Owing to plunging commodity prices, Nigeria’s economy will soon slip into recession. And that is official. The Central Bank of Nigeria Governor, Godwin Emefiele, says, “The conditions that led to the contractions in the first quarter of 2016 were still largely unresolved. The recession, which was signalled in July 2015, now appears imminent.”
According to the National Bureau of Statistics, the economic numbers for May 2016 showed that domestic output in the first quarter of 2016 contracted by -0.36 per cent, the first negative growth in many years. This represents a drop of 2.47 percentage points in output from the 2.11 per cent reported in the last quarter of 2015, and 4.32 percentage point lower than the 3.96 per cent recorded in the corresponding period of 2015. Only agriculture and trade grew by 0.68 per cent and 0.40 per cent respectively, while industry, construction and services recorded negative growth of -0.93, -0.26 and -0.08 percentage point respectively. Because it is expected that the second quarter would be worse, recession has become inevitable.
For some time now, every day has been bringing a barrage of woeful economic reports. One primary cause of the trouble is the plunging commodity prices. The sharp drop in oil prices has drastically reduced government revenues, weakened the national currency and forced the economy into tumbling over. Oil prices have been in a free-fall since mid-2014, when crude traded at about $110 a barrel. It dropped under $30 early in the year, but later nudged $50.
Emefiele explained that a cocktail of institutional failures drove the economy into the sorry mess. In the first quarter of 2016, according to him, the economy suffered from severe shocks related to energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand, among others. “Consequently economic agents could not undertake new investments or procure needed raw materials. Shortage of foreign exchange arising from low crude oil prices manifested in low replacement levels for raw materials, other inputs as well as new investments. In addition, the energy crisis experienced in the first five months of the year, resulted in increased power outages and higher electricity tariffs, as well as fuel shortages; which led to factory closures in some cases.”
But our problems go far deeper than that. Analysts say an upsurge in militant attacks since February has sent production of crude, which usually accounts for 70 per cent of government revenue, plummeting to an almost 30-year low. Ibe Kachikwu, Minister of State for Petroleum Resources, says, “Over the last two months, we have probably lost about 600,000 barrels from various attacks of militants in the area. In terms of production, we are roughly at about 1.5 million to 1.6 million barrels a day, down from 2.2mbd, which is the basis of this year’s budget.” Corruption and depletion of fiscal buffers also left the economy bare-footed. Delays in approving a budget and a cabinet, as well as President Muhammadu Buhari’s refusal to weaken an overvalued currency until recently, have caused foreign investors to flee. Foreign direct investment fell to the lowest last year since the 2007-08 global financial crisis.
Certainly, Nigeria is taking a cue from other countries crushed by corruption, leadership failure and falling oil prices like Russia that contracted by a hefty 3.7 per cent last year, and Venezuela, which is predicted to contract by 10 per cent this year. The present economic crisis is a consequence of five years of the Goodluck Jonathan government’s misrule. There is real fear that the renewed insurgency in the Niger Delta may drag the country even further down the road of recession. Two oil firms, according to reports, say they lose 140,000 barrels of crude daily due to recent attacks on their facilities by militants. At about $48 per barrel, an estimated $6.72 million (N1.3 billion) daily is lost by the two operators due to the attacks. If peace reigns, Kachikwu predicts, obviously, between now and August, we will be able to recover substantial portion of this production so that the budget doesn’t suffer. But, the Niger Delta Avengers, the new criminal group that has been claiming responsibility for most of the attacks, appears determined to ground the oil-dependent economy.
Nigeria is certainly in for a rough ride. The slow but steady recovery of crude oil prices is lost to the drastic cut in daily production, while a steeper drop in oil prices will worsen the economic crisis. A price war between Saudi Arabia and Iran appears to be getting nastier as the Saudi oil giant, Aramco, is about to further reduce its price to its European customers. All this should worry Nigeria.
Getting out of this mess will require deep-seated structural reforms in both the economy and the political system, something Buhari should muster the political will to do. He has taken a bold decision of near-deregulation of the downstream oil sector and backed down on the pegged foreign exchange rate policy.
Yet, the possibility of a deep and persistent recession in terms of worsening unemployment, falling incomes and reduced economic activity is real. Without major changes, the economy will not recover any time soon. Part of the solution will be how to make the economy less dependent on natural resources. Tackling the raging Niger Delta violence will require innovative strategy, including intelligence and dialogue. Corruption must be fought with more vigour and liberalising economic reforms that will roll back the state from direct participation in business should be pursued immediately.
