Change and Expectations in an Age of Recession

Change and Expectations in an Age of Recession

By Ahmed Musa Husaini

Ahmed Musa Husaini
Ahmed Musa Husaini

We are no doubt living in interesting times!

President Muhammadu Buhari rode to power on a promise of change, pledging to change the way things are done in Nigeria and bring about renewed hope in our social, political and developmental outlooks. In May 2015, he inherited an economy that was fast sliding into recession, managing to achieve only half its growth forecast.

Fifteen months later, the promise of real change appears to manifest rather slowly, and the President’s ability to deliver on the economy is hampered by recessionary pressures that are mainly due to low oil prices, empty reserves and economic sabotage in the Niger Delta.

All these coming to maturity at the beginning of the change regime. The timing has never been more inauspicious.

On deep reflection, given our own past history, it is easy to conclude that recession is merely a fait accompli, a matter of when and how?

There was nothing any leader could do to avert the impending recession and neither Emir Muhammadu Sanusi II nor Professor Chukwuma Soludo nor anyone among the legions of firebrand interventionists could do anything to prevent that reality from becoming a reality.

The best we can do is to make it as brief and less painful as possible, and this, in my opinion, is where the Buhari administration is found wanting.

Recession is a necessary evil, an integral component of the modern economic system and this recession will last longer than normal because prices will remain low for the foreseeable future. Global supply will continue to rise and demand will remain moderately low because the Chinese economy, which is the biggest driver of energy demand in the past decade, has slowed down as it recalibrates its development trajectories.

There is even the risk of China sliding into recession and dragging the entire global economy with it. Not only is China facing real risks of instability, so also the US, Japan and the already beleaguered Eurozone. This is the true picture.

Unfortunately for Nigeria, even before the recession began, we have already run out of solutions.

Conventionally, there are five major policy options policy makers can jockey with to prevent an economy from going into – or bring an economy out of – recession. These include drawing from reserve funds, slashing spending and eliminating subsidies, selling off assets, local and external borrowing and economic diversification.

An economy undergoing fiscal crunch can draw from its reserve to fund its spending deficit and smoothen out the adjustment process. Reserves are created to serve as fiscal buffers to cushion the effects of recession or slowdown.

Countries around the world have created sovereign wealth funds to save and manage excess wealth during period of abundance from which they draw on during crisis. Nigeria’s sovereign wealth fund was created in 2011 to achieve just that, with a starting balance of $1 billion dollars, but  nothing has been added to it ever since and even our so-called excess crude account has very little amount to make any difference.

To put things in perspective, little Norway and Kuwait have 847 and 592 billion USD respectively, war-torn Libya has $66 billion, sanctions-ridden Iran has $62 billion, and UAE has over $1.2 trillion (yes, trillion!).

While Nigeria’s sovereign wealth fund is underfunded, our external reserves also face the same problem, standing at less than $30 billion dollars, which is more like a minimum balance and more or less untouchable since it can barely be able to fund the recommended six months of imports and fulfil our foreign credit obligations.

Countries with large sovereign funds are able to weather the storm to a large extent by drawing from their reserves. In 2013, the then Central Bank Governor, Mallam Sanusi Lamido Sanusi, rejected IMF pressure to devalue the naira, preferring instead to defend the naira with our reserves. But that was at a time our foreign reserve was hitting $50 billion, enough to defend the naira for months without any serious consequences.

For Nigeria today, that option no longer exists. Without any reserve, exchange rate pressures will run amok. Any attempt to defend the naira will only exacerbate the problem. Depreciation is inevitable and without creative monetary and exchange rate policies the slide can be unstoppable, leading to higher inflation, falling demand and stagnating growth that will plunge the economy into a vicious cycle of recessionary ruin.

The second option is to impose austerity by cutting down spending and eliminating subsidies. Here, the government has taken a hybrid position. On one hand, the government has eliminated subsidies, plucked leakages, reduced waste and reined in on large scale corruption; on the other hand, it has ramped up spending to an unprecedented level and has continued to indulge in some unnecessary luxuries and profligacies.

