UNDERSTANDING NIGERIA’S CURRENT STAGFLATION (Written on October 8, 2016)
The recent economic condition in Nigeria has got everyone thinking. People read several meanings to the current state of the economy. While some consider it a grand conspiracy by some very powerful forces, others look at it as a fall out from the political tussle between the ruling party and the major opposition party. In a lighter mode, the present economic situation has also taught most Nigerians some economics. Now you hear people parroting words like recession, inflation, foreign reserve, deficit budget, government borrowing, and so on. Of all the words that are being parroted around the word recession seemed to stand out.
However, when I stopped for a moment to examine Nigeria’s present economic reality, it occurred to me that recession might not be the appropriate word to describe our current situation. Even though it might not be totally wrong for it to be called a recession because of some of the attributes it exhibits, looking at some of the features that tend to paint it differently may give us some insights to what precipitated it and the likely immediately accessible remedies. It is this latter objective that I set out to achieve in this write up.
My mission in this write up is to help some of us to understand what is going on.
RECESSION VS STAGFLATION
Let us start by looking at the meaning of recession in relation to Nigeria’s present economic reality. Recession is a consistent decline in economic activities for successive six months. Nigeria has officially been declared to be in recession; this means that the economic decline has persisted for six months. Simply put, recession is a reduction in trade and industrial production continuously for six months leading to disinvestments and job loss. The usual thinking is that a significant fall in spending (buying of things) is what leads to recession. This sounds somewhat obvious. Come to think of it, why would any businessman or woman want to go out of business if there is a sustained demand for his or her goods? The likely reason, apart from reasons beyond his control, why he would shut down business is that the demands are too low and the prices that buyers are giving are such that would not be able to break-even talk less of making a profit.
This brings out two important attributes of an economic recession: reduced spending and a reduced or at most a relatively stable inflation. However, even though it could be argued that demand in certain quarters of the Nigerian economy (like building materials sub-sector) have fallen, the same cannot be said about price level. Prices across all sectors of the economy are skyrocketing. This rise in price cuts across the prices of basic necessities which are almost tripling on a weekly basis, to the prices of luxurious goods and building materials. Just in August 2016 the price of cement rose by 40% from N1,500.00 to N2,100.00. From these experiences, recession would no longer be the ideal word to describe the present Nigerian economic situation; since in as much as the spending in certain quarters can be said to have reduced, prices keep skyrocketing. As a result, the closest term to describe Nigeria’s present economic situation is Stagnation, a combination of stagnation and inflation. Or, do we consider it a “Receflation”? Since the economy is not just stagnant but fast receding.
In the past, economic theory considered recession and inflation as mutually exclusive. There are no standard set of causes of stagflation. The practice so far is to examine the various cases of stagflation on a case by case basis in order to isolate their causes and proffer possible solutions. The same practice will be adopted here.
WHERE IT ALL STARTED
For us to better appreciate the cause(s) of Nigeria’s present stagflation it is necessary that we get to know some of the things that served as a build up to it. The buildup to Nigeria’s stagflation can be summed up as the failure to build the capacity for physical capital accumulation.
Let me break it down. Physical capital resources are goods such as machinery, tools, equipment and buildings used to produce other goods and services. They lead to the production of high quality goods and services at a very cheap rate. Building the capacity for the accumulation of these physical capitals is putting in place all the structures required for the production of these tools, equipment and machineries.
The importance of physical capital accumulation cannot be over flogged. As a matter of fact, physical capital accumulation is what ushered in the Industrial Revolution, the fruit of which the developed world has not yet half reaped. The fact is, there can never be development without industrialization; and there is no way you can achieve industrialization without physical capital accumulation. And the backbone or lead sector of capital accumulation is steel. The Russians knew this too well, and that was why their first attempt at helping Nigeria achieve development was the establishment of the Ajaokuta Steel Complex.
