Stagflation, Fragility and Arrested Development of the Nigerian Economy by a Concerned Nigerian

Stagflation, Fragility and Arrested Development of the Nigerian Economy by a Concerned Nigerian

On Friday March 10, 2017, I was one of the speakers at the Vanguard Economic Discourse where the erudite Prof. Charles Chukwuma Soludo gave the Keynote address. I hereby publish the paper I prepared for the discourse, even though I did not have the luxury of time to give a detailed presentationat the event.

INTRODUCTION

My intervention is going to focus on a long term approach towards building a virile and resilient economy. My contention would be that the issue of stagflation popularly called recession is a short term problem that even if we solve, will not resolve the deeper structural political and economic problems that have separated us from becoming the giant we hope to be. Until we address those problems, development will remain a mirage. The onus should not be left with leadership alone as it would not want to commit suicide. Civil society and patriotic elite should use all legitimate means to force the restructuring to happen. It is not in dispute that the country is going through some economic challenges which has had severe impact on people and businesses. As individuals, our personal finances and lives have felt the negative impact of the downturn. These impacts can be felt in the following areas:

·         High unemployment

·         Decline in GDP

·         Weak local currency value

·         High interest rates

·         Increasing prices of goods and services

·         Weakening Stock market

·         Soft real estate market

·         General drop in the standard of living

PRESENT ECONOMIC OUTLOOK

Macroeconomic indicators have been challenged in the last couple of quarters leading the Federal government to officially declare by mid-2016, that the economy was technically in recession. An economy is said to be in recession when it witnesses negative growthrate in Gross Domestic Product for two or more consecutive quarters. We have experienced negative GDP growth rates for the four quarters of 2016. In quarter 1, the growth rate was -0.36%. It further declined to -2.06% in quarter 2, and contracted further to -2.24% in quarter 3, while quarter 4 recorded a negative GDP growth rate of -1.30%. In economic parlance, a recession is normally accompanied by a general decline of prices of goods and services. It was not until the 1970s that economists realised that it was possible for recession to occur alongside inflation. This kind of situation, they called Stagflation. So, what we are dealing with in Nigeria is not recession as such, but stagflation. Our situation is caused by some short term and long term circumstances, though most analysts have dwelt on the short term causes. The short term causes will include oil price decline which resulted in massive revenue drop for the government, the largest spender in the economy. Owing to the oil price decline, there was also a general strain on foreign capital inflow. The security situation in the country, particularly the North East and the Niger Delta has not encouraged investors. There has, therefore, been a massive exit of Foreign Direct Investment in the country. All these and more have brought untold pressure on the country’s foreign reserves and exchange rate, further weakening the economy. The impact of Stagflation on businesses could be very damaging and in some cases, catastrophic if not properly managed. They include decline in revenue and ultimately, income, drop in production and productivity, decline in demand for goods and services, delays in payment of wages and salaries, layoffs and outright closures.

