Monday, 19 September 2016

THE TRUTHS ABOUT CURRENT RECESSION AND THE WAY OUT

While the politicians trade blames and ‘put forward self-seeking half truths and falsehoods as facts, Nigerians should have access to the unblemished truth and more importantly they need to know the options available to us while the recently declared recession lasts. After all, it is our lives they are toying with. Nigeria is not the only country experiencing recession, mild or severe, at this time.

All the oil producing nations of the world are also experiencing economic reversal whose severity depends on whether they saved for the rainy day and how dependent the country is on crude oil for its annual budget. So, recession in Nigeria, troubling as it is, cannot be regarded as unique. Even the world’s largest exporter of crude, Saudi Arabia, is struggling with it; Venezuela, at the other end of the globe is almost overwhelmed by it.

The country started sliding towards recession in 2013 when the price of crude oil began rolling downwards from US$118 per barrel. That process continued throughout 2014 – which was the first year since 1995 when average crude price fell below the benchmark used for the annual budget. As far back as 2013, analysts had warned the nation that the Age of Oil was over but the ruling party took no notice or dismissed the warning as a prophecy of doom. Having failed to heed the warnings in 2013 through 2015, on account of the bid for his second term, President Goodluck Jonathan missed the opportunity to slow down the depletion of our External Reserves and the Excess Crude Account. The government also failed to gradually impose import restrictions on products which constituted a drain on our foreign exchange revenue and to impose a range of taxes – including luxury tax – which would have beefed up the government’s internally generated revenue and ease the pressure on dollar income.

It should be noted, Buhari’s government came into office without the slightest idea of the magnitude of the problem it was facing. By May last year, it was clear to keen observers of the global market that crude oil prices would stay below the US$50 per barrel mark for a long time. Furthermore, supply pegged at 2.2 million barrels per day would not be achieved for various reasons – vandalism, theft, and chiefly, a glut in the global market. Actual revenue would fall below projections by far and dollar scarcity was inevitable.

Instead of taking prompt action to introduce fiscal measures to slow down the demand for foreign exchange, by allowing the exchange rate to be adjusted in 2015, the President refused to allow the Central bank to make the necessary adjustments – until it was almost unavoidable. By then, more dollars had taken flight from our shores and the measure required to reduce the negative impacts of recession were postponed. The absence of a Federal cabinet of Ministers and a credible Economic Management Team merely compounded the errors of judgment made. It has become an axiom in economics that if you allow an untenable situation to continue for too long, suddenly there will be few, or no, good options left.

Delay in the introduction of an integrated fiscal and monetary policy package, so far, has made the situation worse since last year. Divestment from the Nigerian economy is taking place at a fast pace especially in the capital market where portfolio investment managers have almost all withdrawn from the Nigeria Stock Exchange – taking their dollars with them. By the time Buhari reluctantly agreed to the devaluation of the currency, more damage had been done than would have been the case, if the measures were taken in 2015. The fiscal policies are still not in place. Diversification of the economy remains a mirage because the will and the funds required to achieve it are not there.

Until the Federal Government takes leadership and comes out with a coordinated package of fiscal and monetary policies that can get us out of recession, the nation will have to wait for another oil boom for recovery. Those suggesting that it might last until 2020 are being optimistic. The principal cause of our recession is dollar scarcity, on account of crude oil prices; until we devise a means to earn more dollars or spend less on imports, the recession will continue and become more severe. There is no alternative to that.

Government has adopted external borrowing as an option. That amounts to threading familiar paths. Back in 1980s, when the price of crude first plummeted for years, Nigeria adopted the “borrow-and-spend” option. Our creditors then were the Paris and London group of lenders because the West had the funds to invest. Today, economic power has shifted to the East and increasingly, we are looking to China, Japan, South Korea and the Middle East for loans.

“Borrow and spend” is a viable option if there is cast iron guarantee that the funds will be invested in projects which would make the loans self-liquidating with very little being embezzled. It will become another debt trap if the funds are badly invested or they are used to fund consumption, for example, the Social Welfare Programme. Government has told us where the loans might come from. They have not explained to us the investment plan and how repayment is assured. Without that, borrowing will increase our hardship in the future. Unfortunately, as in the 1980s, another government down the line will have to grapple with the problem of repayment. This government would have mortgaged the future for next to nothing and departed the scene – leaving the nation in another debt-trap. (Vanguard)