However, the fact that the Ajaokuta project and that of Aladja are said to be caught in the web of resource curse is not enough reason to give up the pursuit of the ‘Steel Dream’. Some of the reasons why the ‘Steel Dream’ is yet to become a reality are well known to us. Some of these factors include but are not limited to the ‘cake sharing culture’, activities of unnecessary middlemen, looting of public treasury, and a ‘social welfare civil service’ with a huge and ever increasing wage bill, just to mention but a few.
Nevertheless, the ‘Steel Dream’ is a dream that must be achieved and at all cost if Africa would have any hope of getting out of poverty. No amount of aid can take its place. Steel is the necessary condition that must be met if any development would be achieved. In fact, it will not be too much if all successive governments have the pursuit of the ‘Steel Dream’ their first agenda until it is eventually achieved.
Albeit, even though the lack of the achievement of the ‘Steel Dream’ can be regarded as the bane of Nigeria’s economic backwardness and the very remote broken walls through which wolves of hardship entered to ravage the animal farm of the Nigerian economy, it is not the immediate cause of the present Nigerian economic stagflation.
A HERCULEAN BURDEN FOR COMMERCE AND A MEAGER REAL SECTOR
The lack of achievement of the “Steel Dream”, nevertheless, placed a herculean burden of catering for the humongous population that Nigeria parades on an almost non-existent real sector and a rampaging commercial sector. For clarity’s sake, the real sector means all those who produce the tangible goods that we use. The commerce sector comprises the traders and importers of tangible goods.
Of course, this meager real sector which still relies heavily on raw labour and crude equipment, and is barely able to take a forward step cannot be expected to cater for the needs of the Nigerian population.
The massive vacuum this situation created was filled by a vibrant commerce sector.
It is this situation of Nigeria’s real sector that is making the majority of Nigerians resort to the paying of lip service to the issue of agriculture. References are always made to the Kano pyramids of groundnuts, but nobody is asking if the majority of people are still willing now to put in so much hard labour as was done then only to be paid what is not enough to cater for oneself.
Nigerians like most humans are rational beings. If agriculture is made less burdensome and more profitable nobody will ask Nigerians to go into it. The profitable thing in Nigeria today is politics; and Nigerians being the rational beings that they are doing and undoing to get into it. Of course, Nigerian’s, no matter how senseless anyone may think they are, prefers more profits to less profit.
The non achievement of the “Steel Dream” and the almost nonexistent real sector is the reason why, with decades of campaign for the patronage of Made in Nigeria goods, the realisation of this goal is still illusive. Made in Nigeria goods are still far from being able to compete with their foreign counterparts, both in terms of price and quality, because of lack of productive capacity. And having been so exposed to the quality that is obtained in the international scene, Nigerians would not be compelled to accept low quality and high prices.
Now back to the matter, the collaboration of the commerce sector with the meager real sector succeeded at the best in moving Nigeria forward one step in a very long while and at a very huge cost to Nigerians. Companies and importers are thriving on huge abnormal profits. This is why it is common knowledge that even with the tax burden on those in the UK, for instance, the cost of living in Nigeria is almost twice as high as in the UK.
The task of catering for the tangible needs of the Nigerian population is obviously daunting for the duo of meager real sector and commerce. They have only come this far because of the presence of abnormal profits (economic rent), and occasional pampering through waivers, exemptions, concessions and other measures meant to keep them standing.
Previous administrations, especially the immediate past administration kept the economy afloat mostly by managing the health situation of the meager real sector, commerce sector and the banking system.
It is instructive to note that the recessionary pressure that led to Nigeria’s present economic situation started in 2013. Particularly, oil prices started falling in 2013. In the face of this pressure, the past administration was able to stave off a full blown recession or stagflation by striving to keep the economy alive through the management of the meager real sector, commerce and the banking system.
They used several strategies; even moral suasion was not left out. For instance, there was a time in the past administration when the price of cement rose abruptly; and news had it that the government met with top players in the cement industry to persuade them to bring the price down. The meeting paid off, as the prices were brought down.
