Money

Nigeria in Economic Recession: The Implications and Solutions

 nigeria-economy

Economists officially define a recession as two consecutive quarters of negative growth in Gross Domestic Product (GDP). The National Bureau of Statistics reported that in the first Quarter of 2016, the nation’s Gross Domestic Product (GDP) grew by -0.36% in real terms. This was lower by 2.47 points from growth recorded in the preceding quarter and also lower by 4.32% points from growth recorded in the corresponding quarter of 2015. Thus, Quarter on quarter real GDP slowed by 13.71%.

A comparative study of other macroeconomic indicators of recession such as the unemployment rate, consumer spending and so on indicates that the economy is likely moving towards or already in recession. However, it is quite shameful that we are in a society where most reliable reports do not give accurate indices and policy makers make decisions using their discretions rather than evidence based researches. Nevertheless, the good news that is quite comforting is that recessions are quite inevitable in any capitalist economy but its implications cannot be ignored either.

Firstly, new firms find it more difficult to start while on the other hand, existing firms are at the risk of bankruptcy. With firms (i.e both small and medium sized enterprises and large scale firms) being the driving force of the economy especially now the economy is facing a downturn in the oil sector, it becomes quite obvious that the economy has a larger tendency of falling deeper into recession.

Secondly, the drastic reduction in output means a drastic reduction in government revenues accrued from taxation. This will further cut government spending in capital investment needed for growth in the economy. This is one of the major reasons why recessions seem very difficult to overcome. In situations where recessions become quite bad, there is a tendency for unusual rise in government borrowing (budget deficit) and this will cause the government to either increase taxes or cut spending. Thus the economy slumps deeper into recession.

Thirdly, its impact on the younger and vulnerable generation can never be overemphasized. The rate of unemployment will skyrocket the level of social vices such as prostitution, robbery cases thereby increasing the level of insecurity in the economy; a threat to foreign direct investment. Unemployment also reduces average income levels and such reduces the people’s purchasing power to access basic needs. This becomes a threat to the health status, nutritional status and the quality of life of the people.

Conclusively, there is a need for policy makers to combat the disaster that recession brings to the populace. Policies should be based on evidence based researches; this means increasing her access to accurate data. Policy-mix should be directed towards expansionary monetary policy and expansionary fiscal policy. Central Bank of Nigeria (CBN) should increase money supply so as to reduce interest rate (i.e the price of money). This will make funds available for the investors in the economy. Inorder to reduce the problem of inflation associated with the proposed increase in money supply, this monetary policy should be corresponded with an expansionary fiscal policy such that government will prioritize engagement in capital investments that would provide enabling environment for the key sectors of the economy to thrive and as such produce massively.

Policy-mix should be directed towards expansionary monetary policy and expansionary fiscal policy. Central Bank of Nigeria (CBN) should increase money supply so as to reduce interest rate (i.e the price of money). This will make funds available for the investors in the economy. In a bid to reducing the problem of inflation associated with the proposed increase in money supply, this monetary policy should be corresponded with an expansionary fiscal policy such that government will prioritize engagement in capital investments that would provide enabling environment for the key sectors of the economy to thrive and as such produce massively.

An expansionary fiscal policy increases income in an economy. Following the theory of demand for money, an increase in income, increases the demand for money. From the liquidity preference theory, increases in the demand for money increases the domestic interest rate. Since Nigeria is a small open economy operating on a floating exchange rate, an increase in our domestic interest rate above the world interest rate causes capital inflows into our economy and as such our currency appreciates i.e there will be an increase in exchange rate (where exchange rate is being defined as domestic currency divided by foreign currency i.e naira/dollar). This expansionary fiscal policy which has the capacity of increasing our exchange rate will counter balance the supposed decrease in our exchange rate i.e the depreciation of naira brought about by capital outflows associated with the decrease in our domestic interest rate which was in the first place precipitated by the expansionary monetary policy. Invariably, this means that the supposed decrease in our net exports as a result of the increase in exchange rate will as well counter balance the supposed increase in our net exports due to the decrease in exchange rate.

With this, the economy in the mean time will be operating on a constant flexible exchange rate and at the same time maintain an increase in her income brought about by her massive domestic investments that resulted due to a fall in the domestic interest rate (an effect precipitated by an expansionary monetary policy). The long-run effect is that naira as a currency will loosely appreciate in value as the economy starts exporting some of her domestically produced goods. This will bring the economy to a reasonable balance. Thus a policy mix of expansionary monetary policy and expansionary fiscal policy will salvage Nigeria.

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