Isaac Anumihe, Abuja
A financial economist and renowned professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, has warned that accessing more loans as a solution to recession is not the best option for now. Rather, he advised that the country expands the tax base as well as embarks on the sale of some government assets such as the non-functional refineries.
Uwaleke who is also a former Commissioner for Finance in Imo State and the current president of the Association of Capital Market Academics of Nigeria suggested that the agriculture sector, which contributed about 30 per cent of GDP in Q3 2020 and is known to employ the greatest percentage of the country’s population, should be given a lot of attention.
In this interview, the professor said that in spite of the grave economic situation occasioned by COVID-19 pandemic, the new recession may not last long. Excerpts:
The Nigerian economy has entered into another recession. Considering the fragility of the nation’s economy, what is the implication of this recession for the country?
There is no doubt that economic recession has grave implications for a fragile economy such as Nigeria if I may borrow your word – fragile – in the sense that the issue of diversifying the export base and creating multiple streams of income other than crude oil has remained seemingly intractable, a situation made worse by the huge infrastructure deficit and relatively low Human Capital Development Indicators. Economic recession as you know can be viewed as the downturn in economic activities. Even before the release of the NBS report, it was obvious to most Nigerians, including the government that the economy, like many other economies of the world, was in a recession. The NBS report merely gave it an official status since the economy had gone through two consecutive quarters of negative growth in GDP contracting by -6.10 per cent in Q2 of 2020 and yet again by -3.62 per cent in Q3 of 2020. Regrettably, the country’s case is somewhat peculiar. Unlike in many other countries also in a recession, that of Nigeria is made worse by the fact that inflation rate is also on the rise. So, in the Nigerian context, it is actually a more serious challenge of stagflation that the economy is grappling with. Against this backdrop, the implication as I mentioned earlier is grave for the ordinary Nigerian who has been contending with high cost of living, lower living standards and for firms’ high cost of production and weak productive capacity. So, by and large, the twin impact of recession and rising inflation otherwise known as stagnation will only impoverish the common man.
Will Nigeria ever recover from it with COVID-19 still ravaging the country?
Compared to the situation a few months ago, I think the pandemic has been contained to a large extent if the number of new infections as released by the NCDC is anything to go by. Having said that, the real question is not whether Nigeria will ever recover from the current economic recession, as I do believe the country surely will, but when. While the CBN governor thinks recovery will be by year end, the Finance Minister is reported to have said that the economy would bounce back by the first quarter of 2021. Mindful of the views of some other Nigerians who opined that the recession will last longer, I tend to share the Finance Minister’s optimism. For context, it is pertinent to note that unlike the country’s economic recession of 2016 chiefly caused by the sudden crash in crude oil price resulting in significant fall in government revenue to the extent that several state governments could not pay salaries thereby weakening aggregate demand, the current economic recession in Nigeria is the result of twin shocks. The first shock came from the collapse of crude oil price given the country’s dependence on the oil sector. I must equally mention that the OPEC+ cut agreement in response to the fall in crude oil price, led to a reduction in the country’s daily oil production. You recall that the 2020 budget was predicated on an oil output of about 1.8 million barrels per day. The real GDP contraction of -3.62 per cent recorded in Q3 of 2020 was partly caused by the poor performance of the oil sector which witnessed a reduction in average daily oil production to 1.67 million barrels per day. The second and perhaps more devastating shock arose from the health crisis occasioned by COVID-19 and governments’ attempts to contain it by imposing restrictions in movements and lockdowns. As you know, international flights were banned by most countries, including all forms of public gatherings. Expectedly, there were disruptions in supply chains, production and exchange which hurt several sectors of the economy such as manufacturing, agriculture, transport, trade, construction, hospitality and education to name just a few. You recall that even schools were shut due to COVID-19. So, in summary, this recession was largely caused by COVID-19. I say this because prior to the pandemic, the economy was already on the path of growth recording about 2.27 per cent in 2019. Therefore, I am quite positive the Nigerian economy will weather the storm and pull out of recession by the first quarter of 2021. My optimism is predicated on the fact that unlike in Europe and America, the country may not have to grapple with a second wave of COVID-19 on a scale similar to what was experienced in Q2 2020. Consequently, I don’t foresee another round of nation-wide lockdowns and movement restrictions. Secondly, the economy is fast opening up and business confidence is gradually returning. I am sure you are aware of relative improvements in the Purchasing Managers Index which has now crossed the 50 point threshold. You must equally be aware of the current boom in the stock market especially in recent times. Indeed, the entire financial sector has been resilient with positive performance as indicated in the NBS Q3 2020 report. Again, the early submission of the 2021 budget proposal and the expectation that its implementation will commence in January holds a lot of promise for economic recovery. I also think the impact of the raft of COVID-19 interventions by the government and the CBN should begin to manifest from the first quarter of 2021. By the same token, the implementation of the government Economic Sustainability Plan will go a long way in assisting economic recovery. It’s equally important to mention that a critical assumption in all these is that the economy will not experience any major shock either coming from the external sector such as another crude oil price shock or another crisis in the magnitude of the one witnessed during the EndSARS nationwide protests. As you know, the government projects the economy to recover next year with real GDP growth rate projected at three per cent. While I have no doubt positive GDP growth rate will be recorded in 2021, I think a growth rate of three per cent, though desirable, appears a little ambiguous given the present state of the economy. In order to quicken economic recovery, the implementation of the 2021 budget especially the capital component must start quite early next year. A lot more attention should be paid to the agriculture sector which contributed about 30 per cent of GDP in Q3, but recorded very weak performance. The CBN can also scale up its interventions in the agriculture value chain as doing so will not only bring down food prices, but will also support economic recovery. Above all, the government should move fast to tackle the insecurity situation in the country which is detrimental to production and exchange of goods and services.
