Nigeria in tough policy options over recession

• Economy caves in as COVID-19 reveals old ‘landmines’ • Labour, NECA, others fault unemployment report
• Spend out stagnation, economists advise govt • ‘We must avoid looming depression’

The extended Coronavirus pandemic may have pulled the veil off Nigeria’s fragile economy and set the tone for another contraction less than four years after the country exited a recession that shrank growth by over 1.5 per cent.

From increased borrowing to tax net expansion measures, alongside managing rising unemployment and weakened currency, Nigeria’s economic managers are having a tough call in deciding the best policy options for economic survival and revival.

As fiscal and monetary mechanisms struggle in efforts to salvage the situation, increased demand for foreign exchange has also forced deposit money banks to ration outflow by reducing debit card limits that would be settled through dollar payments and unveiling policies to control withdrawals and outflows.

ALREADY, prospects of an oil rally are dampened as prices retreated below $45; key employment drivers have slipped, raising doubts about early return to growth and correction of high jobless rate. Similarly, the country’s high dependence on imports, oil exports for foreign exchange earnings, high levels of corruption, insecurity, policy inconsistency and inflation rate have affected growth prospects.

With an expected negative Q2 growth and an unlikely good Q3 2020 performance, the country’s recession fears as already expressed by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, is in play, as repeat of the 2016 era is being experienced across sectors.

Many an expert believe that the minister’s statement was an inadvertent admission of helplessness as she said the economy might slide into recession unless the country achieved very strong economic performance this quarter. Economists dismissed her submission as self-defeating.

By widening its tax net, government might be able to address some of its revenue problems, but majority of the people to be taxed are either unemployed or underemployed, while many firms are already overwhelmed with different taxes, notwithstanding the difficult operating environment and lockdown imposed by government to check COVID-19 spread.

For companies in operation, the foreign exchange challenge has equally taken a toll on their businesses as many seek revaluation of assets and commitments.

The World Bank had already warned that Nigeria’s next recession could be the worst experience in almost 40 years, while the International Monetary Fund (IMF) urged Nigeria to slow down on its aggressive tax drive due to the impact of the COVID-19 on businesses and households.

The Bank predicted that there would be 95.7 million Nigerians living below the poverty line by 2022, aggravated by the effects of the
virus.

FOR many businesses and industrial firms, year 2019 had ushered a promising and strong 2020, as the Central Bank of Nigeria’s (CBN’s) manufacturing sector purchasing managers index (PMI) stood at 60.8, indicating expansion in the sector for the thirty-third consecutive month.

But in 2020, the story flipped with the PMI for July 2020 slumping to 44.9 indicating manufacturing sector contractions, an evidence of worsening production and demand.

Since its recovery from recession in Q2 2017, Nigeria’s GDP has shuffled slowly, with a growth rate of 2.55 percent recorded in Q4 2019, the highest in recent quarters. The country grew by 1.87 percent in Q1 2020 and is expected to witness further decline in Q2 owing to the pandemic.

Ahmed’s alarm came the same day the National Bureau of Statistics (NBS) released the latest data for the labour market – figures many analysts described as frightening.

According to NBS’ findings, Nigeria’s unemployment rate had increased from 23.1 percent it was in the third quarter of 2018 when the report was last published, to 27.1 percent last quarter. The underemployment rate – a metric that captures those working less than 40 hours a week or in jobs that underutilise skills, ability, time, training and education (what many people describe as abusive employment) – had also moved up to 28.6 percent.

Of the 80.2 million Nigerians who are able and willing to work, 44.7 million are unemployed or underemployed; implying that one out of every two individuals in the labour market is technically jobless. The figure is larger than the population of Algeria, Angola, Canada, Ghana, Malaysia, Morocco, Sudan or Ukraine. It is also larger than the total population of the Netherlands, Belgium and Switzerland (countries whose individual economies are much larger than Nigeria in terms of GDP).

BY the latest assessment, the country has slid from fifth to the fourth African country with the largest number of idle citizens. In the global ranking, it has moved from the ninth to fifth position. The figures are more shocking when the entire numbers of the active population, which NBS puts at 115.5million, is factored into the equation.

Unsettling unemployment is just a frightening trouble shaping the country’s economy in the face of the ravaging global pandemic. The population is growing at a rate many describe as alarming, which should not pose much challenge if the country could turn it into a productive factor as China has done.

