ECONOMIC RECESSION IN NIGERIA, CAUSES, EFFECTS AND THE WAY FORWARD
INTRODUCTION
In economics, a recession is a
business cycle contraction which results in a general slowdown in economic
activity. Macroeconomic indicators such as GDP (gross domestic product),
investment spending, capacity utilization, household income, business profits,
and inflation fall, while bankruptcies and the unemployment rate rise. In the
United Kingdom, it is defined as a negative economic growth for two consecutive
quarters.
Recessions
generally occur when there is a widespread drop in spending (an adverse demand
shock). This may be triggered by various events, such as a financial crisis, an
external trade shock, an adverse supply shock or the bursting of an economic
bubble. Governments usually respond to recessions by adopting expansionary
macroeconomic policies, such as increasing money supply, increasing government
spending and decreasing taxation.
WHAT IS ECONOMIC RECESSION?
The
National Bureau of Economic Research (NBER) defined a recession as “a
significant decline in economic activity spread across the economy, lasting
more than a few months, normally visible in a real gross domestic product
(GDP), real income, employment, industrial production and wholesale-retail
sales.”
Economics
recession can also be defined as a negative real GDP growth rate for two
consecutive quarters (say first and second quarters). Judging by the above
In
a 1979 New York Times article, economic statistician Julius Shiskin suggested
several rules of thumb for defining a recession, one of which was two down
consecutive quarters of GDP. In time, the other rules of thumb were forgotten.
Some economists prefer a definition of a 1.5-2 percentage points rise in
unemployment within 12 months.
In
the United Kingdom, recessions are generally defined as two consecutive
quarters of negative economic growth, as measured by the seasonal adjusted
quarter-on-quarter figures for real GDP. The exact same recession definition
applies for all member states of the European Union.
ATTRIBUTES OF ECONOMIC RECESSION
A
recession has many attributes that can occur simultaneously and includes
declines in component measures of economic activity (GDP) such as consumption,
investment, government spending, and net export activity. These summary
measures reflect underlying drivers such as employment levels and skills,
household savings rates, corporate investment decisions, interest rates,
demographics, and government policies.
Economist
Richard C. Koo wrote that under ideal conditions, a country's economy should
have the household sector as net savers and the corporate sector as net
borrowers, with the government budget nearly balanced and net exports near
zero. When these relationships become imbalanced, recession can develop within
the country or create pressure for recession in another country. Policy responses
are often designed to drive the economy back towards this ideal state of
balance. A severe (GDP down by 10%) or prolonged (three or four years)
recession is referred to as an economic depression, although some argue that
their causes and cures can be different.
WHAT LEAD TO RECESSION IN NIGERIA
I
will try to be objective in this discussion as much as I can. Before I explain
how Nigeria got herself into recession, let me explain the general causes of
economic recession in any given economy.The major cause of economic recession
in any economy (lesson from great depression, 1981, 1991, 2008 economic
recession) may include:
• High inflation, a general rise in price
of goods and services – leading to low purchasing power.
• Accumulation of debt servicing
especially foreign debts.
• High-interest rate – discouraging
investor
• Fall in aggregate demand, fall in wages,
income.
• Mass unemployment, and general loss of
confidence on the government.
In summary, what lead to economic recession
in Nigeria are:
1. Poor economic Planing: Poor economic
planning and no concrete implementation of her economic planning is the major
cause of Nigeria current recession. Yes the government has proclaimed the usual
generalities that every government indulges itself in about
• Diversifying the economy,
• Improving manufacturing/mining sector,
• Raising agricultural output,
• Encouraging foreign investment, among
others, yet no concrete evidenced strategic plan for growth.
No
doubt, the government has taken some steps like the elimination of dollar
purchase privileges for importers of 40 items such as – rice, cement,
toothpicks, private planes, poultry, meats, margarine, wheelbarrows, textiles,
and soaps.
The
government has, on the other hand, caused serious poverty in the land by
herself. Let me explain, the government through her policy widen the gap
between the rich and poor – creating more economic hardship.
For
instance, when the CBN was selling dollars at N197 and people were buying at
N300, the highly placed individuals in the country were putting call across the
banking industry to get dollar at the official rate. This they later resell at
the parallel market rate of N300.