LAST MINUTE EFFORTS
In a move to check the problems bedevilling the Nigerian economy, and possibly catch up with the “Steel Dream” that is fast drifting away, past administrations took some last minute strides. The most prominent of which is the signing into law and establishment of the Sovereign Wealth Fund. Even though this move was praised by most Nigerians as by far one of the most significant economic policies of recent in Nigeria, it faced serious suspicions and opposition among some stakeholders. No thanks to the 36 Governors forum at that time. The woes of the SWF have also been compounded by falls in oil prices.
LIKE A FLOOD
While there are arguments for and against the achievements of the past administration, one thing I consider as its vital achievement is its ability to not only keep the duo of meager real sector and commerce standing, but to also inspire them to take a couple of sure steps with the herculean load behind their back.
This earned the Nigerian economy the status of the largest economy in Africa. This achievement came in the face of a barrage of challenges, security and otherwise. In my opinion, it was able to achieve this through continuous gauging and managing of the health condition of the trio of meager real sector, commerce, and the banking system, and the economic burden on them through concessions, waivers, soft pedaling and even relaxing the percentage of government funds to be kept in commercial banks, and adopting a flexible foreign exchange stand to quickly absorb shocks. This it did while energizing them with timely government expenditure against all odds. This might not sell for a good long-term solution, but it will certainly count for an acceptable way of managing a terminally ill economy.
Nevertheless, the challenges that faced the present administration and Nigerians came like a flood. First was the fall in oil price. This was followed by a scarcity of petrol that lasted for almost two months. This was followed by the reduction of crude oil production as a result of the activities of the ‘Niger Delta Avengers’, not forgetting the resurgence of Boko Haram. These resulted in a sharp deep in the foreign reserve, decline in government revenue and a high anxiety level which gradually ushered in some sorts of uncertainty.
Meanwhile, the duo of commerce and meager real sector, have endured the huge burden they are carrying for some months without needed attention, and are fast becoming overwhelmed and inpatient. The whole economy, including the banking sector and other service sectors were looking forward to some sort of relief policies from the new administration.
THE POLICY THRUSTS: A BUNCH OF EMOTIONAL OUTBURSTS
Looking at the policies that the present administration eventually made, one cannot help but view them as being made out of a heavy heart. Whether the emotions are justified or not is a topic for another discussion.
Nevertheless, economics is not a respecter of emotions. In my opinion, the present administration took these steps out of a perceived urgent need to heal the economy. In as much as these are noble ideas, we must realise that for a terminally ill patient the priority should be to keep him alive and not to strive to completely heal him immediately. The past administration knew this and that was how it survived the recessionary pressure.
Let us consider some of the policies of the present administration and see why they seemed to be more emotionally driven than rationally thought out.
Firstly, the media criminalisation and reversal of all the waivers and concessions granted to some key players in the commerce and meager real sector collaboration. What these players saw as an incentive from the past administration to keep them going is not only being stripped off them, but they are also being persecuted for it. This would not only shock those already playing in the economy, but would prevent others who are planning to go into real sector or commerce, with the hope of getting some sort of help from the government when things get too tough. This is the first stroke on the already weak pillars of the economy which started the crack that brought down the stagflation.
The second policy is the full enforcement of the “not valid for forex” policy in June 2015, in a bid to supposedly arrest the dwindling foreign reserve and exchange rate. Even though this may seem to be a good policy, it dealt a devastating blow on the economy. The obvious net effect of this policy is a shortage of those goods (and just two services) available in the country, and a continuous rise in their prices in the face of a voracious demand. This is because of a depletion of a sizeable chunk of commerce as traders of the not valid-for-forex goods had either cut the volume of trade or closed shops. Examples abound of importers who have not imported any goods since this policy came into effect. And since Nigerians depend so much on a majority of these goods, this has caused them serious hardship. So, commerce (products) is declining not because of a fall in demand; and the undisputable result of this is the sustained high inflation that we are experiencing. And a reduction in national products plus rising inflation equals stagflation.
