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Negotiating the Recession Challenges: Options for the Structurally Unbalanced Nigerian Economy
MR. ERNEST C. EBI, MFR, FCIB, Chairman, Fidelity Bank Plc
THE 9TH CONVOCATION LECTURE OF REDEEMER’S UNIVERSITY, EDE, OSUN STATE, NIGERIA.
The Founder of this great institution, Your Excellencies’, Members of the Board of Trustees, Distinguished Faculty, Graduating Students, Ladies and Gentlemen.
I count it a privilege to have been chosen to deliver the 2017 convocation address of this great Institution. I do not take this opportunity for granted but as a veritable platform to encourage our leaders of tomorrow.
Let me begin by extending my sincere appreciation to the Vice-chancellor of this great University, Professor Debo Adeyewa, and the Chairman, Redeemer’s University Board of Trustees, His Excellency, Professor Yemi Osinbajo, GCFR, the Vice-President, Federal Republic of Nigeria. Thank you for counting me worthy to address this august assembly on this great occasion.
I would also like to extend my deep gratitude and congratulations to the Founder of the University and my Father in the Lord, Pastor E.A Adeboye, who has been a great inspiration and role model to me, amongst many others around the world.
To the students, who will be stepping out of these walls today, please accept my congratulations. It is instructive to note that the degrees that would be conferred on you were achieved through long hours of hard work, in addition to been found worthy in character and learning. I, therefore, wish you well as you begin your journey into “life” and urge you not to rest on your oars. I hope you find success in your chosen career paths and I pray that in the final count; this institution, your parents, and indeed Nigeria will be proud of you.
I remembered with nostalgia, my own graduation ceremony 43 years ago. Right there at the convocation ground in faraway Washington DC, I knew my destiny was in my hands. Today, I am telling you the same thing – fulfilling your destiny depends on you and how you work things out. I challenge you to make all of us proud by creating a bright future for yourselves and our great nation.
It is pertinent to note that in many ways, I am a part of this great family. I was a pioneer member of the Redeemer’s University Board of Trustees and today my better half, Elizabeth, is also a member of the University Board of Trustees.
I must also commend the administration of this great Institution for the giant strides they have made; growing the student population to a modest 1,800 and winning several awards and recognition within 12 years of its existence. Of importance note, is the winning of the prestigious grant that funded the establishment of African Centre of Excellence for Genomics of Infectious Diseases (ACEGID) sponsored by World Bank, winning of 2017 Seeding Labs Equipment Grant by USA, the Osun State’s outstanding private university award and Best IT-driven Institution Award in Ogun State given by the Nigerian Computer Society. Of equal significance is the prestigious Roger Hatchuel academy award on creativity, won by a student of the University. These are testimonies of your greatness. I urge you to keep up the good work and always reinvent yourself in other to keep pace with emerging trends and innovation. Our expectation from you is to be Nigeria’s answer to the Ivy Leagues and other great citadels of learning where great minds are moulded.
2.0 Topic for discussion
I have been asked to speak on the topic “Negotiating the Recession Challenges: Option for the Structurally Unbalanced Nigerian Economy”. At a glance, I have my reservations about the topic for the simple reason that Nigeria has exited from the recession it plunged into in 2016, posting a GDP growth of 0.55per cent in the second quarter of 2017 from -0.9per cent in the first quarter of 2017 and -1.49per cent in second quarter of 2016. Notwithstanding, the need to interrogate how we got into the recession cannot be over-emphasized with a view to putting in place the appropriate policy framework that will put the economy on the path of sustained and balanced growth. I believe that this, perhaps, informed the choice of the topic by the organizers of this forum. I therefore, consider it quite auspicious and topical.
I have structured this presentation to run through the concept of recession, both theoretical and the experience of Nigeria and other countries, the particular effect of our structural imbalance and options to put Nigeria on the path of balanced and sustainable growth.
