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NIGERIA'S ECONOMIC RECESSION OF 2016
Article · September 2017
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NIGERIA’S ECONOMIC RECESSION OF 2016
Emmanuel Afimia
1. BACKGROUND
Recession is an economic situation in which a country experiences negative growth in gross
domestic product (GDP) in two consecutive quarters of the year. Study.com defines economic
recession “as a decline in GDP for two or more consecutive quarters. As it is known that GDP is
the sum total of all goods and services produced within a country in a year.” The Economic Times
defines recession as a “slowdown or a massive contraction in economic activities, caused by a
significant fall in spending.”
In Economics, recession has been identified as one of the phases of business cycle. Jhingan defines
business cycle as “recurrent fluctuations in aggregate employment, income, output, and price level.
The other phases of business cycle are: prosperity, recovery and depression.
The principal cause of economic recession as described by J. M. Keynes is the fall in aggregate
demand. To him, a fall in consumption and aggregate demand for goods and services translates to
a fall in output occasioned by a fall in revenue of manufacturing firms. A fall in output leads to
decrease in production activities which invariably leads to laying-off of workers, because these
firms wouldn’t be able to cover their cost of production; and this results in an increase in the rate
of unemployment in the country.
Economists have explained that recession is the period characterized by a decline in income,
aggregate demand, prices of goods and services, investment and employment in the country. These
characteristics and many others are present in Nigeria except one, decline in prices of goods and
services. What makes the current recession in Nigeria peculiar is that, it is a combination of balance
of payment deficit, high exchange rate, a rise in prices of goods and services (inflation), low
aggregate demand, low output, rising unemployment, and low income. However, the current
recession didn’t just happen, it occurred as a result of actions and some decisions taken in the past
by administrators and policy makers.
2. THE ISSUE
Prior to the current economic recession, National Bureau of Statistics (NBS) reported that Nigeria
experienced a growth rate of 4.45 percent in real gross domestic product (GDP) in the first quarter
of 2013, and then went on to have 5.40 percent and 5.17 percent increase in the second and third
quarters respectively. The highest growth rate was experienced in the fourth quarter of 2013 with
6.77 percent increase in real GDP.
The first quarter of 2014 saw a fall in growth rate to 6.21 percent and subsequently to 6.54 and
6.23 percent in the second and third quarters respectively. Growth rate further declined to 5.94
percent in the fourth quarter of that same year. This was the year Nigeria was declared as the
country with the largest economy in Africa.
The decline in growth rate continued as it fell to 3.96 percent and 2.35 percent in the first and
second quarters of 2015. The third and fourth quarters of 2015 witnessed a 2.84 percent and 2.11
percent growth rate. However, the Nigerian economy started showing symptoms of recession when
NBS reported a negative growth of -0.36 percent in the first quarter of 2016. The country then
went into a full-blown recession as a result of another negative growth of -2.06 percent in GDP in
the second quarter of the same year.
3. FACTORS THAT LED TO THE ECONOMIC RECESSION
i. Fall in Demand for Nigeria’s Crude Oil
Following the boom in shale oil production in 2014, the United States of America (USA)
announced that it had reached the level of self-sufficiency and does not see the need to import
crude oil anymore. This led to a fall in the total demand for Nigeria’s crude oil from 2.29 million
barrels per day in the first quarter of 2013 to 2.05 million barrels per day in the second quarter of
2015; and a fall in the percentage contribution of crude oil and gas to real GDP from 14.75 percent
in the first quarter of 2013 to 9.80 percent in the second quarter of 2015; thereby leading to a fall
in foreign exchange earnings. The fall in foreign exchange earnings then worsened the country’s
balance of payment. This is the genesis of the problem.
ii. Crude Oil Supply Glut
The fall in international demand for crude oil and the lifting of ban on export of Iran’s crude oil
led to a supply glut in the international market, thereby leading to the fall in global oil price from
an all-time high of $114.49 per barrel in December 2012 to $53.77 per barrel on July 30 2015, and
subsequently, to an all-time low of $27.82 per barrel on January 20 2016.
iii. Activities of Insurgents
The Niger Delta militants resumed insurgency in the South-South region of the country, which is
the main location of crude oil production in Nigeria, by bombing oil installations and vandalizing
pipelines. On 25th of March 2016, the militants attacked and vandalized a crude oil pipeline.
