What are the causes of economic recession in Nigeria for the last years? It has become a major topic of discussion for Nigerians within and beyond the country borders. According to the article in Bloomberg, South Africa overrun Nigeria as the largest economy in Africa. What happened with the economy for the last few years?
Сauses of economic recession in Nigeria
The Central Bank of Nigeria and the International Monetary Fund agreed that Nigeria is on the stage of economic recession. According to their prognoses, if the situation in the world and within the country is for Nigeria, then the country should expect the regaining of stability as early as at the beginning of the second quarter 2017. Nevertheless, there is no discusses economy fresh start, but about simple 1.5% economic growth. This article provides possible causes of economic recession 2016 in Nigeria. Still, what is a recession and how bad is it for Nigerians?
What is economic recession?
Сauses of economic recession in Nigeria
The National Bureau of Economic Research gives next definition to the economic recession: “a significant decline in economic activity spread across the economy and lasting for more than few month, visible through the wholesale-retail sales, industrial production, employment, real income, gross domestic product.” In general, the economic recession is declined by a long-lasting increase of unemployment, drop in the stock market, negative growth of GDP and decline of the housing market. Nevertheless, it`s less severe than economic depression.
The economic depression is the long-standing economic recession. Still, there are no specific criteria for depression. The unique features can be dug out from the USA The Great Economic Depression of the 1930s. It expressed a Decline of GDP for 10% and an unemployment rate of 25%. The blame for the economic recession falls on the Federal Reserve, Government or the President himself.
Economic a recession and Gross Domestic Product
Сauses of economic recession in Nigeria
An Economic recession can be defined as the decline of the Gross Domestic Product for two months or more in the consecutive quarters. GDP is the market price of all goods created within the country. GDP takes into account new products that have never been manufactured before.
Nigeria is experiencing economic recessions because of a significant decline of GDP in the first and second quarters of 2016. The data shows that GDP decline in the first quarter of 2016 is -0.36%, where the second quarter shows -1.5%. Still, the numbers can be misleading as the economic recession and financial crisis can occur without Gross Domestic Product reports. Nigeria showed some growth in the GDP for the fourth quarter of 2016, which is 0.8%. Moreover, financial analytics expect that the first quarter of 2017 is also expected to have a positive growth in GDP. Nevertheless, it does not mean that the country will clearly get out from the economic recession.
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Main Factors of Economic Recession
The main factors of a nation`s economic recession may include:
- Reduced real salaries. It is connected with salaries adjusted for the inflation. Failing of real salaries means that the workers can`t buy the same amount of goods. The worker can make the same amount of money, but the purchasing power is reduced.
- Reduced consumer confidence. If consumers are assured that the situation in the economic sectors is bad, they less prone to spend money. It`s a psychological factor, but it has real influence on the economy.
- Increased inflation rates. It`s the increase of prices for goods and services over a period of time. With the increase of inflation, you can expect the decrease of worker`s purchase power and decrease of money.
- High interest rates. It damages the liquidity of money, which means the decrease the amount of money to invest.
- Accumulation of debts. If the country can`t pay enough money to its citizens, the more debts are inevitable. Nevertheless, if the new stock of money will be spend with no planning about returning the money – it will cause more debts.
- Unemployment rate. The normal unemployment rate is 5%. Any additional per cent in the unemployment rate provides the possible decrease in GDP for 2%.
- General loss of confidence in the Government. It can lead to the meetings, demonstrations and riots which will only increase the economic recession.
Causes of Economic recession in Nigeria
Poor economic Planning
Сauses of economic recession in Nigeria
It means no concrete implementation of economic planning connected with exchange rate policy and economic delay. Nevertheless, the government manifested, that it`s planned to implement some general indulges, like:
- Encourage of Foreign investments
- Raising agricultural output
- Improving manufacturing sector
- Improving mining sector
- Diversifying of the economy
There is no doubt that the Government of Nigeria proclaimed these possible implementations and even showed some steps towards it. These steps, like the elimination of dollar purchase for importers of 40 items, which included soaps, textiles, wheelbarrows, margarine, meats, poultry, private planes, toothpicks, cement, and rice. In the same time, the Government caused a serious poverty problem.
Сauses of economic recession in Nigeria
One of the examples is CBN, which provided one dollar with N197, where people bought the dollar for N300. That helped many individuals to call for the banking industry to get the dollar for N197 and later resell it for the N300. Just try to think about millions of Naira for doing nothing. The poor people paid the price for the devalued currency, and rich continued this scheme plot.
