Although it took nearly five months for the minister of finance to accept this unusual occurrence in the country, it is no more a secret that Nigeria is in a brutal economic recession. Mandatorily the government has acknowledged and accepted the reality on ground, due to unbearable and repeated public outcry.
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades. But with the decline in crude oil prices, it became inevitable for almost all the oil producing and dependent countries to wake up to the realization that rents from this sticky stuff would lead to budget deficits, and consequently, a possible recession for those countries unprepared to make tough economic adjustments.
Nigeria is having its “Minsky’s moment:” This is when a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. For instance, an investor might borrow funds to invest while the market is in an upswing. If the market drops slightly, leveraged assets might not cover the debts taken to acquire them. Soon after, lenders start calling in their loans. Speculative assets are hard to sell, so investors start selling less speculative ones to take care of the loans being called in. The sale of these investments causes an overall decline in the market. At this point, the market is in a Minsky moment. The demand for liquidity might even force the country’s central bank to intervene. A situation already being experienced in Nigeria.
President Mohammed Buhari’s (PMB) ascension was overwhelmingly supported by a large number of Nigerians. Unfortunately he arrived after a period of economic boom, when the natural decline had commenced.
The issue is not the inevitable recession, but the cure, how to recover from it. This is what is actually painting this government’s economic recovery policy incompetent, unacceptable. Buhari would have quickly tackled the scourge before its full -blown stage. He failed.
The failure stemmed from two factors: the Central bank of Nigeria’s (CBN) inability to foresee the approaching recession, and the government’s delayed reaction. The most effective cure of a potential economic crisis is the realization of the latent elements that could trigger the crisis: inflation, unemployment, low aggregate industrial production, and unnecessary government spending. These indices were present during Buhari’s inauguration, but it took the President nearly six months in office to assemble his cabinet. By then all hell had broken loose. The CBN governor, Emefiele, then maintained his delusional rhetoric that Nigeria’s economy had strong fundamentals, when obviously, it was the opposite. The most damaging effect to any economy is the panicking posture of the Central bank of the country. The obnoxious policy of barring commercial bank customers from paying in or withdrawal of foreign currencies from their accounts, last year, further exacerbated the forex crises.
The policy trilemma, also known as the impossible trinity states: a country must choose between free capital mobility, exchange -rate management and monetary autonomy. Only two of the three are possible (the Economist Sept.2016). A country that wants to fix the value of its currency and have an interest -rate policy that is free from outside influence, cannot allow capital to flow freely across its borders. If the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy. And if a country chooses free capital mobility and wants monetary autonomy, it has to allow its currency to float. Nigeria wanted to combine the three— an impossible feat.
To understand the trilemma, imagine a country that fixes its exchange rate against the US dollar and is also open to foreign capital. If its central bank sets interest rates above those set by the US Federal Reserve, foreign capital in search of higher returns would flood in. These inflows would raise demand for the local currency; eventually the peg with the dollar would break. If interest rates are kept below those in America, capital would leave the country and the currency would fall.
Where barriers to capital flow are undesirable or futile, the trinity boils down to a choice: between a floating exchange rate and control of monetary policy; or a fixed exchange rate and monetary bondage. Nigeria’s aspiration to combine the impossible trinity under this government has led to the abrupt surge in the devaluation of the Naira, with unending capital outflows. Foreign investors have fled with their funds, and recession surfaced.
In Nigeria, corruption is ubiquitous; it is inherent in almost everyone. The prevailing anti-graft war is noble, but it cannot precede sound economic judgment. It is a national responsibility of the government in power to create enabling environment where citizens enjoy prosperity or strife to gain some form of financial freedom. Nigeria’s economy is severely micromanaged; the myopia if unchecked, could expand the current recession into a depression.
With oil prices hovering around $40 per barrel, and no visible diversification programmes, it was only a matter of time for recession to appear on the podium. Evidently, President Buhari met a bad situation, but he has made it worse.
What I find difficult to understand is the President’s refusal to establish a viable economic team. State governors and cabinet ministers (who are mostly lawyers) cannot constitute his economy redemption visionaries. This is one area PMB has remained myopic and unnecessarily rigid.
It is no secret that Buhari is unwilling to change his rigid beliefs of how things should be done, especially when he constantly refers to his time in office in the mid-1980s. The only way effective and positive change can occur is if the President embraces modern economic principles and listen to his professional advisers. The war against corruption must be fought along positive economic principles, not normative.
There is glaring dissatisfaction of how the government is handling the economy; masses have started crying out for the defunct People’s Democratic Party (PDP). This is not only a big paradox, but Nigerians impatience to invisible economic reforms. Reforms must be proactive, endearing, and visible. They must start from the top, with clear effort to cut down perks and other luxuries usually associated with political office holders in Nigeria. With a governor’s motorcade of 13 expensive luxury cars, and unlimited number of security guards, it does not seem rational enough to tell the common man that the country’s economy is in doldrums. Change must begin with the top echelon of government.
Opinion polls suggest that very few citizens are in support of the government’s effort to overcome the recession, the large majority aren’t happy with the dissipating hardship. Fifty six years of independence, still Nigeria seems to have found no viable equation to economic management.