With a declining revenue base and weak national currency, growing unemployment and rising poverty levels, high inflation and high level of corruption, experts warn that the Nigerian economy might soon tip into recession
Oluwole Ibikunle could not have been luckier. Two months before he wrote his final examination at the Obafemi Awolowo University, OAU, Ile-Ife, Osun State, he had a letter of employment. Before he could finish his National Youth Service Corps, NYSC, programme, many other offers came his way, including one from the United African Company, UAC. But that was in 1978 and the university then was known as University of Ife.
Ibikunle, who is now the managing director of Boaz Management and Financial Strategies Limited, recalled that government establishments and the private sector operators used to invade institutions of higher learning to recruit final year students. “When we were leaving the university, jobs were chasing us. We wrote the final examination in June 1978 but I received a provisional letter of employment in April. Organisations used to monitor the progress of students in their final year with the sole aim of engaging them upon completing their studies and the compulsory national youth service,” Ibikunle recalled the glorious past of the nation. Among all the offers he got, Ibikunle chose to work with the Central Bank of Nigeria, CBN, from where he eventually retired after 30 years.
But the story is no longer the same for today’s graduates of tertiary institutions as they are forced to roam the streets for years after graduation without a job. Many of them even take to menial jobs to make a living. The country no longer offers hope to its teeming jobless generation of youths. To this unfortunate group, the recent warning by Ngozi Okonjo-Iweala, minister of finance and coordinating minister for the economy, that the country is heading towards a recession is an understatement. For Adebowale Adetunji, a former banker, for instance, Nigeria is already in recession. Adetunji who lost his job in 2010 argued that the harsh economic situation in the country couldn’t have been better than a recession.
Even if Adetunji’s view is not shared by many, there is still a popular belief among Nigerians that several socio-economic indicators in the country are pointing towards recession. And that is why Okonjo-Iweala’s warning cannot be ignored. The minister of finance, while cautioning government to be prudent in the management of the nation’s resources, had said Nigeria was not insulated from the economic crisis in Europe, particularly Greece and Spain, as the dwindling crude oil revenue has shown. She would not be the first to raise the alarm. Christine Lagarde, managing director of the International Monetary Fund, IMF, issued a similar warning when she visited the country last December. Stressing the fact that Nigeria may be at the receiving end of the economic shock from Europe due to the volume of the country’s trade all over the world, Lagarde said: “The recipe for resisting the shock has become imperative in order to avoid the ripple effects of the meltdown.”
The European Union, EU, has been battling to rescue the economies of some of its members from recession to prevent a spill over effect. Earlier this month, the Spanish government agreed to accept €100 billion ($125 billion) in assistance from EU emergency funds. Greece had obtained a loan of €240; Ireland, €85 billion; and Portugal, €78 billion to address the debt crisis crippling their countries. Italy is also weighed down by huge debt burden. It is, however, not certain if all these would solve the rising unemployment rates and dwindling economies of the affected countries. For instance, a quarter of Spain’s workforce is unemployed and its banks are sinking despite the lifeline offered by the EU. Italy has admitted that it has little likelihood of recovering from the recession this year. In fact, the economies of nearly half of the countries in Euro zone are shrinking with no ray of hope in sight.
But why should Nigerian be worried? Harrison Tettehfio, chief executive of Veromikes Consulting, noted that the world has become one global village such that what is happening in one country or region can have domino effect across the world. He recalled the crash of the sub-prime mortgage market in the United States, US, and the ripple effects it had across the world. According to Tettehfio, some of the troubled banks in Europe act as correspondent banks for Nigerian banks and that if they are in crisis, Nigeria could be affected. “We have their banks as credit banks to handle transactions. If they have problems, we will have problems,” he said. He explained that trouble in Euro zone could also translate to reduction in aid, investments and remittances into the country.
