came in.

Chioke says, “In October 2015, Afrinvest examined the outlook and envisaged these problems. We said we needed to move the exchange rate. Unfortunately, we did not. By the time we moved it in June 2016, things had become worse. Even when it was moved, the implementation was not done well.

“The manufacturing sector, for instance, went into problem over lack of forex. Many of the industries survived on their forex reserves. This and many other things affected our growth. Many of them had to lay off because there is a certain break-even point for them to keep running their plants. And all these have serious implications on the economy.

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“The mistake was that we wanted to maintain a particular exchange rate rather than a market-determined exchange rate.”

The CBN had kept the exchange rate at N199/dollar for 16 months from February 2015 to June 2016. Experts concludes that the decision, which is against known economic theories, led to the drought of forex that later forced the apex bank to start rationing dollars.

A former Governor of the CBN, Lamido Sanusi, says the apex bank’s decision to peg the exchange rate rather than implement the flexible free float forex policy is a major clog in the wheel of progress of the economy.

He advises the CBN to allow the currency to move in order to attract Foreign Direct Investment and Foreign Portfolio Investment into the economy, saying this is urgently needed to restore the economy to the path of growth.

A former Minister of Solid Minerals, Mrs. ObiageliEzekwesili, says the administrations of former President Goodluck Jonathan and the incumbent, Muhammadu Buhari, led the nation’s economy into recession by failing to adopt the right policies to deal with the crash in crude oil prices, which began in mid-2014.

Speaking as the guest speaker at the inaugural Business Lecture of the Lagos Country Club in Lagos recently, Ezekwesili notes that while Jonathan’s administration failed to do something about the impending recession before leaving office, the current administration also failed to launch a comprehensive fiscal stabilisation programme on assumption of office in May 2015.

According to her, the economic policies of the present administration have worsened the matter, because they are not the right ones.

She says, “The parlous state of the Nigerian economy by the 29thof May, 2015 should have instructed an incisive and urgent macroeconomic stabilisation programme to realign the price levels in the economy. By May 2015, we knew we were already in trouble. As a matter of fact, we were already in trouble in 2014. That was the first time that growth collapsed to 3.8 per cent. The incoming administration should not have been told that we were weak and vulnerable.

“Had the government made quick and necessary adjustment that corresponded close enough to the level of impact of the 40 per cent decline in oil revenue, our story could have been different today. We would never have lost growth.”

Ezekwesili, a former Vice-President of the World Bank, further states, “There is a new level that our post-2014 oil shock economy needed to find for stability. We needed a policy response that could have enabled that adjustment to happen immediately. That response could have helped the economy to absorb the shock. It could have reassured the investors. It could have reassured the consumers. It could have helped us to reasonably retain investor confidence in the economy, but that did not happen.

“The attendant fiscal pressure and the delayed right policy responses were severe enough that by 2015, economic growth had sharply declined from 3.8 per cent to 2.7 per cent. And then began the sharper loss of growth into negative growth rate by 2016. It was a major mistake that the economy did not get timely and right type of policies that could have helped us avoid the calamitous collapse into negative growth in the last three quarters of 2016.

“The economic preferences did in fact worsened matters and set off a wave of uncertainties that dented investors’ confidence in the economy. So, it is accurate to conclude that both the preceding and successor governments conspired by their actions and inactions to throw the Nigerian economy into the deep throes of economic recession of which it must be rescued in order to avoid social implosion.”

The former ministerurged Nigerians to demand from the government to retrace its steps and implement the right policies.

She further says, “The record of the government today for timely and right actions on the economy is, however, so far not encouraging at all. For almost one year, the government delayed prime action on the fuel subsidy regime despite its aggravating impact on fiscal imbalance.

“Over the same period, it delayed the right action on the exchange rate policy despite the deleterious effects that it was having on foreign reserves, the value of the naira, as well as on inflation. Before the government came on board, inflation level was nine per cent; today, inflation has doubled to more than 18 per cent. The greatest enemy of the poor is inflation. The greatest enemy of business is inflation. All you need in order to destroy the poor is total unstable price levels in an economy.”

On how to restore the economy to the path of growth, Ezekwesili says, “As long as we continue on the path of wrong prescriptions for the economy, the situation will worsen. The more these indicators deteriorate, the harder it will be for growth to resume. The macroeconomic stability that poor choice of economic policies helped to unravel within one year took many years of work.

“It is, therefore, critical for the citizens to convince the Federal Government to urgently retrace its steps back to what it failed to do on May 29, 2015. We swore to allow the market economy to adjust itself without command and control. The government failed to launch a deep fiscal consolidation programme. Recession is nothing new in other countries.”

Chioke says there is a need for philosophical agreement among the Presidency, CBN and the Ministry of Finance on how the economy should be managed if the country will move forward.

“Currently, it appears that the CBN has its own view, the Finance ministry has its view, while the Presidency has its own view. There can’t be progress this way. We have to come to an agreement on how the economy should be managed,” he says.

A professor of Economics at University of Uyo, Leo Ukpong, explains that lack of coordination between the CBN and the Finance ministry is hindering the country from moving out of recession.

He says, “The recession was clearly avoidable if we hadimplemented the right policy choices. Now that we have found ourselves in it, the CBN and the Finance ministry are not helping matter, because there is no coordination between them.

“While the CBN is taking liquidity out and refusing to bring down the benchmark interest rate to enhance growth, the Finance ministry is busy pumping same liquidity into the system to jump-start growth. The CBN needs to align with the ministry. We have to get jobs back before fighting inflation.”

However, CBN Governor, Mr. Godwin Emefiele, believes that reducing the benchmark interest rate may not creat credit and jobs. He also insists his forex policies are good for the country.

Like Ukpong, an economist at the United States Federal Reserves Bank, Mr. David Oppedahl, says when the US had the twin problem of inflation and slow growth some years back, the country first tackled slow growth by bringing back jobs before going back to deal with inflation even though policies favouring growth will attract high inflation.

He, however, says that each country will have to deal with its own economic problems based on certain local factors.

The Director-General, Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, says there was a sharp drop in investors’ confidence during the year following the weak growth numbers and the fact that the economy slipped into recession.

He adds that there was consequently a slowdown in the tempo of economic activities with implications for job retention and job losses.  However, he notes that other factors that contributed to the weak investors’ confidence include sharp currency depreciation of over 100 per cent; liquidity problems in the foreign exchange market, which manifested in the acute scarcity of foreign exchange for most part of the year; high interest rate regime; multiple exchange rates; policy uncertainties; and security concerns in parts of the country.

On the way forward, Yusuf says, “A framework to ensure the liquidity of the foreign exchange market should be urgently put in place. This is critical to restore investors’ confidence, enhance forex inflows, boost FDIs and FPIs, and reduce the level of uncertainty in the economy.

“The tight monetary policy regime should be relaxed to spur domestic investment and consumer spending. The exclusion of the 41 items from the official foreign exchange market should be reviewed to exempt the critical manufacturing inputs as listed by the Manufacturers Association of Nigeria that are currently on the list.The import exclusion policy should be managed within the context of the trade policy framework.”

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