BudgIT reported that the attack led to the complete shutdown of Shell Forcados terminal which
caused a shortfall of 380,000 barrels per day of crude oil export, thereby leading to a loss of about
$2 billion in potential revenue. The bombings of pipelines by the insurgents continued and this led
to a huge decline in Nigeria’s crude oil export from about 2.16 million barrels per day in the fourth
quarter of 2015 to an all-time low of 1.69 million barrels per day in the second quarter of 2016.
The fall in supply of crude oil from Nigeria eased the supply glut in the international market,
consequently leading to a reduction in the gap between global demand and supply of crude oil.
This led to a rebound in its price to an average of $53.20 per barrel on October 10 2016. However,
it is quite unfortunate that Nigeria has not been able to benefit from this rise in price because of
the continued attacks on the country’s crude oil installations. This has resulted in a further fall in
the country’s foreign exchange earnings, thereby further widening the gap between receipts and
payments.
iv. Over-dependence on Importation
The country depends heavily on importation of goods and services. As a result of this, a fall in
foreign exchange earnings led to an increase in the gap between the demand and supply of foreign
exchange, thereby leading to a fall in the value of Naira. Nigeria, that was practicing a fixed
exchange rate regime, had to devalue her currency, which led to the adoption of a floating exchange
rate regime in June 2016. This action was taken in order to forestall the complete depletion of the
country’s foreign exchange reserves.
v. Removal of Fuel Subsidy
The federal government also designed a new framework for petroleum products supply,
distribution and pricing in May 2016 which sought to reduce the Federal Government’s foreign
exchange support (subsidy) for marketers and distributors of premium motor spirit (PMS) to
import the product. This led to an increase of 59.06 percent in the pump price of PMS in the country
from N87 per litre to an average price of N147.3 per litre.
vi. Irregular Power Supply
In Nigeria, households and businesses generate their daily requirements of electricity using PMS
and diesel-powered generators. This is done in order to augment the little electricity from the
national grid. The increase in the price of PMS led to an increase in the cost of transportation and
cost of production.
vii. Shortage of Gas Supply to Manufacturing Companies and Gas Based Industries
Vandalism of gas pipelines by the Niger Delta militants also affected manufacturing companies
that utilize natural gas either as feedstock or as a source of energy. This led to an increase in the
cost of production, because some of these companies resorted to alternative means of transporting
gas (virtual pipeline); while others turned to diesel as their alternative source of energy. In addition
to this, the rise in exchange rate led to an increase in the cost of importing raw materials. These
alternative sources to pipeline gas, coupled with high cost of importing raw materials, led to an
increase in the cost of production thereby contributing to the hike in prices of finished goods.
viii.
Delay in Signing the 2016 Budget
Another factor that contributed to this recession is the delay in signing the 2016 budget into law.
This caused a delay in the commencement of the development of capital projects in the country.
As a result of this, the government couldn’t release money into the economy for the construction
of infrastructures; and as such, there was no way to provide capital goods on time. This limited
government spending; thus, labour could not be hired and there was a reduction in the circulation
of money in the economy, thereby contributing to the fall in aggregate demand.
ix. War Against Corruption
The current administration’s war against corruption led to the mop up of black money from
circulation. The government was able to do this by enforcing the policies of “Treasury Single
Account (TSA)” and “Biometric Verification Number (BVN)” that commenced in 2012 and
February 2014. This led to a reduction in the liquidity of banks thereby leading to downsizing in
the financial sector; and then, to massive unemployment and a fall in people’s income. This
liquidity problem hindered banks from lending out money to intending investors; hence, a fall in
the level of investment in the country.
Summary
In summary however, the fall in demand and price of crude oil (the remote cause), balance of
payment deficit, adoption of a floating exchange rate regime, an increase in the pump price of
PMS, activities of pipeline vandals, irregular power supply, the delay in signing the 2016 budget
into law and the withdrawal of black money from circulation has resulted in a significant increase
in the cost of production. All these factors combine to create a cost-push inflation, fall in aggregate
demand and a fall in output of goods and services as defined by the current economic recession in
Nigeria.
As a result of the cost push inflation in the economy, there was a fall in the value of Naira, and this
made goods and services very expensive; hence, the fall in aggregate demand. This caused output
to fall thereby, leading to the shutting down of some firms that could not cover their average
variable cost of production; while others resorted to cutting down costs by downsizing. This led to
mass unemployment as people massively lost their jobs. Mass unemployment therefore, led to a
further decrease in output and aggregate demand, which eventually led to a negative growth in
GDP in two consecutive quarters of 2016.