Think
of how much some of them were making. An individual can make as much as
N1billion naira without doing anything according to the former CBN governor
(Lamido Sanusi). The people that were profiting from this were people that were
telling the government that if it didn’t devalue the Naira people would suffer.
The poor paid the price of a devalued currency and the rich schemed off the
profits.
For
example, should you take dollars, for every $1 billion taken from the
Federation Account and sold by the CBN at N200 to the dollar, the states were
losing N100 billion that could have gone into salaries, agriculture,
healthcare?
Yet,
the states were going to borrow from the same government on a bailout when the
government was selling dollars cheaply to a small group of people. This
incidence is still ongoing and the government is doing nothing about it.
2.
High Inflation rate: Government
banning the importation of certain essential agricultural products like Rice
without considering gestation period is error.
Removal of fuel subsidy shoudn’t be simultaneous with the banning of
these agricultural products.
Nigeria
inflation rate currently stands at 17% that is extremely high.
3.
High-Interest Rate: Interest rate is between 26.77-27%. Is extremely high for
investors. This high interest rate is discouraging investors. The poor
investment culminate into high rate of unemployment in the country.
4.
High Taxation: It is only in Nigeria that I see government charging high tax
rate during economic recession. Small businesses are slaughtered with high
interest rate. Both high interest and tax rate has lowered Nigeria aggregate
demand.
5.
Policy conflict: The economic policies appears conflicting. How? High-interest
rate, high tax rate are tight monetary policy measures. But government told the
public it is adopting expansionary policy – budget deficit.
It
should be noted that the fall in oil price and production is not the cause of
Nigeria economic recession. Yes! Oil only account for 15% of Nigeria GDP. And
an economic recession is measured on the basis of GDP growth. For the want of
details, I won’t go further on that analysis.
IMPACTS OF ECONOMIC RECESSION ON
NIGERIA ECONOMY
A
recession means a fall in GDP / national output. A recession will typically be
characterized by high unemployment, falling average incomes, increased
inequality and higher government borrowing. The impact of a recession depends
on how long it lasts and the depth of the fall in output. The great recession
of 2015-till date in Nigeria has shown many of the negative impacts. Some of
these impacts include:
Unemployment
Not
everyone is affected equally by a recession. A fall in GDP will cause a rise in
unemployment. This is because:
• Some firms will go bankrupt meaning all
workers lose their jobs.
• In an effort to reduce costs, firms will
cut back on hiring new workers. Therefore, unemployment often affects young
people the most.
Lower
wages
Firms
will also try to reduce costs by keeping wages low. Some workers (especially
temporary workers without contracts may see wage cuts) This has been a key
feature of the 2008-12 recession, also aggravated by rising costs of living.
With cost push inflation, nominal wages haven’t kept pace meaning Nigeria workers have seen substantial cuts in their
real wages. Another cause of lower wages is under-employment. Some workers may
keep their job, but see their hours cut. Rather than working full time, they
become part-time workers (e.g. 20 hours a week). This means that the rise in
unemployment may be muted, but many workers see substantial falls in effective
income.
Taxation
Governments
will see a fall in tax revenue as a result of a recession.
• Firms make less profit, therefore
government receive lower corporation tax
• Workers receive lower income, therefore
government receive lower income tax
• Lower house prices, and fewer housing
transaction – lower stamp duty
• Lower expenditure, leading to lower VAT
payments. E.g. in Greece during 2011, VAT Revenues fell 18% simply because
60,000 business and small business have gone bankrupt since the summer.
Government Spending
• Rising government spending on welfare
payments, such as unemployment benefits and income support.
Budget
Deficit. Because of falling tax revenues and rising welfare payments (automatic
fiscal stabilisers) a recession tends to cause an increase in the budget
deficit, and total government debt.
Impact on Workers
Unemployment
can leave lasting negative impacts. Firstly, unemployment is very stressful and
can damage the persons morale, and even health. Areas of high unemployment tend
to experience more social problems. High unemployment can be factors in
creating social instability such as riots. Mass unemployment in Spain and
Greece is threatening the social fabric of the countries.
The
unemployed lose the opportunity to gain skills and on-the job training.