The refusal of outright devaluation is another ill timed policy that has led to the loss of confidence on the nation’s economy by foreigners. Recently, the World Bank refused to grant Nigeria a loan, asking the present administration to go and restructure the economy. Basically, what we are doing when we fail to obey the law of demand and supply by refusing to devalue the naira, is that we are compelling other nations to exchange more of their goods for almost nothing. The result is a lack of trust in the Nigerian economy leading to lack of new foreign direct investments and a possible capital flight out of the country.
Even though the choice to devalue may be frowned upon because of some undesirable effect, whether we like it or not it is the choice of the lesser of two evils. Without devaluation goods will not be available, and prices will be very high. With devaluation prices might be high in the immediate short-run, but at least the much needed goods by Nigerians will be available. Moreover, the self correcting mechanism of an instant and outright devaluation would have succeeded in enhancing the foreign reserve situation in no time.
If the present administration had stopped there it may have been a manageable situation. As the erstwhile importers of the ‘not valid for forex’ goods who were at the verge of closing shop because of the policy and scarce forex reserve could possibly have approached the banks for loans to, maybe, start domestic production of these goods. However, this window was also abruptly and totally shut by the present administration’s policy of full implementation of the Treasury Single Account (TSA); a policy that was initiated by earlier administrations but was never fully implemented for once because of its rash effect on the economy. And to have undertaken its full implementation at this time is definitely not a wise decision. This made banks nationwide stop the granting of loans and instead focus on the collections and recovery of granted loans. This prevented the growth in commerce and real sector that would have resulted from increased bank loans. The fortunes of the banks also declined as a major source of their income was taken away, leading to substantial layoffs and the winding down of businesses.
An inevitable consequence of these tight policies was an indiscriminate increase in prices. Since that was the only way the few producers and business people left could compensate themselves for all their troubles. This indiscriminate price increase is further reinforced by the fast widening gap between demand and supply. The amount of goods that is now being chased by the current level of demand became smaller and the few remaining producers and importers simply increased prices as they wished with helpless consumers left to suffer most of the consequences alone. Even if the money in circulation decreased, like some people would like to argue, the goods in circulation decreased much faster. The result is the present stagflation that the Nigerian economy is facing today.
The last stroke that broke the remaining pillar of the Nigerian economy that is already about to crumble is what has been described in some quarters as a body language that seemed like a disregard or usurping of the power of the judiciary by the present administration. This body language may have been wittingly or unwittingly propagated by several accusations of the administration’s disregard of court orders leading to the arrest and re-arrest of suspects even after they have been supposedly granted bail by the court; and the ease at which people are arrested and their accounts frozen. It is not the intention of this write up to prove the morality or otherwise of these actions; it is simply to articulate the responses of a highly emotionless and unsentimental phenomenon as the economy to these actions.
It should now be clear that even though the failure by successive administrations to accumulate capital may have led the economy into the tight corner it was before the coming of the present administration, I make bold to say with no sentiments attached, that the current stagnation is mainly due to the policies of the present administration, which produced counterproductive effects. The present administration is applying long-term solutions to short-term problems.
THE WAY FORWARD
The present administration seems to be very eager to quickly arrest the current economic stagnation. An economic retreat has been held; there are alleged plans to sell off some national assets to generate revenue for the government; and there are intensive drives to secure loans, some of which have started paying off. Nevertheless, I dare to say that if some subtle but critical steps are not taken now to disentangle and revive the now almost comatose trio of meager real sector, disgruntled commerce, and bleeding banking sector; any increase in government expenditure would amount to beating a dead horse, or pouring water on a stone. Facts already abound to support this assertion. The fact that the last administration floated budgets of amounts in the vicinity of N4 Billion but was still able to stave off the stagflation; while the present administration that floated a budget of above of N6 Billion almost at the middle of the year could not prevent the stagflation attests to this fact.
Below are some of the steps that the present administration could take to revive the dying trio and set the economy on the path to full recovery. Even though the final effects of these prescription can rightly be said to be subject to testing, from practical experience the effects envisioned here are by far what is most likely to take place
Immediate Short- Run Strategies:
Immediately negotiate a ceasefire with the Niger Delta Avengers and start peace talks to return to usual production level of crude oil in order to sure up government revenue. Out right devaluation, reversal of the tight forex policies, and controlled soft pedalling on the TSA policy.