The concept of recession has been defined variously. However, it is a “period of general economic decline, defined usually as a contraction in the GDP for six months, (two consecutive quarters) or longer; marked by high unemployment, stagnant wages, and fall in retail sales; A recession generally does not last longer than one year and is much milder than a depression”
Technically speaking therefore, a recession occurs when there is negative economic (GDP) growth in a country for two consecutive quarters. This was the case with Nigeria when it posted –0.67per cent and – 1.49per cent GDP growth in the first and second quarters of 2016. This was to extend to the third and fourth quarters of 2016 and first quarter of 2017, when it posted GDP growth of – 2.34per cent, -1.73per cent and –0.91per cent respectively. The effect of a recession is that “macroeconomic indicators such as GDP, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise” – we saw this happen in Nigeria.
You will notice that in a period of recession, it is expected that inflationary pressure will decelerate. But clearly, this was not the case with Nigeria, as inflation actually spiked moving from 12per cent in March 2016 to 18.72 per cent in January 2017, before trending downwards currently at 16.05 per cent in July 2017. Thus, giving rise to what is called stagflation. However, the inflationary pressure at the time was not caused by system liquidity but rather by structural factors such as cost of energy and transportation, infrastructural deficit, and FX pass through to the domestic economy.
Let me also add that recession could be triggered by events such as financial crisis (GFC- USA, Greece, Russia, Italy (2007-2008)), external trade shocks (Nigeria, Angola, Venezuela (2016)), adverse supply shock, or the bursting of an economic bubble.
3.0 THEORITICAL AND CONCEPTUAL BACKGROUND
3.1 The Great Recession or Global Financial Crisis (GFC) 2007 - 2008
A financial crisis is any of a broad variety of situations in which some financial assets suddenly loose a large part of their nominal value. This could be as a result of banking crisis, currency crisis, stock market crash, speculative bubbles, sovereign default etc. The nexus between financial crisis and recession has been subject of debate amongst economists. While some economists have argued that financial crisis is caused by recession, others posited that recession have in part been caused by financial crisis.
However, there is no doubt that financial crisis has caused economic recession in many countries. The Great Depression of 1930 and the Global Financial Crisis of 2007-2009 are readily available examples of financial crisis that triggered slowdown in global economic growth.
The GFC for example, was due to poor and irrational lending policies from the financial industry that allowed people to buy houses they could not afford because everyone thought housing prices would continue to rise.
In 2006, the bubble burst as housing prices started to decline. An escalating foreclosure rate caused panic and many banks and hedge funds who had bought mortgage-backed securities on the secondary market suddenly realized they were facing huge loses. By August 2007, inter-bank lending weakened in a bid by banks to avoid toxic assets as collateral. This led to the $700 billion bailout from the United States government to help save several large financial institutions from bankruptcy. By December 2008, employment was declining faster than in the 2001 recession, and the country fell into a deep recession.
During the Great Recession years – identified by the United Nations as the period between 2008 and 2010 – global productivity dropped substantially. Total global gross domestic product (GDP) slid in 2008, but it actually became negative (and substantially so) in 2009, bottoming out at a -1.7per cent annual growth rate. This may not seem significant at first, but 2009 was the only year in the post-World War II era with a net negative global GDP.
Ironically, while countries like USA, Russia and Greece, where adversely affected by the GFC, the impact on Nigeria, was moderated by the buffer provided by our reserve, Excess Crude Account, and the banking sector consolidation. According to Prof. C. Soludo ‘Nigeria is not insulated from the GFC but it is now better prepared to withstand the shock than in the past by : Debt Relief (effectively saving about $4bn in annual debt service payments), Banking Sector consolidation and Robust External Reserves (about $52 billion) with ‘Savings for the Rainy Day of $20 bn as possible cushion’. From Soludo’s informed stance, we can deduce that the foundational defense against recession is buffer provided by savings.
2.1 The business Cycle Theory
This is another contribution to the body of knowledge on recession. Proponents of this school of thought posit that an economy witnesseses a number of business cycles in its life. A business cycle involves periods of economic expansion, recession and recovery (Table 1). However, the duration of each stage may vary from case to case.
Graph 1 – Business Cycle
2.5 Country Experiences with Recession
Global GDP has rebounded post GFC, but different countries applied different approaches and hence, are recovering differently. Some nations, such as Greece, have obvious problems while others, including Japan and Russia, comprise some of the most influential economies in the world in terms of recovery.