In countries with local refining capacity, eliminating energy subsidies did not lead to increase in energy prices because of low oil prices globally. That is not the case in Nigeria where subsidy removal led to rise in energy prices and its attendant multiplier effects on other prices for the simple yet scandalous fact that we lack sufficient local refining capacity and rely on imports to meet our domestic energy demand.

The third option is for government to sell off its assets to raise funds. But with the fall in oil prices, bleak global economic outlook, tension in the Niger Delta, and the lack of a comprehensive industry framework caused by the impasse over the passage of the Petroleum Industry Bill, the Nigerian oil assets no longer appear lucrative and could therefore fetch little in return.

The fourth option is to borrow, internally and externally, to bridge the deficit, sustain the economy and put it on the path to recovery. In theory, Nigeria’s debt situation doesn’t look that bad, with a debt to GDP ratio of about 12%, considering that even a 40% ratio is within prudential limits for developing economies.

The problem, however, is that Nigeria’s credit outlook is unflattering. Few lenders would agree to credit Nigeria even at higher interest rates and multilateral debts will only come with strict conditionalities that are inimical to the government’s recovery final.

The final option is to diversify in the medium- and long-terms by shifting to non-oil, export-driven production that guarantees greater competitiveness and domestic self-sufficiency. For countries with functioning economies, diversification may come easily because there is high quality infrastructure. What is only needed is the requisite institutional reform to sustain the diversification drive by putting in place the necessary policy, legal and regulatory framework.

In Nigeria, we don’t even have an economy to start with. Therefore, diversification, in our own case, means starting from scratch. That is, building the infrastructure, the institutions and policy environment to support economic diversification. And we cannot achieve that when our reserves are empty, our fiscal deficit is insurmountable, our credit rating is poor and our assets undervalued.

And for all his shortcomings, I believe we are a bit less unfortunate to experience recession under a relatively fiscally disciplined Buhari regime. I can only imagine the Venezuelan scenario with Jonathan at the top, going by his penchant for unrestrained profligacy and large scale corruption. Venezuela shares similar characteristics with Nigeria, with oil accounting for over 90% of government revenues for both countries. Today, Venezuela is economically prostrate due to mismanagement and elite greed.

That does not mean President Buhari couldn’t have handled things better, with a more vibrant economic team, more focused vision and sound and innovative monetary and exchange rate policies and not the current policy incoherence pursued by the CBN under a man who is also a part of the problem and has no business being part of the solution.

President Buhari’s job is already cut out and is doing fairly well in the big things: increasing capital and social welfare spending plans, plugging leakages, improving our non-oil revenue base and stopping large scale corruption.

However, it is in the little details that he is found wanting and those little details matter greatly during crisis. This is the time to lead by example, to begin the change from top down and not the other way round. Nigerians have not only embraced change, they in fact, created it with their PVCs and swallowed every austerity pill pushed down their throat with remarkable equanimity.

The onus is now on the government to fulfil its own part of the change bargain, to rein in on its own luxuries and profligacies and restore public trust and confidence by pruning its presidential fleet without delay, eliminating official luxuries the same way it eliminated subsidies, tackling the pervasive culture of nepotism and favoritism that is making a mockery of the whole change mantra, and making relevant appointments whose delay is not only impeding change, but also squeezing out the informal welfare system that is sustained by political patronage, and thus preventing resources from trickling down to the lowest levels.

Above all, this government needs to improve on its communication efforts. Governance is all about communication. It must learn to communicate its plans to Nigerians in a timely, appropriate, inclusive and inspiring manner, by explaining why some measures are necessary, why we are where we are and what it is doing about it, and by setting up emergency palliative measures to cushion the effects before desperation and despair set in.

These are the only ways we can achieve change and manage expectations during a recession.

Sloganeering should be followed by sincere action, not by debate over who the change should begin with. The change cannot be complete if it begins with the government and ends only there; it needs the buy-in of the public. Likewise, the change cannot be complete if it begins with the public and ends there; it needs the sincerity of the government.

  • Ahmed Musa Husaini 
  • Development and communication practitioner
  • Abuja  
  • Email: ahmadugombe@gmail.com

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