Nigeria in recession- 2020 edition explained
"When the economy shrinks, as it happens during recessions, all these things go into reverse. There are less jobs, companies are less profitable and many shut down leading to job losses and the government is unable to spend on infrastructure and pay salaries."
The renowned writer, C.S Lewis said, "If you're on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive."
This is an apt quote in light of Nigeria's current reality. On Saturday, November 20, 2020, the National Bureau of Statistics - the Nigerian agency responsible for the coordination of national statistical work and national economic accounting - announced that Nigeria has fallen into a recession (1). This is the second time the country has entered a recession in five years. It is the third time Nigeria has fallen into recession under the leadership of Muhammadu Buhari – the first was in 1984 when he was the Military Head of State.
Should we agree with Ian Fleming who remarked, "Once is happenstance. Twice is coincidence. Three times is enemy action."?
What is a recession?
An economy grows because the goods and services in a country increase from month to month. As the citizens of the country work, they produce goods and services. The value of those goods and services that a country produces is called the Gross Domestic Product (GDP) (2). You sell jewelries on Instagram. Your Facebook friend manages a social media account for a company. Chivita produces fruit juice. A lecturer teaches in a University. All these and more make up the GDP. This GDP is usually measured every three months which is called a quarter of a year. These are represented by Q1 (Jan to Mar), Q2 (Apr to Jun), Q3 (Jul to Sep) and Q4 (Oct to Dec).
According to 2019 figures by the World Bank, the United States has the highest GDP in the world valued at $21.3 trillion (3), followed by China at $14.3 trillion (4). Nigeria has $448 billion (5). The IMF says Tuvalu is the country with the smallest GDP at $46 million (6).
In normal times, the GDP of a country increases because the more the production of goods and services, the more people are employed, the more they are employed, the more the companies expand and the more goods and services they produce. On and on.
But sometimes the GDP falls in value, not increases. Remember I said that GDP is measured in quarters. It's fine if it falls in one quarter and then increases again. But in a scenario where the GDP falls in two quarters in a row, you have a Recession.
Why does a recession matter?
When the GDP grows, it usually means that there is economic growth which is good for most people in the country. It usually means there are more jobs, and companies are more profitable and can pay employees and shareholders more, than in the previous three months.
A growing economy also gives the government more money in taxes. So it can spend more on public services and government workers' wages.
When the economy shrinks, as it happens during recessions, all these things go into reverse. There are less jobs, companies are less profitable and many shut down leading to job losses and the government is unable to spend on infrastructure and pay salaries.
The growth of the GDP when it is not in recession also matters. Here are Nigeria's GDP growth since 2014 (7):
2012 - 4%
2013 - 6.6%
2014 - 6.3%
2015 - 2.6%
2016 - (-1.6%)
2017 - 0.8%
2018 - 1.9%
2019 - 2.2%
2020 (Q1) - 1.87%
2020 (Q2) - (-6.1%)
2020 (Q3) - (-3.6%)
As you can see from 2015, growth when they occurred were sluggish. A 0.8% or 1.9% growth in an economy like ours makes little or no impact on its people. In the same timeframe that Nigeria experienced these low and negative growths, Ghana had 3.4% growth in 2016, 8% growth in 2017, 6.2% growth in 2018, and 6.4% in 2019 (8). Kenya was 6.3% in 2018 and 5.3% in 2019 (9).
The snail growth is exactly the reason why it seems as though Nigeria has been in recession throughout the last 5 years.
Why is Nigeria in a recession?
When you see these GDP figures, know that they are lagging metrics. In other words, they are reports of what occurred, not necessarily what is occurring. The period between March and September 2020 have been especially hard on Nigerians. One of the ways I measure this is to regularly ask those close to me to tell me the frequency with which they have been asked for financial assistance. It's been a difficult time. It is safe to say that these metrics are still in full force.
