February 8, 2017

Crisis As An Opportunity: The Two Sides Of Economic Recession

Economic crisis is no doubt a painful episode for different economic entities; however it also presents an opportunity for implementing reforms, especially for economies like Nigeria, where political will towards implementing reform, even during good times, is weak

The economic crisis currently facing the Nigerian economy has no doubt had a catastrophic and debilitating effect on various economic entities. For instance, the most recent economic report by the Nigeria Bureau of Statistics (NBS) shows that the population of the unemployed has increased to about 11 million in the third quarter of 2016, from around 9.5million recorded in the first quarter of the year; while output contracted by 2.4 percent over the same period. Even worse is the fact that the lucky few holding on dearly to their jobs are doing so with no assurance of regular emolument. While these statistics reflect the grim economic conditions faced by businesses and households, the public finance of the three tiers government in Nigeria has also been significantly affected by the economic crisis. The amount in the federation account, which is shared among the three tiers of government, dropped from an average of NGN450 billion in 2015, to around NGN364 billion in 2016.

With these depressing developments arising from the economic recession, one might honestly ask what could be positive, or what could generate opportunity from the economic recession as the caption of this article suggests. However, a throw-back to the pre-recession periods will indeed reveal a lot of positive benefits that the present crisis avails the country if effectively utilized. For far too long, high crude oil prices have masked the huge structural problems in the Nigerian economy. On the fiscal side, the fiscal sustainability remains a concern, despite the fact that the country benefited from the debt forgiveness initiative by the Paris Club in 2006. For example, prior to the debt forgiveness in 2004, Federal Government total debt outstanding (domestic and external) stood at NGN6.4 trillion (52.7 percent, Debt-GDP ratio) and subsequently dropped to NGN2.2trillion (11.8 percent, Debt-GDP ratio) in 2006, after the large part of the external debt component were written off [1]. However, in 2015, the debt outstanding jumped to NGN10.95 trillion (11.5 percent, Debt-GDP ratio), almost doubling the debt size before the debt forgiveness initiative.

Nigerian fiscal sustainability problem is also reflected in the dismal level of public savings. The Federal Government has recorded budget surplus in just one fiscal year over the past two decades. In fact, the modest public saving, Sovereign Wealth Funds (SWF), made before the oil price crash was about USD2.9billion[i]. Comparatively, Saudi Arabia, also an oil dependent economy, had about USD668billion in SWF prior to the oil price crash[ii]. The implication is that Nigerias economy entered into the recession with very limited fiscal buffer to implement sound economic stabilization policies.

Another structural problem, the reform which has long been delayed is the countrys deficient fiscal federalism. Crude-oil which only a few of the states are producing has been the main revenue source for the entire federation. In 2014, crude-oil proceeds accounted for 72 percent of total government revenue, yet, the countrys over-reliance on crude oil has come with its attendant problem of resource curse. For example, the easy-to-get and huge oil revenue has reduced incentive for the sub-national governments to develop their internal revenue capacity. It is therefore not surprising that 26 of 36 States in the federation have challenges in paying the salaries of their workforce timely[iii]. More broadly, due to lack of transparency and accountability in the oil sectors management, dependency on oil revenue has eroded good governance at all levels of government.

Furthermore, the rebasing exercise of the Nigerian GDP, released in 2014, points to another structural problema dysfunctional developmental transition. At the time, the Nigerian government was in euphoria, as the country became the largest economy in Africa by transiting from an agricultural-based to a service-based economy. However, development theories and historical evidences suggest that typical economic development follows an initial transition from agriculture to manufacturing sector, and a final transition to the service sector. This atypical transition in Nigerias case is largely driven by the trade sector and telecommunication and real estate sub-sectors. While the development in the telecommunication and real estate subsectors can be attributed to the privatization of the sub-sector and the bulging middle-class, the spark in trade is primarily driven by access to cheap imports, especially from China. Expectedly, the transition reflects no improvement in jobs or other development indicators. Even worse, the manufacturing firms were collapsing at an alarming rate despite the growth recorded during the periods. In essence, the direct transition from agriculture to service sector reflects a fundamental structural defect in the Nigerian economy, with clear sign of imminent danger.

These highlighted structural deficiencies and many more are indeed well documented and recognized by the policymakers and policy experts as areas demanding holistic reforms. Yet, it appears paradoxical that the deficiencies have been left unattended to over the past years. Interestingly, the whole development and governments inaction seems less paradoxical if considered in light of idea of crisis hypothesis which is increasing gaining consensus among economists and reform analysts. According to the crisis hypothesis, first proposed by Alesina and Drazen (1989)[iv], in good times the propensity to implement reform is weak and even if implemented, its probability of success is low. Thus, in good times such as during oil boom or sustained economic growth, government could gloss over fundamental problem; until crisis emerges and changes the dynamics. Specifically, during economic crisis incentive for reform intensifies and the probability of reform success is also enhanced. In essence, while economic crisis comes with the undesirable cost of instability, among other problems, it also creates opportunity for reform. Thus, on the balance, if the benefit of reform exceeded the cost, then the economy could in the long run benefit from the crisis situation, like the ongoing economic recession in Nigeria.

The argument is not to christen the crisis as virtuous, but when a needful reform is delayed, economic crisis tends to force the government to implement the reform more urgently. For Nigeria, the luxury of reforming in good times is fading and the unfolding crisis is another opportunity to take a hard look at the structural deficiencies and develope a more sustainable pathway to economic development. In no distance time, by governments action or inaction, the economic recession will surely vanish and even oil prices could rebound. However, without addressing these structural deficiencies (fiscal unsustainability, fiscal federalism, dysfunctional developmental transition, among others), the good time will be anotherdj vu.

[1] Prior to the 2004-5 debt deal with Paris Club creditors, Nigeria saved some US$12 billion in the Excess Crude Account which was used for the purchase of the remaining US$18 billion, and hence the elimination of US$30 billion in external public debt.

[i] https://www.gfmag.com/global-data/economic-data/largest-sovereign-wealth-funds

[ii] Ibid

[iii] http://www.nairaland.com/3081200/list-only-10-states-not

[iv] https://dash.harvard.edu/bitstream/handle/1/4553028/alesina_whystabilizations.pdf?sequence=2



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