For instance, if take one billion dollars from the Federation Account and sell it on the CBN for N200, the states can lose one hundred million Naira. This money could be invested into salaries, healthcare or agriculture. These incidents keep occurring throughout the whole country when the limited group of individuals has access to the lower prices to the dollar and selling it at least on 33% higher in price to other people. It means getting money almost out of nowhere.
High Inflation rate
One of the causes of economic recession in Nigeria is the banning of essential agricultural products with no gestation period. The products, like tomatoes, rice, beans, and pepper were banned for import as Nigeria decided to fill the demand by itself. Nevertheless, additional removal of fuel subsidy and the banning of these products only sponsored the speculation in the stock market. It was also expected with the rise of oil prices, budget delay, the skyrocketing rise of the households. Nigerian current inflation rates are 18.63%. That can be a record for the past ten years.
Сauses of economic recession in Nigeria
High-Interest Rate
Investors are not ready to bring more money into the economy of Nigeria. The Interest rate in Nigeria is now around 27%. No money from the investors means high unemployment rates. Which causes the severe damage to the GDP of the country.
High taxation
Economic recession is usually a period when the Government should rethink its taxation policy and provide a better climate for investors, small businesses, and employers. Nevertheless, the murder of small business in Nigeria with high taxation and high-interest rate – leaves no chose to the aggregate demand. It`s expected to be low and even lower.
Policy conflict
The conflict between economic policies gives no choice than to expect the continuance of economic recession. High-interest rate and high tax rate are considered to be the tight monetary policy measures. Still, the Government keeps telling to the public that it`s the expansionary policy. The results are simple – budget deficit.
Implementation of Treasure Single Account
Сauses of economic recession in Nigeria
This idea was created by the Government to stop the corruption and consolidate all funds of the Federal Government. Therefore, all departments, ministers, and agencies transferred their funds from all the commercial banks to the Central Bank of Nigeria. Any approach or voice against this decision was treated as corrupt. The banks who delayed the instructions from the Government were heavily fined. The Finance Minister, party leaders, government officials advertised the campaign as a huge success.
Real results were devastating! The immanent withdraw of deposits from banks did give them the ability to guarantee the loans programs to the customers. Any bank lends parts of deposits to customers, but the balance of demands and depositors should be in the balance. Governments deposits were a reliable source of deposits for commercial banks, and their withdraw was the extreme damage to the banks.
It means that companies relied on loans will sell less, produce less and sack more workers. Small companies will be forced to close their businesses. Some banks were forced to stop funding the projects on the halfway. Therefore, it`s impossible to get bad loans. Almost all banks provided bad loans expectations in 2016 which resulted in the diminishing of profit. Therefore, banks were forced to sack many workers.
The Government officials might have acted with good intentions as the high level of corruptions was needed to be stopped. Nevertheless, the speedy implementation of the policy resulted in major side effects.
Stoppage of Pipeline contracts
Сauses of economic recession in Nigeria
The intentions of the Government were simple – to stop all bogus contracts of predecessors. That included the contracts with the Niger Delta warlords and the suspension of the Amnesty Program. That gave the militants the excuse to recommence the sabotage of the Nigerian oil assets. It caused almost the financial crisis as it provided the reduction of revenues from gas and oil plants.
Should it be mentioned, that there was already a major reduction of the revenues of the crude oil due to the global price decrease for the crude oil? Nevertheless, the addition damage provided by the Niger Delta Avengers decreased the level of production from 2.2 million barrels to 600 000 barrels. It had effects on prices, revenues, and salaries. The implication of this policy had grudge results as the government was not able to fulfill their election promises to package the budget.
Therefore, it resulted in the ability of CBN to provide importers with the required foreign exchange. The consequences were the reduction of manufacturers output due to lack of raw materials, reduced revenues, and sack off workers. Moreover, the Niger Delta was one of the regions that attracted investors to the country, and now with the Niger Delta Avengers and military operations ongoing, there was a huge withdraw of international investments.
Economic managers
Unfortunately, not all Nigerians are gifted in managing the country. Therefore, Finance or Accounting graduates from universities could provide some additional causes of economic recession in Nigeria. It means the decision of the President to give the positions in the Government to people who have almost no experience.
Nevertheless, it does not diminish their patriotic feelings or desire to help the country. Still, the lack of experience in controlling large companies or corporations, or even just work provided Nigeria with not the best results. Some people might say, that they are just getting the experience, but their mistakes have a huge impact on the whole country. There was no turn in planning the Fiscal policies or Marshal Plans that can provide some passage out of the economic recession. Scientific or theoretic management can`t be in place and in the hands of people who are provided with power.
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