In the last six decades, Nigeria slipped into different magnitudes of recessions in thirteen different years. Each time, the narrative has always revolved around lower oil prices, vulnerability to adverse global development, forex shortage and overvaluation of the exchange rate. Experiencing the latest recession in 2016, when the economy shrank by 1.6%, plummeted oil price exerted a bigger effect as oil price crashed within a range of $25-$30 per barrel. In the advent of the recent development in the oil market – supply war between Russia, Saudi Arabia, and the US, Nigeria is in deep again, bracing itself up for a fresh round of recession, barely five years post-recovery.
Nigeria’s 2020 recession may officially launch when the oil price goes below $20 per barrel. As a precursor, reserves have suffered a free fall since May 2019 from $45 billion to $34 billion in April 2020 – a decline of about 24%. In response, an inescapable devaluation from N307/$ to N380/$ – a decline of about 24% – a beautiful coincidence! Should the dip in reserves go further, perhaps by another 20%, the CBN may as well float the exchange rate.
The Nigerian economy with a picturesque penchant for imports will have to accommodate a GDP growth rate in the range of 0% – 1% if a recession starts out in the fourth quarter and could be worse if the recession commenced in the third quarter. This simply means domestic production will drop, particularly from manufacturing companies. Consequently, Nigerians must buy more imports at expensive prices but the high rate of unemployment that will persist then will squeeze aggregate demand – consumers will not have as much money to spend.
Nigeria’s recession is always unique in that it takes the form of mutually rising prices and a high number of out-of-job Nigerians – stagflation. In 2016, inflation spiked to 18.6% by year-end from 9.6% at the beginning of the year. This means inflation could hit 20% if recessions kick off in the third quarter. Of course, unemployment will always be high. Combined, Nigerians will have to pay twice for essentials like food, education, health, and accommodation. Even if employers increase wages, which is highly uncertain, the standard of living will drop and absolute poverty levels will soar.
If Nigeria had an income-resilient export product portfolio, it could gain from the devalued currency because higher export volumes will make up for the cheaper export. Sadly, Nigeria exports only oil, a product whose price is determined by Saudi Arabia and other big producers. This means tumbling balance of trade and continued import-dependency.
Honestly, Nigeria cannot escape a recession if the oil price drops below $20 per barrel with its economic fundamentals. As usual, the government will have to borrow, cut capital spending instead of recurrent as they would often do, make a promise to diversify the economy and Nigerians will pray to God to save their economic palaver. Will God yet again save us?
Written by Abdulmuttolib Salako and Michael Ogunremi
Abdulmuttolib is a graduate of economics from Crescent University, Abeokuta
With the government’s poor management of the economy, we can only hope the Covid-19 crisis ends soon and the Saudis and Russians hit a compromise. Or else, no way we avoid another recession.
well said
I want criticize the last paragraph, where God is mentioned I consider it not to necessary
Quite right, but this an article not a research paper. In an article, opinions can be expressed as the writer would love it. This means it is not entirely inappropriate like you mentioned
I have always feared reading some Economics texts, because of the concepts the discipline uses which are unfathomable to me. Fortunately, I have been able to read yours checking the dictionary only once, and probably, you might instigate me using my search engine further for questions that are inspired from reading.
Meanwhile, you guys might have come up with some DISTINCT (not the usual and popular, ehn ….. the country should diversify the economy, local products should be encouraged, etc.) strategies on what the country can do especially in the SHORT-TERM. Also, you might have just quoted the current price of oil in your analysis.
Anyways, I am enlightened, unfortunately, I still don’t know the reason why a nation would devalue her currency by herself, this also testifies my weak understanding of the economy, despite that I’m a sociologist.
Good luck to us all
Thank you Luqman
Well, devaluation is inevitable in a country where exchange rate is fixed based on the strength of its reserve. Once the reserve is insufficient to support the fixed exchange rate, the central bank is forced to devalue
The recession situation we are now isn’t what we expected and the country has been improving before the whole pandemic started
God will surely continue to save us
Good write-up
Thank you Temitope
Corona virus pandemic is the deepest and fastest economic shock in history. Unless the pandemic stopped, the Nigerian Economy will inevitably face another recession, being a country whose business cycle has always been flunctuating.
Well said
Publishing this article at this time reflects a good understanding of the economy. However, it should be noted that whether or not the crude oil price reduces further, economic recession is almost inevitable. This is not only envisaged for Nigeria alone but will be a global one. The plague the whole world is dealing with has put considering and applying economic knowledge on hold. The whole world is focused on just SAFETY and HEALTH of its citizens.
Based on this and more, businesses need to work below capacity (for those not shut), millions of jobs are being lost daily, incomes are no longer forthcoming for some families and even governments. Therefore, after the world conquers #Covid-19, countries will start redeveloping and restructioning their economies. The important questions amongst others are:
* how fast can Nigeria get her acts together?
* will our policy formulators and implementors be realistic this time around?
In all, it is a nice write-up. Kudos to you
This is a good contribution
Thank you