What steps can the government take to ameliorate the hardship on citizens?
I think, overall fiscal and monetary policies appear synchronised and in the right direction. In response to the pandemic, the government scaled up the social investment programmes. It has also provided cash support to some households that were seriously affected by COVID-19 as well as rolled out tax incentives to business enterprises. In addition, the government came up with an Economic Sustainability Plan outlining bold measures aimed at helping economic recovery, including mass agriculture, housing and investment in infrastructure especially solar energy. The major challenge now is its implementation in order to ensure a quick return of the economy to the path of growth. On its part, the CBN has been deploying its development finance function, beyond the use of the traditional monetary policy tools, to support economic recovery. All said, I think the policies are in the right direction. Nevertheless I would like to see speed, a sense of urgency and scope especially with respect to the implementation of stimulus packages which have so far benefited only a small fraction of small businesses especially those in the informal sector.
With the disappointing performance of agriculture and global low crude oil price, where can Nigeria look for help?
You can say that again about the dismal performance of the agric sector in Q3 2020. It was quite disappointing indeed at a mere 1.39 per cent growth, worse than the Q2 growth rate. This gives cause for concern. You recall that even at the peak of the last economic recession towards the end of 2016, the agriculture sector was the bright spot posting real growth of about four per cent. Following this weak performance, the negative impact on food prices is capable of worsening poverty and the health crisis due to poor nutrition. Is it any wonder that the food index is the major driver of headline inflation in the country at present? So, turning to your question concerning the options out of this challenge, it is important to recognise that with respect to diversification of the export base and creating multiple sources of revenue for the country, this government, like many others before it, has articulated the roadmap in the Economic Recovery and Growth Plan. The key challenge has been the implementation of the lofty ideas contained in that plan especially in the area of diversification especially through agriculture, solid minerals and tourism. This is not unconnected to bottlenecks in revenue generation for the purpose of executing developmental projects. So, the agriculture sector, which contributed about 30 per cent of GDP in Q3 2020 and is known to employ the greatest percentage of the country’s population, deserves a lot of attention. I think the aggressive implementation of the mass agriculture scheme outlined in the government’s Economic Sustainability Plan will be a step in the right direction. This must be complemented by a more proactive approach to tackling the issue of insecurity which is hampering food production in the country.
Do you support the idea of the government taking more loans as a way out of the recession?
To answer this question, I would like to begin by saying that a number of studies have shown that many countries that had gone through economic recession had to resort to borrowing. As a matter of fact John Keynes, a famous economist, posited that countries should spend their way out of recession and this usually involves increasing the size of their public debt stock. Having said that, the question about whether or not the government should go for more loans at this time should, in my opinion, be a function of the outcome of a thorough cost benefit analysis. If the benefits of taking a loan outweigh the costs, then the loan can be taken. Otherwise, such loans should not be contracted. I think this should be the golden rule. The country is already choking from huge debt. It is not about debt to GDP ratio providing room for further loans as is often canvassed; it is more about the country’s debt service-to-revenue ratio indicative of a huge debt burden which poses great risks to debt sustainability. As justification for more government borrowing, I am aware of the argument that Nigeria doesn’t currently have a debt issue, but rather a revenue challenge. I think, however, that such argument holds little water as it amounts to putting the cart before the horse. This is because the abnormally high debt service crowds out government expenditure in critical sectors of the economy which is detrimental to revenue generation. In the 2021 budget proposal for example, over N3 trillion has been budgeted for debt servicing alone. You can imagine the opportunity cost of this huge sum for debt servicing in a country lacking in human capital development and critical infrastructure. So, I think if we can get further concessional loans from the World Bank or African Development Bank for capital projects; that is okay. Otherwise, except for self-liquidating projects, it is not in the long term interest of the economy for the government to keep accumulating loans.
A more viable option at this time would be for the government to continue to expand the tax base as well as embark on the sale of some government assets such as the non-functional refineries.