2.5.1 Greece: The Never-ending Tale
Greece remains one of the most high-profile struggling economies in the world. According to U.N. data, Greece was in a period of recession (defined as multiple quarters of negative GDP growth) for an unheard-of 63 consecutive months between the third quarter of 2008 and the second quarter of 2014.
Greece briefly emerged from its recession in early 2014, but it began to contract again for the final quarter. The numbers entering 2015 were not good: Youth unemployment was well above 50per cent, at least 80per cent of the unemployed have been without jobs for more than six months, and gross government debt exceeded 160per cent of GDP.
In terms of percentage of GDP lost, Greece's downturn was never as deep as the recession in the United States. However, the Greeks don't have their own printing press for the conduct of monetary policy (it has no central bank because it is part of the EU economic alliance), and its future prospects appear quite bleak.
The major hurdle to economic growth appears to be political. Greece's intractable government – buoyed by a population unwilling to accept EU bailout conditions – appears to be incapable of taking serious steps to fix the country's balance sheet or credit issues.
2.5.2 Russia: A Double-Dip
From 1991 until 1999, the new Russian Federation experienced a period of remarkable economic upheaval. However, the former superpower saw a rising GDP from 1999 until 2008, when crisis hit global markets.
Starting in 2008, the Russian economy saw sharp declines in GDP and stock prices. The benchmark share index, the RTS, lost nearly three-quarters of its value by January 2009. Industrial production fell by 12.5per cent in the following 12 months, and many of the gains from the previous decade were wiped out.
Russia showed signs of recovery in 2012 and 2013, posting positive year-on-year GDP growth on the back of high energy prices and rising productivity. However, from 2014 with reversals in the price of oil, the economy experienced huge revenue shocks and gradually slid into another bout of recession. Russia thus appears to have similar economic experience with Nigeria.
In October 2015, Forbes magazine ranked Russia as the single worst economy in the world. Suffering a recession on the back of dropping crude oil prices – a commodity comprising 68per cent of Russia's total exports – and a flailing fiscal and monetary policy, the future prospects for Russia are bleak at best.
2.5.3 Italy: A Drain on Southern Europe
Several countries in South Eastern Europe struggled for much of, if not all, of the period between 2008 and 2015. Next to Greece – by far the worst economy in the region – Italy stands as the slowest gainer since the Great Recession.
The Italian economy officially pulled out of the recession and posted positive GDP in the third quarter of 2009, but two years later, it spun into a 27-month long productivity drain. Productivity per person in Italy was lower in 2015 than in 2007.
On a real, seasonally adjusted basis, the Italian economy has lost nearly 10per cent of its GDP since its 2008 peak. Private consumption and investment remain low. Youth unemployment reached a record high of 44.2per cent in July 2015, and overall unemployment stayed above 12per cent from 2013 to 2015.
3.0 The Nigerian Experience
3.1 The Economy from the Global financial Crises era; 2008 to 2016, showed a progressive drop in real GDP growth.
From table 1 below, Nigeria's GDP, from a high of 8.3 per cent in 2009 crashed to its lowest between 2015 and 2016 culminating in the recession. Many economists hold the view that the Nigerian economic recession was triggered mainly by severe drop in oil revenue. However, many other scholars including the former CBN Governor now, Emir of Kano – Emir Sanusi Lamido Sanusi in 2016 argued differently. According to him, a nation cannot be in recession, because a sector that contributes 15per cent of its GDP has declined. He posited that “We have had decades of policy failure. The last decade was Africa’s miracle decade because we moved from a continent that was known for hunger and war to a decade where we were seen as a land of opportunities and investments. Nigeria grew at seven per cent every year throughout that period as the economy doubled and we became the biggest economy in Africa but lack of appropriate policy implementation made us lose all proceeds.” Like Soludo, he also attributed the cause of recession to the nation's poor savings over the years and misappropriation of resources which should have been injected into strategic sectors of the economy such as agriculture, infrastructure, and general improvement in the business environment (ease of doing business).
Growth rate (in per cent)
Table 1 Source: National Bureau of Statistics (Culled from several reports)