Data show that the country’s population has grown by an average of 2.63 percent in the past decade. The growth, unlike productivity benchmarks, has also been consistent. The United States Census Bureau said Nigeria’s population would double by 2020.

Sadly, the magnitude and consistency of economic growth are not as predictable as that of the population. From 2011 to 2015, the economy grew at an average rate of 5.7 percent after which recession hit the trend. Though the economy returned to growth in the second quarter of 2017, it is yet to regain the pre-recession momentum. This, according to economic analysts, is unlikely in the short-run.

When the ailing economy climbed out of the 2016 recession, oil and gas – a sector that contributes less than 10 percent GDP – came to the rescue. Today, the volatile hydrocarbon industry leads the laggards as major growth indices nosedive.

In the past six months, investments in the oil and gas have stalled while ongoing projects have been suspended. Credit exposure to the sector is threatening a run in the banking sector with some stakeholders calling for a bailout.

A former Director-General, the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, said that the minister’s apprehension fell short of the true state of the economy. He said the country risked a depression except “the government can spend its way out” of it and embarks on aggressive monetary expansion.

And should the authority continue to dillydally on relevant actions, the professor noted, “the monetary policy will become ineffective” in stemming the hemorrhage, leaving the government with a choice – the overstretched fiscal stimulus.

Expo’s suggestions leave no easy choice for a revenue-starved country, which Nigeria currently is. The country will have to choose between a higher inflation rate to embark on “aggressive monetary expansion” and more debts, which experts have dismissed as unsustainable.

Nigeria’s inflation rate is currently at 12.56 per cent while the total debt profile is inching towards N30 trillion. Nigeria will spend N1.57 trillion this year, an equivalent of 14.5 percent of the national budget, to service its current debts. And about 50 percent of the budget will be funded by debt.

Of the troubles facing the economy, Bala Zaka, an energy economist, pointed out oil and gas-related ones as the most challenging. Unlike 2017, he noted, the industry cannot bail out the economy and halt the current crisis.

According to him, the three key factors – security, transparency and profitability – the international oil companies (IOCs) consider before making a final investment decision (FID) do not favour Nigeria in the context of the current global market.

We could have built refineries and take advantage of the opportunities in the African market. Imagine the jobs a single refinery would have created? But this does not appear a possibility at the moment,” Zakka said dismissively.

He also lamented that the key components of GDP – consumption, saving, investment, import-export differential – are on the red, warning that worsening insecurity and banditry across different parts of the country would scare investments and worsen youth unemployment, which the recent survey put at 40.8 percent.

When the finance minister gave a hint of the government’s fear about the economy, thousands took to social media to query not only government’s helplessness but also its unwillingness to bite the bullet as revenues fall.

Zakka said the government should demonstrate it understands the consequence of recession beyond admission. Leakages that have constituted into major drains on public resources, he suggested, should be blocked and bloated salaries/allowances slashed to free more funds for productive investments and infrastructure that will create jobs.

The latest unemployment data did not come as a surprise, as the Vice President, Yemi Osinbajo-led Committee on Economic Sustainability Plan had warned that about 39.4 million people might be unemployed by the end of 2020, if government failed to take pre-emptive measures.

The committee also warned that millions of other citizens might fall into extreme poverty before the coronavirus pandemic ends, as GDP slides to between minus 4.40 per cent and minus 8.91 per cent.

According to the committee, the severity of the situation will depend on the length of the lockdown period and strength of the country’s economic response.

The impact of the COVID- 19 pandemic had a negative effect on Nigeria households’ total income, as a high rate of households reported income loss since mid- March. 79 percent of households reported that their total income decreased.

The performance of FMCGs “continues to reflect the challenging operating conditions as pressured consumer wallet continues to impact sales, while weaker exchange rate, poor FX liquidity and rising inflation continue to impact input and fixed costs,” said analysts at Cordros Securities.

ACCORDING to the Lagos Chamber of Commerce and Industry (LCCI), there is need for the Federal and State Governments to support business recovery so that operators can equally fulfil their civic responsibilities.

According to the Chamber, it will take a while for many businesses to recover from the consequential shocks, thus necessitating state government’s support and intervention in the recovery of businesses from these disruptions and dislocations.

With many still grappling with breach of contractual obligations, inability to retain staff, cost escalation resulting from exchange rate depreciation, loss of foreign credit lines, burden of loan repayment, and collapse of consumer purchasing power, the chamber said a business has to be alive to fulfil its obligations to the state.