RECOMMENDATIONS
i. Resolve the Crisis in the Niger Delta
The first and most important thing to do is to end insurgency in the Niger Delta region. This would
help to increase the volume of oil production, thereby allowing the country to benefit from the
increase in the global price of crude oil. Foreign exchange earned may be used to fill up the gap
between the demand and supply of foreign exchange in the economy which will translate to the
appreciation of Naira. This will also lead to availability of more money in the economy that can
be channeled to the development of capital goods and infrastructures. Dialogue can be employed
as a solution to this problem.
ii. Reduction in the Cost of Governance
Government should adopt a policy that seeks to cut down the cost of governance and encourage
public officials and the general public to patronize locally made goods and services. For example:
education, medical services, banking, tourism, vacation, training of public officials, conferences,
cars, cloths, shoes, etc. that are produced locally, should be patronized. This would help save
foreign exchange and also improve the quality of goods and services produced in the country. For
instance, a governor, instead of awarding 60 scholarships to students to study medicine in China,
could give them scholarships to study that same course in a Nigerian university.
iii. Adoption of Expansionary Fiscal Policy
Expansionary fiscal policy should be adopted by the government in order to boost aggregate
demand and output in the economy. Increased spending by the government would increase
disposable income of Nigerians, which would eventually increase aggregate demand in the
economy; while, reduction in taxes would encourage businesses to produce more outputs. In this
way, there will be enough money at the disposal of consumers to purchase the additional goods
and services that are produced within the economy.
iv. Deregulation as an Important Tool
The government needs to remove every form of market distortion so as to allow the forces of
demand and supply to operate freely. This would help to ensure competition in all the sectors of
the economy. Competition breeds efficiency and discourages laziness. Healthy competition in the
Nigerian economy would lead to improvement in the quality of goods produced and services
rendered. Nigerians are creative and as such, competition would help maximize this great potential.
v. Power Sector Development
Government should make policies that would encourage the completion of uncompleted and
abandoned projects in the power sector. For instance, Mambilla Hydro Power dam and Azura-Edo
power plant have the capacity to double the current amount of electricity generated in Nigeria.
Also, as a solution to the problem of vandalism, generating companies should adopt alternative
modes of transporting natural gas. The use of LNG and compressed natural gas (CNG) should be
adopted in transporting natural gas to power plants across the country.
vi. Construction of Modular Refineries
In addition to Dangote refinery that would come on-stream in 2018, a policy should be made to
encourage modular refineries. These modular refineries do not take as much time to assemble
compared to big refineries. An increase in output and supply of PMS and diesel would cause their
prices to fall thereby leading to a reduction in the cost of transportation and cost of generating
electricity using PMS and diesel generators. Therefore, this would lead to a reduction in the cost
of production and a fall in the prices of goods and services.
vii. Production of More Capital Goods in Place of Consumer Goods
Government should spend less on production and supply of consumer goods, but rather concentrate
on developing infrastructures and adopt policies that would encourage the private sector in
providing capital goods within the next few years. This would help to put in place the structures
needed to develop the manufacturing sector of the country. This way, the country can channel its
efforts to the processing of natural resources (raw materials) into finished goods for consumption
and also, for export.
viii.
Businesses
Businesses that utilize natural gas either as feedstock or as a source of energy, should consider
adopting LNG and CNG as their modes of transporting natural gas to manufacturing plants. This
would help to reduce the cost of transporting gas in the case of vandalism.
Local manufacturers should improve on the quality of goods produced and services rendered so
that individuals will be encouraged to patronize them instead of going for foreign made goods and
services. In the same vein, investors should take advantage of the current situation to look for
opportunities in the country. Research should be carried out to determine ways of maximizing
production and minimizing costs.
ix. Individuals
Individuals should cut down their appetite for foreign made goods and services that are readily
available in the country. They should increase their demand for locally made goods and services.
This would help to reduce the pressure on foreign exchange reserves and also ensure a favourable
balance of trade.
Individuals should invest in the local economy as opposed to investing abroad. This would lead to
an increase in output and also ensure that resources are not taken out of the system at the expense
of the local economy. Agriculture is important; individuals can invest in that sector so as to boost
food production and supply into the market, thereby beating down the prices of food stuffs in the
market. This would also create employment in the short run and food security in the long run.
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