It is feared that if the situation in Europe continues unabated, many countries around the world would be affected, particularly countries that depend on remittances, tourism or export of commodities for survival. For the Nigerian economy, it could jeopardise the success of the Transformation Agenda of President Goodluck Jonathan’s administration, designed to tackle issues of poverty, lack of infrastructure, industrial decline and the general socio-economic development of the country. The country’s long-term economic development blueprint, the Vision 20:2020 policy document, is intended to provide the direction for the country’s growth and development. The first National Implementation Plan of the vision indicates that the country would require about N32 trillion for capital projects to attain the desired level of development by 2013. By that year, which is less than seven months away, government expects to achieve 30 per cent diversification of the economy from oil and gas to agriculture and manufacturing, among others. However, this growth target is threatened by the Euro zone debt crisis as the region accounts for about 25 per cent of Nigeria’s non-oil export. Bismarck Rewane, managing director, Financial Derivatives Company, has noted that the EU is one of Nigeria’s strategic trading partners, contributing over 30 per cent of Nigeria’s imports for 2010. Rewane noted that the crisis in Europe could cost Nigeria about 24 per cent of its total annual export to the region, estimated to be about $74 billion in 2011.
The country, therefore, cannot be immune to the EU crisis. The Vision 20:2020 policy document, designed to place Nigeria among one of the 20 largest economies in the world by 2020, together with the medium term economic framework and fiscal strategy that has been put together, is expected to drive government’s transformation agenda. But meeting the targets and projections would pose a serious challenge given the crisis in Europe and other negative developments in the global financial system. This is because many of these advanced economies are going down the slope, which explains why the IMF had to revise downwards its 2012 global growth projection of four per cent to 3.3 per cent. For the Nigerian economy, there are dire consequences – reduction in the inflow of foreign direct investments for infrastructural development and lower demand for the country’s export which, at best, is highly inadequate. Government requires huge offshore resources to address its infrastructural deficit and finance its development programmes. Shamsudeen Usman, minister of national planning, said that attracting more foreign investment into Nigeria is critical to achieving the Vision 20:2020. But the crisis in Europe is still a major drawback for the Nigerian economy, most especially as revenue from oil is rapidly declining.
The dwindling oil revenue occasioned by the tumbling price of crude oil in the international market is already taking its toll on the Nigerian economy, prompting calls for prudent management of the nation’s resources. Lamido Sanusi, governor, CBN, expressed concern recently over the impact of the crisis of the European banks on Nigeria’s oil exports. “We are concerned because we sell our oil to Europe and America, and any major slowdown is likely to lead to softness in the oil market, which would affect government revenues,” he said. This is already happening as confirmed by Okonjo-Iweala. The price of crude had fallen from $128 per barrel in March to $97 per barrel, resulting in a monthly revenue loss of $1.8 billion. If the figure slides further to $90 per barrel, government revenue would nosedive by 35 per cent from five per cent in January 2012, said Rewane. He also predicted a drop in the country’s foreign exchange inflows from $4.3 billion in January to $3.3 billion in July. “If oil prices were to drop to $80 per barrel, there is a 95 per cent likelihood that foreign exchange inflows will decline to approximately $3.03 billion, pushing the reserves to as low as $22 billion, covering less than three months of imports.
The Euro zone crisis, which has resulted in a drop in demand for crude, is partly responsible for the slide in the price of crude. The development is worrisome because Nigeria’s is a mono-economy, as it depends on oil for about 95 per cent of her foreign exchange earnings and about 80 per cent of government revenue in the country. The country is thus heavily exposed to fluctuations in the global market.
Though the current rate is still higher than the budget benchmark rate of $72 per barrel, the drop in revenue is significant enough to dislocate the economy. For instance, there is pressure on foreign exchange, leading to an unfavourable exchange rate of dollars to the naira. The naira has continued to suffer depreciation over the years, crashing from N118 to the dollar in 2007 to N165 to the dollar currently, thus raising a lot of concerns especially within the organised private sector operators who depend on foreign exchange to sustain their operations. Experts predict that the value of the naira will depreciate further in the months ahead. For an import-dependent country like Nigeria, this is bad news.