Long-term unemployment can make it harder for the worker to gain a job in the
future; it can even cause people to give up and drop out of the labour market
completely.
Falling Stocks and Slumping
Dividends
As
declining revenues show up on its quarterly earnings report, the manufacturer’s
stock price may decline. Dividends may also slump, or disappear entirely.
Shareholders may become upset. They and the board of directors (B of D) may
call for a new CEO and/or an entirely new senior management team. The
manufacturer’s advertising agency may be dumped and a new agency hired. The
internal advertising and marketing departments may also face a personnel
shakeup.
When
the manufacturer’s stock falls and the dividends decline or stop, institutional
investors who hold that stock may sell and reinvest the proceeds into
better-performing stocks. This will further depress the company’s stock price.
Credit Impairment and Bankruptcy
Also
impacted by the recession is the accounts receivable (AR). The customers of the
company that owe it money may pay slowly, late, partially or not at all. Then,
with reduced revenues, the affected company will pay its own bills more slowly,
late, or in smaller increments than the original credit agreement required.
Late or delinquent payments will reduce the valuation of the corporation’s
debt, bonds and ability to obtain financing. The company’s ability to service
its debt (pay interest on the money it has borrowed) may also be impaired,
eventuating in defaults on bonds and other debt, further damaging the firm’s
credit rating and preventing further borrowing. Debt will have to be
restructured and/or refinanced, meaning new terms will have to be agreed upon
by creditors. If the company’s debts cannot be serviced and cannot be repaid as
agreed upon in the lending contract, then bankruptcy may ensue. The company
will then be protected from its creditors as it undergoes reorganization, or it
may go out of business completely.
Employee Lay-offs and Benefit
Reductions
The
business may cut employees, and more work will have to be done by fewer people.
Productivity per employee may increase, but morale may suffer as hours become
longer, work becomes harder, wage increases are stopped and fear of further
layoffs persists.
As
the recession increases in severity and length, management and labor may meet
and agree to mutual concessions, both to save the company and to save jobs. The
concessions may include wage reductions and reduced benefits. If the company is
a manufacturer, it may be forced to close plants and discontinue poorly
performing brands. Automobile manufacturers, for example, have done this in
previous recessions.
Cuts to Quality of Goods and
Services
Secondary
aspects of the goods and services produced by the recession-impacted
manufacturer may also suffer. In an attempt to further cut costs to improve its
bottom line, the company may compromise the quality, and thus the desirability,
of its products. This may manifest itself in a variety of ways and is a common
reaction of many big businesses in a steep recession.
Airlines,
for example, may lower maintenance standards. They may install more seats per
plane, further cramping the already squeezed-in passenger. Routes to marginally
profitable or money-losing destinations may be cut, inconveniencing customers
and damaging the economies of the cancelled destinations. Some airlines might
even shutdown operations, just as Aero Contractors announced yesterday.
Giant
food purveyors may offer less product, for the same price, in the same size
package in which the larger amount was previously sold. Quality may also be
reduced. Coffee, for example, may be cut with lesser-quality beans,
compromising flavor and driving away cost-conscious consumers with little brand
loyalty who have noticed the change.
Reduced Consumer Access
As
firms impacted by the recession spend less money on advertising and marketing,
big advertising agencies which bill millions of dollars per year will feel the
squeeze. In turn, the decline in advertising expenditures will whittle away at
the bottom lines of giant media companies in every division, be it print,
broadcast or online.
SOLUTIONS TO ECONOMIC RECESSION IN
NIGERIA
Keynesians
school has suggested measure of ending economic recession. The major measure
which is to reduce tax rate and increase aggregate demand. Let elaborate on
this.
1.
Reduction
in tax rate:
Government should reduce tax rates on
individuals, small businesses, and corporations by lowering the tax rate by at
least 10 percentage points.
The
government instead of reducing tax rate to increase purchasing power, rather
increased the tax rate killing so many small scale business who cannot meet up
with the cost of doing business. Foreign investor will be encouraged with
reduction in tax rate. This will increase inflow of dollar to Nigeria economy,
and ultimately increase investment cum standard of living. And this will solve
the problem of high exchange rate.
2. Effective
Spending:
Mere
increase in government spending will not solve the problem of recession. Yeah!