CHANGING THE NARRATIVE

Somehow, we know there are more fundamental issues around the economic challenges than what we have been told so far. The point is that recession or stagflation may just be the symptom of a fundamentally flawed economic structure. An economy that has remained import- dependent for decades cannot withstand external shocks. An economy characterized by decayed infrastructure, in the area of roads, rails, airports, marine transport, and the biggest one, power cannot be said to be resilient. There is a table (Table 1, available online only) which highlights Power Generation Capacity for 44 selected countries divided into the Highest 10 countries and the lowest 10. Nigeria understandably, is not only in the lowest 10, but boarded last in the list of the lowest 10. A country which seems to have deliberately embarked on a de-industrialisation policy and cares less about the number of manufacturers and industrialists closing shops cannot claim to be ready for global competitiveness. A country that pays little or no attention to neither education nor health care delivery is not ready for sustainable economic development. A country that has refused to diversify from a commodity to a knowledge economy cannot be said to be ready for the 21st century. A country that borrows to finance its recurrent expenditure even in an era of oil boom cannot qualify as being ready for development. We cannot take ourselves very seriously when we continue to defend a bloated, unreasonable and unsustainable political structure. We cannot continue to deceive ourselves, pretending to be an oil economy when in the real sense of it, even with our position as the 6th largest producer of oil in the world, we are but a very poor country with some oil, whose impact on a per capita basis is at best insignificant. We conveniently fail to compare ourselves with other oil economies as doing this would puncture our hypnosis in our dream land. (See Table 2 on the website). This table shows that while a barrel of oil on per capita basis is shared by 2 people in Kuwait, 4 people in Qatar, 15 people in Angola and 35 people in Algeria, 105 people shared one barrel of oil in Nigeria, according to 2015 average daily production statistics. It also shows that we are the largest importer of refined petroleum products amongst all the countries analysed. A country that loves to humour itself as a large or potentially large economy when it knows its fundamentals are very fragile cannot be said to be serious. We say we are the largest economy in Africa measured by GDP after we rebased our GDP in 2014. We, however, conveniently forgot to tell the rest of the story. We failed to tell our people that what is important is not the absolute GDP figures, but GDP per Capita. The Current GDP figures of $415b, (some analysts believe it is much lower) placed us at No 26 in the world, but when you look at our GDP per Capita of $2,800, we move down to No 180 out of the 228 countries ranked by the IMF World Economic Outlook, 2016. And in Africa, we ranked No 17 out of the 53 countries ranked. These are the real numbers that we don’t like to show, but they are the numbers that attempt to compare apples with apples and not with oranges. Bottom line: ours is a very weak and fragile economy. In fact, we have continued to slide downwards in the Fragile States Index (FSI) ranking from No 17 in 2014, when we were ranked amongst the “Alert” category, through No 14 in 2015 moving downhill to the “high alert” category at No 13 in 2016 out of the 178 countries ranked. We are only better than countries like Guinea, Haiti, Afghanistan, Chad, Sudan and Somalia. WHERE DO WE GO FROM HERE? We have argued that recession is a temporary situation that can easily be reversed once the economy becomes GDP positive. If for instance, oil prices suddenly recover and we begin to see pre 2014 prices again, we will be out of recession in a jiffy. If for some reason we reduce imports either by fiat or by accident and begin to spend less foreign exchange or if foreign exchange supply increases for some strange happenstance either by reason of increased exports or inflow of foreign investment, recession will abate. If we increase spending in real terms, either by reducing interest rates or by borrowing, recession would give way. The government may also choose to reduce taxes and tariffs to leave more money in the hands of people and business. The same effect will be witnessed if government finds a way of paying salaries and domestic debts owed to local contractors. An expansionary government spending policy by way of issuing fiscal stimulus package will put more money in the economy, encourage consumption, jump start production, and create jobs. All these will cure recession, but the fundamental problems with the economy will remain and recession can happen again if any of the challenges that led us here show up again and the bad news is that they are bound to show up again. It is therefore important to look at those things that must be done to ensure a long term solution to our economic challenges. My submission is that the solution transcends economic considerations as the major area to look at is the political structure. I am therefore, like every other student of political economy, inclined to locating our economic crisis within the context of the structure of the polity. Even at that, within the economic sphere, some things must be done right to support a sound system. We must set up a robust economic development plan with clear deliverables and monitoring mechanism to ensure zero tolerance for non-implementation. I am not unaware of previous attempts at economic planning in the country. The major problem with those plans was that there was no will to implement them. Our suggested plan would be very heavy on implementation. The plan must set clear guidelines on how to industrialise the economy, how to build a non-import dependent economy, how jobs would be created and what number over a defined period of time. It must also set out how to build sustainable wealth for the country that is not commodity based. It must focus on infrastructure and the promotion of micro, small and medium scale enterprises as a sine qua non for economic development. The economic plan should also provide for massive investment in education to eradicate illiteracy and herald an innovation and technology revolution while at the same time encouraging a sustainable health care delivery system for the populace. This plan must also not be silent on eradication of poverty and corruption. Still on structural reforms, we need to tinker with the democracy model we copied from the US. It is simply not working and I do not see how it will work. We cannot afford it as it is not only inefficient, but it is unsustainable. We cannot afford a Presidency with minimum of 36 ministers and thousands of aids. We cannot, in all honesty, continue to fund 36 governors and their deputies with thousands of aids and assistants. We do not need 109 senators nor do we need 360 house of representative members with over 2,500 aides. In fact, we do not need a bicameral legislature. We cannot afford close to 1000 house of assembly members with thousands of aids across the 36 states of the Federation. Neither can we afford 774 virtually idle or impotent local government chairmen and thousands of councillors maintained by the public till. We must reject a situation where over 70% of our annual budget is used to run less than 1million people by way of recurrent expenditure while a meagre 30% is set aside as capital expenditure for the remaining 180m+ people (see Table 3 on website). We should not tolerate a situation where government revenue cannot pay salaries of government personnel like have been the case in the recent past. Since, it will amount to committing suicide for some of these far reaching reforms to be made, given that it would require making changes to the constitution and those that can make those changes are also the ones benefitting from the status quo, I am sure people will wonder how they can be achieved. It takes the people to dictate the kind of changes they require. But for that to happen, the populace must be educated to even understand what it wants. The patriotic elite in the society must lead and insist on the reforms. Some of these absurdities have been encouraged by the silence and docility of the populace. It is time people begin to speak out and reject leaderships that do not mean well for the country. It was Albert Einstein who warned that “the world will not be destroyed by those who do evil, but by those who watch them without doing anything”. Unfortunately, most of what we know today as civil society, has become clapping society, out of greed and penchant for “stomach infrastructure” but it is the people that must insist and get the reforms and changes they need. I do not see that we need more than 6 states with 6 governors and not 36. We need only one chamber of the National Assembly with no more than 60 members. We need a lot fewer ministers and aids. We can do with much fewer local governments. Public service at this level should literally be pro bono to attract the right caliber of leaders who had been successful in other endeavours and discourage ‘chartered politicians’ whose interest in politics is self-serving. CONCLUSION The current economic crisis did not just happen. We planned for it by failing to plan for a resilient, self-reliant economy. The situation was compounded by a masturbative belief that we are an oil economy. We actually began to behave like one, when in the real sense of it, we are but a poor country with some oil and gas deposits in some parts of the country. We went on a spending spree, importing everything from the profound to the profane with its attendant impact on our foreign reserve. Wittingly or unwittingly, we started a project of de-industrialisation of the economy by promoting infrastructural deficit and decay. We left our educational system in ruins, as well as our healthcare delivery system. At the same time, we were making little progress with eradicating corruption in virtually all aspects of our economy. To make matters worse, we have been operating a profligate political system that we can ill afford. To get out of these on a sustainable basis, we must tell ourselves the truth and hit the reset button immediately with a view to institutionalising sound economic and political reforms otherwise, we should prepare for a full blown descent into a failed state.