One major consequence of a declining naira is the sharp increase in the prices of basic consumer items and services. Since the beginning of the year, prices have remained at elevated levels, thus reducing the purchasing power of the people. It cannot be otherwise. The high exchange rates translate to high cost of goods and services as the cost of imported raw materials and production is also on the increase. There has been high level of factory closure with its attendant job losses, a situation the National Association of Chambers of Commerce, Industry, Mines and Agriculture, NACCIMA, blames on the declining value of the naira against other international currencies. Government has not been able to contain inflation, which is now at almost 13 per cent as against the single digit it plans to achieve this year.
Pat Utomi, economist and director, Lagos Business School, thus agrees with Okonjo-Iweala that if something drastic is not done, the country will be on its way to recession. A country is said to be in recession if its gross domestic product, GDP, is going down over a prolonged period of time. There is usually a loss of confidence on the part of consumers on the economy, as their purchasing power gets eroded. This could lead to decreased demand for goods and services, thus leading to a reduction in production activities, increased job losses and rising unemployment levels. Such economy would not attract investments on stocks and this could cripple the stock market based on negative sentiments of a deepening crisis. The socio-economic indices have indeed convinced many experts that Nigeria’s economy is on the decline and could hit the tipping point of recession if care is not taken. Making reference to the recent data from the Bureau of Statistics, NBS, which puts the country’s GDP growth rate at 6.17 per cent year-on-year, in the first quarter of the year as against 7.68 per cent in the last quarter of 2011, Razia Khan, regional head of research, Africa Global Research, Standard Chartered Bank, London, reiterated that fears of a slowdown in the Nigerian economy is now more palpable. Nigeria’s problems are compounded by the fact that it is largely import dependent and oil constitutes its major export commodity.
But even then, Ibikunle insists that the GDP ascribed to Nigeria is not realistic because it is merely paper growth and does not reflect the welfare of the people and the development of the country. To him, a healthy GDP should create jobs and reduce poverty as well as translate to development. “We are claiming that we are growing at seven per cent per annum. But has that translated to development or job creation? No,” Ibikunle said, adding that even at that rate the distribution is flawed, as the wealth of the nation is concentrated in the hands of a few. The Boaz CEO said there is a clear difference between growth of an economy and development of an economy.
Like others, Bisi Orekoya, a stockbroker, is bothered by developments in the country’s financial services sector. To him, the stock market is down already and based on the warning, it implies that major market indicators like all share index, ASI, market capitalisation, which have maintained a decline in the last one month, will slide further. He explained that the stock market is not isolated from developed markets because foreign investors from United Kingdom, Spain and America are still present in the market and if the recessions in their countries persist, then they may pull out of Nigeria stock market like what happened in 2008. “Already, some of them are gradually pulling out to invest in their home exchanges, forcing the market capitalisation to shed about N500 billion in three weeks,” he noted. Half of the companies listed on the stock exchange between 2008 and 2010 are currently trading at 50k while 10 stocks have recorded no price movement in the last three years.
Recent statistics show that the poverty level has increased astronomically as over 67 per cent of the over 160 million population is said to be poor. Unemployment rate, particularly youth unemployment, has skyrocketed. And experts say this is a very critical indicator of recession. Tertiary institutions are churning out graduates every year into the already saturated labour market. “One major characteristic of a recession is unemployment. Look at the teeming population we are churning out and look at the rate of unemployment in the country. It is a sad situation,” noted Ibikunle, adding that for every employed person, there are more than 30 dependants.
Tettehfio who considers Nigeria’s situation as deserving urgent attention noted that Nigeria has failed to change its toga of a consumer nation as the productive sector has been crippled by years of neglect, a situation which he said contributes to the depletion of the country’s foreign reserves. “We are still a mono-economy, we are not exporting anything apart from oil. So when there is volatility in the international oil price which we have no control over, we run into problems,” he said.