On his part, the Director-General of the Nigeria Employers’ Consultative Association (NECA), Dr. Timothy Olawale affirmed that the pandemic has affected workers and household income.

According to him, the reality remains that workers, employers and consumers in general will have to make changes to their hitherto ostentatious lifestyle.

“As the world moves into a season of “new normal,” with government and business revenue dwindling, workers must also review their priorities in the face of reducing disposable income,” he added.

He said: “Granting Company Income Tax (CIT) incentives concessions, reduction in the rates of VAT, incentives to employee on payment of PAYE among others would help in re-flating the economy and when production increases, there would be impact on payment of other taxes by companies as well as Employee and resulting in a boost to the economy in the long run.

“We called for a reversal to the five percent in the VAT, reduction in CIT to same rate being enjoyed by the SMEs, in order to stimulate production. Monetary authority could look into reduction in the MPR for provision or allocation of more funding to Enterprises”, he added.

Earlier, a former President, Chartered Institute of Bankers of Nigeria (CIBN), and Professor of Economics, Babcock University, Prof. Segun Ajibola had told The Guardian that tough decisions have to be made.

“Government may forgo one type of tax by way of concession but may be compelled to levy another type of tax to make up for the concessions with a view to balancing out its budgeted figures. Of course, taxes and levies affect the disposable income of ordinary citizens and may increase the poverty index if not well balanced out,” he said.

MEANWHILE, the organised labour, at the weekend, faulted the second quarter report by the NBS, which put national unemployment rate at 27.1 per cent. Labour unions argue that the unemployment rate had gone beyond what the bureau released.

A lawyer, Paul Omoijiade, who is an expert on labour matters, described the unemployment data as a titrated figure, saying government made no efforts to document the number of unemployed people.

“I disagree with the figure, how many times have you seen labour inspectors or the statistician going round to find out how many people are unemployed in a particular locality? There is no conscious effort to document the number of unemployed people in Nigeria. The figure is more or less, titrating figures for them to come up with something.”

He said the train and agriculture sectors needed to be revived to encourage more youths to be interested. He said most of the youths in the rural areas had migrated to urban areas to do menial jobs.

A senior official at the Nigeria Labour Congress (NLC), Chris Onyeka, said the NBS figure of 27.1 per cent rating of unemployment was understated and unreliable.

He argued that a nation without creative, functional and accurate data gathering mechanism would operate in the dark and be unable to deliver appropriate and desired benefits to its citizenry

Citing independent sources, he claimed general unemployment had risen to nearly 40 per cent as a result of the huge impact of COVID-19 and associated consequences on the informal sector in Nigeria, which occupies about 70 per cent of the nation’s economy.

He said what NBS seemed to have arrived at the released figure by factoring in the impact of COVID-19 into the unemployment situation did not base on the true situation.

He urged the Federal Government to review its policies and strategies designed to generate employment. Corroborating Onyeka, President of the Trade Union Congress (TUC), Quadri Olaleye, challenged government to disclose the number of companies that had stopped operating due to the harsh operating environment, the number of graduates in the labour market, and many that had lost their jobs before and after the outbreak of coronavirus. All these and other factors put together, Olaleye said would be more than the unemployment figure released by the NBS.

To reduce unemployment rate, he said government must as a matter of urgency fix the refineries, stop individuals from mining the nation’s mineral resources, encourage local content, discourage influx of expatriates, stop smuggling, build recycling plants, infrastructure, fix power and sign MoU with automobile companies to assemble their vehicles in Nigeria.

Reacting to the NBS report, the Director-General of the Nigeria Employers’ Consultative Association (NECA), Timothy Olawale, said unemployment and underemployment had worsened since 2010.

He lamented that while some nations were giving incentives in tax rebates and other innovative schemes to enhance productive activities, keep enterprises running and generate employment even during crisis, Nigerian businesses are still trying to breathe as a result of the COVID-19 disruption.

He urged government to create an enabling environment that would not only attract FDIs, but also enable local entrepreneurs to thrive and create employment.

A Professor of Labour and Employment matters at the University of Lagos, Sola Fajana, said the reason for high unemployment rate was because the supply side was very high when compared to the demand side.

He tasked government for a holistic plan to avoid the figure escalating in near future. He canvassed economic policies that would address all citizens, and not just the vulnerable.