Reality of Nigeria’s second recession in 5 years under Buhari administration
By Oludare Mayowa
Nigeria slipped into its second recession in five years, coincidentally under the same leadership of President Mohammed Buhari as the country’s economy recorded two consecutive quarters of negative growth by the third quarter of 2020.
The last recession was in 2016, which was regarded as the country’s worst economic downturn. Nigeria’s economy was also in recession, for less than a year, in 1991, NBS data shows. It also experienced a prolonged recession from 1982 until 1984.
So the news of the negative economic growth of 3.62 percent in the three months to September 2020, though not surprising, but was shocking to many Nigerians who are already going through economic hardship due to many factors which include stagflation, unemployment, and insecurity.
According to the report of the National Bureau of Statistics (NBS), “The performance of the economy in Q3 2020 reflected residual effects of the restrictions to movement and economic activity implemented across the country in early Q2 in response to the COVID-19 pandemic.
More natural and unnatural occurrences have conspired to push the country to the economic condition it has found itself today.
One such natural occurrence which was beyond the control of the economic managers is the advent of and impact of the Coronavirus pandemic, which has led to a major decline in the revenue of the country and slowed down economic activities across the globe.
For instance, the NBS said that “the average daily oil production recorded in the third quarter of 2020 stood at 1.67 million barrels per day (mbpd), or 0.37mbpd lower than the average production recorded in the same quarter of 2019 and 0.14mbpd lower than production volume recorded in the second quarter of 2020.”
The decline in production coupled with the slip in the global crude oil prices negatively impacted the earnings of the government and its ability to finance growth enable projects.
Also, the decline in oil revenue has impacted the country’s foreign exchange reserves and the ability of the Central Bank of Nigeria (CBN) to meet demand on the domestic foreign exchange market thereby impacting economic growth as businesses are constrained in procuring machinery and raw materials for productions.
Already, Nigeria is suffering stagflation as the consumer inflation figure surged to 14.32 percent in October, while the country’s foreign exchange rate has declined to N478 per dollar on the parallel market.
Though the current administration has put in place some measures to help the country cushion the impact of the economic downturn brought about by the Covid-19, many of such measures are yet to yield the desired result due to some fundamental constraints in the economy.
The implication of the country’s second recession in five years is that the economic managers may be forced to take drastic steps to arrest the situation.
The monetarists, under the Monetary Policy Committee (MPC) are meeting on Monday and Tuesday, and they may have to adopt some monetary policy measures to arrest the surging price, curb the depletion of the foreign exchange reserves and protect the integrity of the banking system.
Such measures could involve the hike in the benchmark interest rate to tackle surging liquidity in the market and arrest rising inflation. The monetarists could also discreetly ask the CBN to devalue the local currency to stem the erosion of the country’s foreign exchange reserves.
All these measures would definitely have dire implications on the country’s debt stock, price stability, and even the integrity of the banking system.
The CBN had in a report recently said that its stress test conducted on 27 financial institutions, showed that most banks are vulnerable to economic headwinds.
The regulatory bank in its economic report for the first half of 2020 stated that a contraction in GDP in the third quarter could lead to a fall in Capital Adequacy Ratio (CAR) from an average of 15 percent to 11.2 percent.
The regulatory bank stated that in a worst-case scenario of a further contraction in GDP in the fourth quarter of 2020 and the first quarter of 2021, banks’ CAR could fall as low as 8.3 percent.
The implication on the banking industry is that with the recession and consistent decline in economic growth, this could lead to a deterioration of banks’ asset quality and the possibility of distress condition resurfacing in the subsector.
Also, Nigeria may run into trouble in its debt repayment and servicing if the economic recession persisted beyond a certain period while rating agencies may be forced to downgrade the country’s economic outlook.
This also has dire consequences on the capital inflow from foreign investors and a negative impact on the local currency exchange rate and stability.
Gloomy as the situation is, it is not irredeemable as the government and its economic advisers should roll up their sleeve and put in place effective measures to counter the impact of the negative growth on the living standard of Nigerians and safeguard all economic agents within the economy.
Also, the government could muster the political will too to once and for all cut down on the costs of governance, curb corruption, and focus on measures that could lead to the revival of the economy.
All hands must be on deck to ensure that the country gets out of recession as quickly as possible to stave off social unrest in the country.