Here are the reasons for the 2020 recession:
Coronavirus-induced low oil prices
According to budgit, Nigeria's oil and gas sector represents about 60% of government revenues (10). On April 22, 2020, I comprehensively explained how the coronavirus pandemic will affect Nigeria's oil revenues and Nigeria's fortunes (11). The country's 2020 national budget was drawn up with an oil price expectation benchmark of $57 a barrel which was later cut down to $30 after some reality check. Nigeria’s total production capacity is 2.5 million barrels per day. But the effects of the pandemic and low oil prices have cut production to approximately 1.4 million barrels (12). The attendant effect is that we are low on price and yet still low on supply. According to the Statistician General of the Federation, the oil sector contracted by 13.9% in the third quarter against growth of 6.5% in the same period a year earlier (13).
In other words, there is simply not enough revenue. According to Vice President Yemi Osinbajo, Nigeria’s revenue has dropped by almost 60% (14).
But whose fault is it five years after the government has promised to diversify its revenue? The Buhari administration campaigned on economy diversification (15).
The Nigerian government seems blind to the reality that Oil is dying. Prime Minister Boris Johnson at the weekend announced the U.K. will ban the sale of new gas and diesel-powered vehicles, starting in 2030 (16). Germany, France and a host of countries in the European Union already announced the ban for 2040 (17). Norway which is an oil producing country like Nigeria wants to ban petrol and diesel cars by 2025 (18). Nigeria's main oil export partners are the United States, India, Brazil, Spain, France, and the Netherlands. The United States, under Donald Trump, has now become a net exporter abandoning Nigeria's oil (19). Spain, the Netherlands and France have vowed to ban diesel-powered vehicles so are reducing their dependencies. India and Brazil are cozying up to the United States and with Joe Biden promising not to ban fracking (20), these two countries would rather buy from the US than Nigeria.
Time is running out and the government seems not to be in a hurry. Earlier this month, the Director General of Budget Office said at least 428 Ministries, Departments and Agencies, MDAs, in the federal civil service have reportedly exhausted their 2020 personnel costs and are, therefore, unable to pay salaries going forward (21).
Another reason why Nigeria is in a recession is our disregard for trade. I see several people blame the 3-month lockdown, but I had warned since November 2019 (22) that disaster awaits us with the ill-advised closure of the border. Nothing good could come out of it. The idea that we import too much and thus we should close the border both to import and export is one of the most preposterous policies of this government. The idea that smuggling across the border has not allowed our industries to grow is at best a smokescreen. I argued in my November 2019 piece that according to figures released by the National Bureau of Statistics, in 2018 Nigeria imported goods worth N74.7 billion from its West African neighbors, and exported N1.04 trillion.
Yet one year later, the borders have remained shut yet the government cannot point to anything good that has come out of it. In fact, it is such a bad policy that the government has now through the backdoor exempted Dangote from this god-forsaken policy. While Nigerian manufacturers gnash their teeth, Dangote Cement has been given approval to export through land borders (23). It is a case of one law for me, another for you. It is a terrible policy. No wonder in terms of contribution to the Q3 negative growth, trade deficit contributed the most at -1.85%, more than petroleum which contributed -1.34%. We need to open the borders and we need to do it immediately. Real people and businesses are suffering this insane policy.
This is the elephant in the room that many people close to the government seem to shy away from. On August 12, 2018, The Punch newspaper reported a news item about the Chairman of APC, Nasarawa State chapter, Mr. Philip Shekwo. In it, he attributed the killings by suspected Herdsmen and bandits in some parts of the country to “corruption fighting back to discredit the president.” (24) Yesterday, Mr. Shekwo was found dead after he had been reportedly kidnapped by unknown gunmen (25). May his soul rest in peace.