The indicators of a recession are staring Nigerians in the face, but it does not appear the country is ready to withstand the shock of full-blown recession. Ibikunle said the warning signals are sufficient to keep the country on its toes: “Unbridled or uncontrollable rate of unemployment is an indication of a recession. I am bleeding inside when I see the situation where graduates will have no jobs or are underemployed. There are graduates earning N10,000 per month in Nigeria of today.
There is youth unemployment, poor infrastructure, decline in GDP, inflation, which is 12.7 per cent. We are fighting to achieve single digit. We are unable to control inflation. The consumer price index is going up. In those days, if you don’t get scholarship you get bursary. Now a child will get first degree, second degree, yet no job. We cannot insulate our economy but we should make sure we do some tightening within our economy so that by the time the external shocks hit us, we will be able to stand.” To Tettehfio, the country needs to de-emphasise oil as the major foreign exchange earner by diversifying the revenue base of the economy through strategic development of the productive sector and also ensure investments in critical infrastructure.
To prevent the ripple effect of the EU debt crisis on the Nigerian capital market, Orekoya said the federal government should actualise its promise to provide infrastructure in the country, adding that “If the government works on these, it will cost less for listed companies to either produce or render quality service that will drive the performance of their shares on the floor of the stock exchange.” He further explained that listed companies are not miracle workers; it is wise for them to borrow money from banks for expansion of factories, buy machines but foolish to obtain loan to fuel generators and transport their products to end users. Based on this, Orekoya believes Nigeria is not prepared for the recession because there is no structure on ground to fall on.
Apart from physical infrastructure, Ibikunle said the government needs to provide social infrastructure like security to create an enabling environment for businesses to thrive. This is also the view of Utomi who expressed worry that the massive bombings and killings going on in the country are not helping the economy. “Nobody is investing in northern Nigeria right now, and that should call for concern from all quarters. I was talking to some businessmen in Asia and the image they keep seeing is bombing everywhere in Nigeria, and they are scared of coming to do business here. The problem is affecting not only the North but the whole of Nigeria. In one word, it is affecting economic growth, and with the decline, we may be heading towards recession,” he said, calling on government to address the problem urgently.
Ibikunle who is currently building capacity for microfinance banks across the country is of the view that the small and medium-scale enterprises are the engine of growth of the economy and that the microfinance banks should be repositioned to propel them to growth. Utomi also wants government to create an enabling environment to allow businesses easy access to funds so that they can help to stimulate economic growth and development.
Tettehfio has also reiterated the need for governments at all levels to cultivate the saving culture so that they can secure the future of the coming generations. Experts generally expect the government to develop the productive sectors of the economy like agriculture, education, health and manufacturing. “What we should be doing really is to target key areas that can grow the economy more quickly and be more focused on how we drive these sectors,” suggested Utomi. The professor of economics also advised on the need for the country to be more prudent in her dealings with external investors: “All these things we are signing with China and others, we need to be careful because I think in many cases, they are over leveraging.”
Will Nigeria go the way of the European countries already reeling under the yoke of recession? May be yes, may be no. Udeme Ufot, group managing director, SO&U Saatchi and Saatchi, said if the whole world is in recession, “we know how they got there, and so we need to checkmate our economy by putting things right, so we don’t get to toe that line.” Ufot advised the country to set economic growth target for itself and attain it so as to improve the socio economic lives of her people. If we are going to drop from that trajectory into recession, then it is going to be disaster for our economy.
For Utomi and many other Nigerians, it is never too late for Nigeria to take the right steps to revamp its economy and develop its human capacity. But with the fear of recession looming over the country, many are still asking if the leadership of the country has the will to keep the country’s economy on the path of sustainable growth to avoid the ill winds of Europe blowing over the people.
Additional Reports By Stella Sawyerr and Abiola Odutola