Nigeria is out of recession but not out of the woods yet
igeria’s economy has finally exited its worst recession in 29 years. After five quarters of negative growth, the economy grew by 0.55% in the second quarter of this year, a result largely driven by the oil sector which contributed about 78% of the growth recorded. This indicates that the economy is positively responding to the recent improvement in oil prices and domestic oil production.
The recession was initially triggered by an interplay of external and internal factors. On the external side, the crash in global oil prices that become particularly acute towards the end of 2015 led to a slowdown in economic growth and depressed foreign direct investment into the country.
The problem was further compounded by renewed restiveness in the Niger Delta in early 2016, leading to the vandalism of major oil and gas infrastructure. This resulted in a significant reduction in crude oil production and foreign exchange earnings for the government. Combined, these factors generated a substantial shock to the economy, leading to a recession in the second quarter of 2016.
Earlier this year, the Centre for the Study of the Economies of Africa (CSEA) accurately forecast that the impressive but negative economic growth recorded in the first quarter of 2017 suggests that the Nigerian economy is on the right track to positive growth in the second quarter. This positive outlook should be sustained for the two remaining quarters of the year, as the key macroeconomic fundamentals (oil prices, inflation trend and exchange spread among others) look robust, barring any major shock.
For the federal government, which has been criticised for its weak policy response to the initial oil price shock and subsequent exchange rate depreciation that compounded the crisis, this recovery reflects an impressive development.
In some respects, government policy intervention, especially on the monetary side, could be attributed to the economic turnaround. For example, the Central Bank of Nigeria has conducted regular mop-up operations in the exchange rate market over the past six months to curb inflation and prevent further depreciation of the Naira.
The country has also been able to benefit from the slight oil price rebound by stemming the pace of the crisis in the Niger Delta region. This has resulted in improved stabilisation in the exchange rate market, as evidenced by the reduction in spread between parallel and official exchange rate markets from 42.9% in the first quarter of 2017 to 22% in the second quarter of 2017. In essence, the government's initiatives and interventions have played a significant role in getting Nigeria out of recession.
"Economic recovery is sometimes a harder outcome to achieve than ending a recession."
Recession vs recovery
However, any celebration needs to be ephemeral as the country still has a long and arduous road to economic recovery ahead.
In economics diction, recession and economic recovery are two distinct phases of business cycles. Based on the definition by the National Bureau of Economic Research, which officially dates recession in the United States, a recession is defined “as a period of significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”.
On the other hand, economic recovery is the phase beginning with the end of a recession until the economy regains and even exceeds peak employment and output levels attained before the decline.
However, the recent experiences of economies affected by the global financial crisis of 2008 show that economic recovery is becoming a much more painful process characterised by sclerotic and jobless growth. The case of the American economy is a good example. Many economists still believe that the US economy is yet to complete its recovery process since 2008 .
A similar outcome is playing out in the Eurozone where concern around sclerotic growth has grown so huge that a new round of quantitative easing was implemented in 2015. Some analysts believe the weak recovery process is an emerging feature of the increasing linkages among economies. The extent to which this is true will determine how sustainable and robust the recovery process in Nigeria will be.
The key point here is that economic recovery is sometimes a harder outcome to achieve than ending a recession
Best- and worst-case scenarios
To give a sense of the enormity of the task before government, we did some basic scenario analysis of the growth path and estimated time it will require for the Nigerian economy to return to its initial peak levels of output and growth.
First, we analysed the different growth trajectories that will be required to get the economy back on track to the recent output peak attained in 2015 . By annualising the GDP in 2017 and using the present growth rate of 0.55%, the estimate shows that it will take 52 quarters (or 13 years) to regain the loss output.
Of course, this is somewhat pessimistic as growth should expectedly gain momentum over time. At a constant growth rate of 1%-2%, which is close to most recent IMF projections, the estimated recovery time is between 3.6 and 7.2 years. Also, assuming a growth rate of about 4%-5%, which is close to the government forecast in the Economic Growth and Recovery Plan, the recovery will take 1.4 to 1.8 years.
The best scenario is if the growth returns to its peak period of around 6% that was achieved between 2012 and 2014. Based on this simple analysis, we could expect a recovery period of at least 1.2 years.
However, for a country like Nigeria, which has enormous developmental challenges and potential, getting back to its initial output peak represents a mundane goal. In fact, a higher and more ambiguous growth target is required. For example, it is not far-fetched to say that Nigeria’s target of USD 900 billion GDP, as contained in the Vision 20:2020 blueprint, should be the benchmark. If this is used to simulate the different growth path again, some fascinating but frightening results emerge.
Based on the annualised GDP in 2017, meeting the Vision 20:2020 will require an audacious growth rate of 63% per annum. Shifting the target period slightly up to 2025 will require a growth level of about 20% per annum, or 12% if 2030 is used as the terminal period.
Finally, we simulated a growth rate target of 6%-7% which is historically the peak economic performance recorded in recent years. At this rate, the expected time it will take to reach the target GDP level will be about 20 to 24 years.
It is difficult to overstate the enormous task that lies ahead of the government, both in terms of recovery in the aftermath of the recession and meeting more fundamental developmental objectives of the country. It must be stressed that these growth projections represent mere numbers if they fail to affect poverty, education outcomes, employment and other development indicators.
Given Nigeria’s economic track record, these growth projections look unachievable. Experience shows that recent strong and sustained growth episodes are largely driven by high oil prices. With the recent push into shale oil and renewable energy, such a buoyant outlook for the oil sector seems a thing of the past.
However, larger developmental history shows that this growth trajectory is indeed achievable for developing countries without resource endowment. The recent experiences of two decades of two-digit growth recorded by China is an example. Therefore, policymakers in Nigeria need to search and deeply interrogate the reforms that could help engender a similar growth streak.
Overall, reform should begin in these three crucial areas: (1) Structural and institutional reforms of the public sector to ensure better service delivery and improve business-doing conditions; (2) Ensuring political stability and policy consistency to create an atmosphere for sustained investment and growth; and (3) Formulating a concrete industrialisation strategy and ensuring its proactive implementation.
(Main image: Tom Saater/Bloomberg via Getty)