The insecurity in the country is alarming. The Chairman Senate committee on Army, Ali Ndume, said the Army is currently operating in at least 33, out of 36 States of the Federation (26). In which other country not at war is this happening? Amnesty International says that 1126 persons have been killed while no less than 380 others have been kidnapped by bandits in the period between January to June 2020 (27). Even some governors are no longer at liberty to move freely in their states. France24 reported in September 2020 that 30 people were killed when a convoy transporting the Borno governor came under attack (28). Yesterday marked the third time the governor had been attacked by Boko Haram terrorists in the last three months (29). Nine people reportedly died yesterday. Convoys of Zamfara and Gombe governors have been attacked in the past. In fact, the brother of Bauchi state governor was kidnapped in March this year (30). This should not be strange when Nigeria is host to three of the world’s five deadliest terrorist groups – Boko Haram, ISWAP and Fulani militants.
The main impact insecurity has on the recession is food insecurity. Right now, insecurity has created a food problem in the North with over 2.5 million refugees (31). Up to 200,000 Nigerians are refugees in neighboring countries of Cameroon, Chad and Niger (32). Entire farmlands are decimated and with the North producing a large chunk of food in the country, expect that the rise in the prices of food items will continue in 2021. There are already reports that there will be famine in the new year.
Therefore, when we decry the great insecurity in the land, it is not to attack the present administration, it is a cry from our hearts for the government to fulfil its pledge of protecting lives and property. The first and most important function of a government is to provide common defense and security for its citizens.
Managing the recession as an individual
As far back as June 2020, the World Bank already urged Nigerians to prepare for a severe economic recession, the worst since the 1980s (33). This recession is particularly biting because it is more of Stagflation. Ideally, when in a recession, because demand for goods and services are low, the rate of inflation slows down, stops, or becomes negative. This is not the case right now because at 14.23%, Nigeria's inflation rate is the highest in 30 months (34).
Stagflation happens when there is a recession yet the inflation keeps rising. This combination is unnatural because inflation is not a condition that is generally seen when the economy is slowing or stagnant and unemployment is high.
Policy prescriptions in a situation of stagflation can be tricky since increasing interest rates to control inflation will make it difficult for the economy facing slowing growth to recover. At the same time, keeping rates low to support recovery may exacerbate the inflationary situation. But I assure that if the Nigerian government can address the three issues above, the country will make a lot of headway.
This article is already too long as is, but it will be a disservice if I don't write something about what the individual citizen can do to protect himself at this time. To be candid, the best time many people should have read this article is in March as that gives them time to plan ahead. Be that as it may, I still have a few suggestions that may help in these trying times:
- Have an Emergency Fund: When the economy starts to dip, our jobs and our income can be put in jeopardy, and it’s for this reason that saving an emergency fund is crucial when you prepare for a recession. In a nutshell, an emergency fund is the money you’ve saved up for the sole purpose of helping you get through your day-to-day living during financial hardships. If it’s possible, try to save about 3 to 6 months’ worth of your salary.
—Avoid interest-bearing debts: Carrying a debt burden is exactly that: a burden. And, during a recession when jobs are scarce and money is tight, those high debt payments will add only more stress to an already stressful situation. The lender is also going through a lot and the zeal to collect payment is high. If you have debts right now, you may want to renegotiate the terms or pay it off completely.
— Lead a More Frugal Lifestyle: Downsizing and learning how to live frugally can be a great strategy, because if you can learn to make do with less, you’ll increase your savings and you won’t find yourself struggling to adapt to a new lifestyle as a recession hits. Living frugally isn’t as difficult as it sounds, and contrary to popular opinion, a frugal lifestyle isn’t about pinching pennies and depriving yourself of things that bring you joy. Rather, it’s about making conscious spending choices that reduces expenses, with minimal impact on your lifestyle.
—Diversify Your Income: Most of us are familiar with the saying “don’t put all your eggs in one basket,” and this adage could be applied to your source of income. Relying solely on a particular job for all your income has inherent risk, because if the economy tanks and you lose your job, you’ll also lose your only income and your ability to meet all your financial obligations. I always say that in the age of the internet, there are opportunities in online and remote work to earn extra income especially if you are self-disciplined enough to learn digital skills.
Tosin Adeoti is a Market advocate, Founder, Freshly Pressed.
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