It is strategic spending in area with high multiplier effect such as
agriculture and manufacturing sector that increase aggregate demand.
Nigeria
need to expand her export earnings and production base through wise
investment. Otherwise might likely end
up in a classical Malthusian situation, where the resources cannot support the
population.
Injecting
more funds into the economy is not bad, but there is need for diversification,
allowing free flow of Naira and stabilizing the oil sector, modernizing agricultural sector. Yes,
Nigeria can spend her way out of recession wisely.
3. Enhance
access to credit.
For
instance, total consumer credit in Nigeria stands at less than $10 billion
dollars in about $500 billion economy, this corresponds to about 2% of her
GDP. Look at some developed economies,
consumer credit ranges from about 20% (USA) to 50% of GDP (Brazil).
South
Africa, Africa’s largest economy by PPP has a consumer spending to GDP ratio of
66%. Nigeria should aim for a consumer credit to GDP ratio of about 10% over
the next 5 years. This would be the equivalent of injecting a stimulus of $50
billion per year into the economy.
Consumer
access to credit will speed up the economy. The CBN recently raised the real
interest rate of Nigeria. Am of the view that this policy should be evaluated.
The max interest rate at 26.93% is too high.
4. Nigeria government should increase her
expenditure on skills: This is one point that most Africa countries had always
neglected. It is only skills that lead to production. People are looking for
problem solver.
So
the government should invest in skills acquisition in IT, telecommunication,
agro-allied, sports among others. The training should be 80% practical. There
is needs for multiple competences, particularly among youths as a measure to
curb increasing global joblessness. The greatest challenge today in Nigeria is
unemployment. The government should partner with private organisation to
organise entrepreneurship and skill acquisition programme for the youth. There
should be high level of transparency in the programme to ensure the best
candidates are picked. This way Nigeria will soon see herself on top of the
fastest growing economy in Africa.
Increase agricultural produce and
export
In
the 1960’s, agriculture is the main base of Nigeria, in terms of GDP, foreign
exchange earnings, and employment. Today, Nigeria spends about $10 billion a
year on the importation of agricultural products.
Nigeria
government led by Buhari should stop talking and start working. Enough of talk,
people want to see actions. The youth like I earlier stated should be
encouraged to go into farming. They should be trained free on various
agricultural sector.There are lands lying fallow, the government should start
farming on those fallow lands. This will take Nigeria to the real position of
giant of Africa.
CONCLUSION
Economics
recession can be defined as a negative real GDP growth rate for two consecutive
quarters (say first and second quarters). Judging by the above definition
Nigeria is experiencing economic recession currently, since her first and
second quarters growth in 2016 are -1.7% and -2.06%.
The
major cause of economic recession in any economy (lesson from great depression,
1981, 1991, 2008 economic recession) may include:
• High inflation, a general rise in price
of goods and services – leading to low purchasing power.
• Accumulation of debt servicing
especially foreign debts.
• High-interest rate – discouraging
investor
• Fall in aggregate demand, fall in wages,
income.
In
this paper we have looked at so many solutions to end recession in Nigeria some
of this solutions are: Reduction in tax rate, Effective Spending: Enhance
access to credit, Nigeria government should increase her expenditure on skills,
Increase agricultural produce and export.
REFERENCES
Koo, Richard
(2009). The Holy Grail of Macroeconomics-Lessons from Japan's
Great Recession. John Wiley & Sons
(Asia) Pte. Ltd. ISBN 978-0-470- 82494-8.
Samuelson,
Robert J. (14 June 2010). "Our economy's crisis of confidence". The
Washington Post. Retrieved 29 January 2011.
"The Conference Board – Consumer
Confidence Survey Press Release – May 2010".
Conference-board.org. 25 March 2010. Retrieved 29 January 2011.
Shiller, Robert
J. (27 January 2009). "Animal Spirits Depend on Trust".
The Wall Street Journal. Retrieved 29
January 2011.
Gregory White
(14 April 2010). "Presentation by Richard Koo : The Age of Balance Sheet Recessions". Businessinsider.com. Retrieved 29 January
2011.
Richard
Koo – The World In Balance Sheet Recession – Real World Economics Review – December 2011