MONEY MATTERS: Coping with economic recession

Many people are wondering whether or not the Nigerian economy is in recession. The technical definition of a recession is when the output of a country declines for two consecutive quarters. Since change in output in Nigeria is not reported on a quarterly basis we can only estimate.

According to the 2008 annual report of the Central Bank of Nigeria (CBN), the key sectors of the Nigerian economy, representing 85% of output, are oil and gas, agriculture and trading. We should add banking and finance to these sectors although it is only 2% of output. This is because this sector provides credit and foreign exchange, two critical engines of growth, to the other sectors.

According to OPEC statistics, crude oil production in Nigeria during the first two quarters of 2009 averaged 1.65 million barrels per day (mbpd) compared to a production average of 1.9 mbpd in 2008. This represents a contraction of 13% in a sector that was 39% of output in 2008.

Agriculture was 31% of output in 2008 and given the seasonal nature of output in this sector it is unlikely to have recorded any significant growth in the first two quarters of 2009.

Trading was 15% of output in 2008 and imports represent a large portion of the output of this sector. Shortage of foreign exchange, a depreciating Naira rates, high nominal interest rates and reduction in bank lending have certainly had an adverse effect on the output of this sector during first half of 2009.

It is unlikely that the other sectors that constitute the remaining 15% of output grew at a rate high enough to compensate for the contraction in the key sectors. Therefore, one of the readers of this column that claimed that the Nigerian economy is already in recession may be right.

How do we reduce the adverse impact of a recession on the Nigerian economy? Should we copy the economies of the Western world and come up with a large spending programme labeled “economic stimulus package”? This may actually help Nigeria because the country is underleveraged with a debt to GDP ratio of only 13% and infrastructure that need rehabilitation. We surely need to repair our roads, rehabilitate existing power stations, re-tool our hospitals and restore our schools and universities.

Can government raise say US$ 5 billion externally to finance this? This will only add 2.5% to our debt to GDP ratio but could go a long way in lifting the economy out of recession and will partly address the current account deficit in the external account.

In order to raise this amount from the international markets, the government will need to convince the lenders that she will use the money for the purpose intended and will take active steps to resolve the Niger-Delta crisis. This is because oil revenue will be looked upon as the source of repayment of the loan.

Government also needs to provide tax breaks to businesses to encourage private sector spending. Today our tax laws provide tax holidays for “pioneers” when we require private sector investment to build roads, provide electricity and water and build modern internet infrastructure for the nation. Tax holidays similar to those provided to these “pioneers” should be given to private sector companies that invest in these and indeed other sectors where the government requires major private sector spending.

During periods of recession, banks are usually looked upon to help stimulate growth by lending to businesses and households. In order to help the Nigerian economy out of recession we need a strong financial sector. It is therefore urgent and important to resolve the weaknesses that the CBN is uncovering in the banking sector. The work of the CBN deserves support but the cost of the bail-out must be controlled and government must get out of these banks as soon as they have been stabilized.

Initial bail-out is costing about ₦400 billion and total bill could reach ₦1 trillion. In the spirit of openness and transparency urged by the CBN, the apex bank should also tell us where all this money is coming from.

Lastly and perhaps the most important, we need to find a political solution to the Niger-Delta crisis.

Although this may appear a tough one, if our political leaders bring equity and sincerity of purpose to the table progress will be made.