The road to recession

Nigeria’s descent to a now virtually inevitable (?) recession has long been foretold by this columnist so no serious-minded person will be surprised at the news that the Nigerian economy contracted by 0.36 percent in the first quarter of 2016. Economic historians say this is the first quarterly negative since 2004 and on an annual basis since 1992, twelve and twenty-four years ago respectively!

All that is left for the economy to be officially classified as in recession is for a second consecutive quarterly negative GDP growth in Q2 2016. Given that April and May 2016 by and large amplified the factors that may have pushed the economy into negative territory-fuel shortages; sectoral declines in manufacturing, construction, government, hotels and restaurants, and oil and gas; absence of a budget hence zero capital spending; declining consumer activity plus higher inflation; constraints to food production due to insecurity in the North-East and disruptions particularly in the North-Central, but elsewhere too, caused by the menace of murderous and pillaging herdsmen; and lack of investment and currency inflows due to a grievously flawed foreign exchange regime, only a June miracle (and more practically, large budget releases, full fuel sector deregulation-which appears finally underway, and the much-touted “flexibility” in FX policy) will avert an official economic recession.

Many analysts suspect it is probably too late with the impact of policy shifts and budgetary spending likely to be seen in the third quarter. The records will confirm that I did a lot to prevent this sad eventuality! On May 20, 2015, nine days BEFORE the government was inaugurated, I laid out “Policy Prescriptions”-diversification of production, government revenue, and exports; imperative of a strong and credible economic team and cabinet; targeting “opportunity sectors” (solid minerals, refining and petrochemicals, a new and realistic fiscal regime for upstream oil and gas, private sector investments in power and infrastructure, agro-processing, retail and construction); freeing “up resources from downstream petroleum sector deregulation” emphasizing “an economic reality in which hard decisions including some previously rebuffed by the opposition will have to be taken” a clear reference to the petrol subsidy which government waited a full year before countenancing the critical decision!

When government delayed unduly before composing its cabinet in spite of an incipient economic crisis, while offering various red herrings as justification, I warned on numerous occasions and in multiple media of the economic consequences-in one interview which “The Guardian” titled “AGBAJE: Government can’t be effective without a cabinet” on July 5, 2015, I said, “the bigger problem from the economic point of view is that there has been no statement or substantive pronouncement on policy, on the economic direction and management for one month. Of course it has significant impact on the economy. If you look at the capital market for instance, that is the best indicator…markets, investors, economic activities are now beginning to take a pessimistic view, because they don’t have a cabinet or policies…it is the same thing in the forex market.” At the time I was complaining, a policy direction and cabinet were lacking for just over a month! A cabinet was eventually appointed after seven months (!) and policy confusion persists till today!

I sounded the first alarm on approaching economic danger on September 16, 2015 in an article appropriately titled “Economic Red Flags!” just four months into the administration. I reviewed Nigerian Bureau of Statistics (NBS) Q2 2015 GDP data (June 2015!) which gave indications about where the economy might be headed, with real GDP growth dropping to 2.35%. In that article, I said “prospects of a rebound are limited due to uncertain policy outlook, low oil prices and a looming shut-out of FDI”. I also pointed out that Nigerian manufacturing was already in recession by then and noted that “all major macroeconomic indices are trending negative” including inflation, FX and capital markets, and jobs and warned that “the Nigerian economy exhibits recessionary conditions with Q2 growth approaching one-third of the level just one year earlier” and counselled that “the slide to an actual recession may still be averted with a strong economic team and sound policy”. I think it is evident that we have not had either!

On November 4, 2015, I wrote a much-discussed neo-satirical piece titled “How to Decommission an Economy” expressing bewilderment at what looked like deliberate efforts by policy makers to wind down the Nigerian economy! The ultimate consequence of such a winding-down process would of course be economic recession!!! As I explained in that article, the cumulative effect of going round the world proclaiming that your nation was corrupt, large sums of money were missing from the country’s treasury and declaring that your state’s treasury was now “empty”; frittering away scarce foreign reserves through an over-valued currency; absence of policy and substantive governance; and drastically reduced investment, would be to put the economy out of activity! When satire did not work, the next week November 11, 2015, I returned to explicit economic advisory in “Reversing Economic Slowdown” where I noted that “I have been loud in warning about the dangers of allowing the economy slide into recession and the imperative of policy to prevent that eventuality, on social media, in my Businessday column and in discussions on Channels Television and CNBC Africa, but the sense I get is that many are yet in denial about the reality of our economic conditions”.

Six months later, while some of those I referred to have moved from denial to delusion, NBS data confirms that recession is probably just one month away, and a largely ineffectual CBN, whose policies have played a large part in producing this debacle, has issued a hypocritical recession warning! President Muhammadu Buhari, having taken over monetary policy from the CBN and being personally responsible for two of the key policies which appear to be choking the economy into recession-the refusal to deregulate downstream petroleum until it had virtually grounded the economy and the obstinacy over an unsustainable foreign currency regime, bears ultimate responsibility for the worsening economy. It is unfortunate that Buhari’s first anniversary in the presidency is signposted basically by economic decline, rising unemployment and poverty, and increasing hardship on the populace! I focused again on demonstrating the negative impact of these two “Policy Conundrums” on November 18, 2015.

Given the extensive commentary by this columnist here and on various other media, I find it quite curious that anyone is surprised about a looming recession. In “Nigerian Economy in 2016: Withdrawal Symptoms” (January 27, 2016), I compared Nigeria to an addict finding it difficult to wean itself of the drug of oil and warned that “in 2016 we will be forced to begin reconciling ourselves to the real exchange rate of the Naira” and “it is wise to formally and publicly end the subsidy regime and bring certainty and investments into the downstream petroleum sector.” I warned in “Broken Budget” (February 17, 2016) that “even at the N2.2Trillion deficit level, it was not clear how the conservative deficit figure would be financed”, a point that has only just recently been admitted by both ministers for finance and budget and planning. In effect the expected stimulus impact of projected capital expenditure in 2016 may not materialize!

While I have consistently issued these prescient warnings, all of which have been borne out by subsequent developments, there has been no shortage of columnists, commentators and “economists” who have encouraged government along a ruinous path! Some may have been simply ignorant and others desperate for jobs and therefore willing to deploy their degrees and theoretical constructs, often lacking actual market grounding in aid of policies which one could predict could only lead us to recession. In one sadly memorable incident, one “economist” speaking at a NESG meeting I was moderating, confidently ruled out a recession (the fellow in fact categorically discounted the possibility of GDP growth below 1%) to the shock and disbelief of the manufacturers, oil and gas executives, ICT entrepreneurs and bankers in the room who were more familiar with reality!!! As the results of such de facto quackery becomes evident at great cost to the Nigerian economy and its people, you may of course expect some to conjure up alternative academic theories to explain why a recession is not such a bad thing!