Recession: Nigeria in need of Expansionary Economic Policy
Abdulhaleem Ishaq Ringim
Recession is a function of a country’s Gross Domestic Product(GDP); which is defined as the cumulative value of all finished goods produced and services rendered in a country within a year(although usually calculated quarterly).
The GDP as calculated using the national spending approach is a summation of the value of all the “Consumption”, “Investment”, “Government Spending” and “Net Export(Exports - Imports)” done in a country.
The percentage change in GDP either yearly or quarterly shows whether the economy is improving or deteriorating. Recession is said to set in when a country’s percentage change in GDP stays negative for 2 consecutive quarters.
Nigeria, for example is in recession today because our percentage change in GDP stood at -6.10% and -3.62% for the second and third quarter of 2020 respectively.
Most people believe Nigeria is in recession because the whole world seems to be plunging in to recession due to the effects of COVID-19 on the world’s economy. Although partly true, I still believe it is not a justification that because world countries are experiencing recessions, Nigeria should/must too.
This is because One of the worst financial crisis the world had witnessed in recent times is the 2008-2009 Great Recession. GDP of countries like the US shrank in 5 quarters(at a point, I think 4th quarter of 2008, the GDP of the US was -8.4%), EU countries like Germany that we like making reference to also plunged into one of their worst recessions too, the entire world was affected!
Nigeria, also gravely affected by the crisis having experienced a 400% net outflow from the Nigerian Stock Markets as a result of the credit crunch international investors were facing in their countries led to the stock markets losing 70% of its value. During same period, Nigeria’s revenue also dropped by 44% as a result of a massive drop in oil price to $41 from $147. But we did not plunge into recession, not for a single quarter during that period.
Our GDP remained steady, we experienced a marginal decline to about 5.99% in 2008 but rose to 6.9% and 7.2% in 2009 and 2010 respectively. We had very prudent fiscal policies and effective economic buffers designed in case of rainy days. Buffers like the effective Excess Crude Account(ECA) policy constituted during the Obasanjo administration which held about $22 Billion in 2008. This particular fiscal tool served as a stimulus to the Nigerian economy during the global economic crisis before state governors of that time(some of them ministers today) ensured the consistent depletion of that account even after the rainy days.
So, it is not a justification that because world countries are experiencing recessions, Nigeria should/must too.
However, since the deed has already been done, it’s time Nigeria gets its economics right.
Assuming Keynesian Economics prescriptions remain accurate, recession is seen as “the persistent deficiency of aggregate demand, where the economy will not self-correct and instead can reach a new equilibrium at a higher rate of unemployment, lower output, and/or slower growth rates.”
Therefore, Nigeria needs to urgently but prudently put money in the hands of a section of the people in this country whose resultant cumulative spending can actually plunge up the aggregate demand and push Nigeria out of recession in no big time. 86.9 Nigerians are living in extreme poverty, and this almost 50% of Nigeria’s population are the country’s simplest key to unlocking the country from the shackles of recession by increasing their purchasing powers.
This can be done through the implementation of expansionary economic policy measures both in fiscal and monetary terms.
Fiscally, the policy model should take a modified stance where there would be ‘targeted tax relief’, decreased discretionary and unwarranted government expenditure and targeted increased investments.
The tax relief should take a form of progressive personal income tax (where higher income earners should pay higher percentage of income tax compared to lower income earners), reduced Custom Duty for small vehicles, reduced Withholding taxes for Micro Small and Medium Enterprises(MSMEs) etc.
There should, however, be a careful categorization of “luxury goods and services” in the country and a realistic upward review on taxes on this category. Such upward review in tax should also target the big national and international companies and corporations operating in the country. The proceeds from such tax review on luxury items and big corporations should be able to service the deficit la the budget might run into. We should as much possible avoid further indebtedness.
The country must ensure absolute transparency and accountability in the inflow and outflow of these tax proceeds as it would be highly economically detrimental if the rich and the country’s big corporations are being taxed just for the proceeds to be squandered or channelled to non-essential expenditure. An accountability framework should be set up for easy traceability. Here, we are hoping for a Robin-Hood effect!
The Discretionary expenditure section of the budget should also be reviewed and anything that stands to be non-essential should be immediately sliced out.
The government should however initiate targeted investments in sectors that have high potential of creating jobs, like agriculture, manufacturing, oil and gas, transportation and also essential social services like health, education and General human capital development. This should be able to boost employment rate and in turn get money into the hands of people.
Monetarily, the government should consider decreasing interest rates so as to enhance spending and make savings somewhat unfavourable. The CBN should also increase money supply through the implementation of the various monetary policy options e.g Open Market Operations, downward review of bank reserve requirements for banks to have additional capital to loan out at lower interest rates etc.
Inflation will definitely set in as money supply and circulation increases, hence, the government should consider options around reducing VAT to partly neutralize the effects of surges in prices.
The government should commit to Increasing the ease of doing business for MSMEs, within the ECOWAS, (and general exports) to increase foreign earnings. Of course, it comes with higher security risk that requires attention, which is why the government needs to urgently take a firm stance on issues of insecurity.
And while we take this as temporary recovery measures, Nigeria should revive its saving mentality and enhance national savings through the Excess Crude Account and Sovereign Wealth Fund. Perhaps when enhanced and properly administered, Nigerian will be able to survive the next rainy days.
Abdulhaleem Ishaq Ringim is a political and public affairs analyst, he writes from Zaria