Firstly, this will have a very vital effect restoring some level of trust in the Nigerian economy by foreigners. Also, this will succeed in reopening the Nigerian economy to the global forces of demand and supply; which would work to absorb the present inefficiencies in the Nigerian economy. The cheap prices of our non-oil exports in the international market would definitely lead to some net inflow of foreign exchange. This would provide a fresh blood of Forex upon which a policy to relax the ‘not valid for forex’ will derive its strength.
The devaluation coupled with the relaxed Forex policy will lead to increased commerce. This will at least make more goods available, even if at a higher price at the moment, and ease the pressure on the meager real sector. As I have said before, without devaluation goods will not be available, and prices will be very high, but with devaluation prices might be high in the immediate short-run, but at least the much needed goods by Nigerians will be available. The desire to take advantage of the high prices will spur some of the importers to consider the option of local production of these erstwhile imported goods. The financial system now strengthened by the inflow of fresh funds from the relaxed TSA policy will respond appropriately to the credit demands of these erstwhile importers turned manufacturers. As a matter of fact, the present administration can use the granting of quality credit to qualified erstwhile importers as an incentive for the release of TSA funds to banks. This would have a rejuvenating effect on the real sector, increase supply and put a downward pressure on prices.
It is after these measures must have been put in place that the government would reap the desired effect of any increase in government expenditure. If not, any supposed benefits to Nigerians of an increase in government expenditure would quickly be swallowed up by the skyrocketing inflation resulting from the widening gap between the present level of effective demand and the heavily declining supply.
Short Run Strategy:
One short run strategy that will pay well is the encouragement of local production through concessions and waivers. The government needs to urgently meet with the organised real sector and commerce to determine what cushions in terms of concessions and waivers can help them do better. This is because of the desperate need for more players in the Nigerian economic field. The concessions and waivers should be designed in such a way that it stops after some time.
After some successes have been recorded in the above strategy, the government can go ahead to enforce the Made in Nigeria policy starting from its procurement processes without delays. This will act to reinforce any gains made by the concession and waiver policy. These policies are actually not strange. As a matter of fact, this concession and waiver policy is just a version of the application of the prevailing and countervailing powers of the government. Which John Kenneth Gailbraith posited as the secret of the success of the American Capitalism in his book — -American Capitalism published in 1952. If America with her base of physical capital can resort to concessions and waiver to keep her economy afloat, then Nigeria with a very meager physical capital base needs those most.
Medium Term Strategy:
The medium term strategy would be full and proper running of the sovereign wealth fund and the systematic build up of the capacity for the accumulation of physical capital. This would include sponsoring legislations and making policies that will make the building of modular and mini steel plants and refineries very attractive to the private sector. The government can take the part of the PIB that relates to this and immediately pursue its implementation. It is the success in this area that will make Nigerians less edgy when it comes to unbundling and selling some inefficient national assets. For instance the success of mobile telecom has since removed talks about Nitel from the public domain.
Coal exploration and mining also need to be resumed to augment the increased energy demand that will result from increased activities of modular and mini refineries and steel plants.
Long Term Strategy:
Some applicable long term strategies would be the selective restriction of imports, such as the ‘not valid for forex’ policy. This is actually a long term policy for the present administration from the stand it has taken. It would have been ideal for the present time if the present administration had accepted its era as the medium or even long run of past administrations and stepped on the shoulder of their successes. Rather than change everything and begin to reinvent the wheel. Economics is not a respecter of sentiments!
Another long term strategy would be the aggressive promotion of export to consolidate the gains from any growth in physical capital accumulation. Even though this is presented here as a long-term strategy in the national level, it is already an immediate short term strategy in a state like Anambra. This brings us to the final medium to long term strategy to be adopted by the present administration for the good of Nigeria; which is the putting in place of the mechanism to bring about true federalism in the country. By any means possible, this must be achieved if Nigeria would take its place among the nations to reckon with.