Nigeria’s economy is underperforming and it has got so bad that the country’s recessionary gap is now at a five-year high. According to a presentation by Lagos-based Financial Derivatives Company (FDC) at a Lagos Business School (LBS) breakfast meeting, Nigeria has been plagued by a persistent recessionary gap for five years in a row, the highest being 11.8 percent estimated for the year 2020.
Recessionary gap is when a country’s potential gross domestic product (GDP) is greater than its real GDP, and this is often evident during economic recessions. The implication is that the economy is growing below its potential, which translates to higher unemployment in a country already starved of jobs.
The FDC report explains that this gap between actual GDP and potential GDP is expected to persist till 2021, with real GDP at 1.8 percent while potential GDP is estimated for -3.6 percent.
“Nigeria already had a recessionary gap. What we are facing today is that we are going through a situation of stagflation, which is a recession plus inflation,” Bismarck Rewane, chief executive, FDC Limited, said.
Nigeria needs an investment multiplier within the range of $160 billion to $200 billion, which will have a direct impact on poverty, people’s lives, growth and inequality, Rewane said.
In dealing with the pressure of recessionary gap, most economists say that Nigeria’s economy is not strong enough to encourage businesses to raise their demand for labour while consumer wallets is still under pressure owing to elevated costs of living, as businesses continue to grapple with tough operating conditions.
Others have said for government to solve the problem of recessionary gap, which comes with higher unemployment, there is a need for more auto-centric and pro-growth policies geared towards attracting and improving private sector investment in critical sectors of the economy.
“Reducing the high cost of operation faced by businesses will go a long way in allowing them to divert such resources devoted to energy cost to expansion of their labour force,” they noted.
To escape the recessionary gap, Gbolahan Ologunro, a research analyst at Lagos-based CSL Stockbrokers, suggests that the solution lies in turning the exchange rate failure into a more flexible rate as determined by market forces, which will go a long way to attracting foreign direct investment (FDI) in critical sectors and subsequently increase employment opportunities.
“On the part of public sector, the current government administration has focused more on social welfare programmes for vulnerable citizens but this is short term and not sustainable, especially given the pressures of recurrent expenditures and rising debts,” Ologunro says.
Aside the effect of recessionary gap, the economic effect of coronavirus pandemic is expected to not only plunge the Nigerian economy into a severe economic recession, but to also remove the veil among stubborn Nigerians who believe a stubborn myth that Nigeria is a wealthy country.
The cycles in crude oil prices have buttressed the fact that it is not wisdom to run an economy at the mercy of the oil market. The last five years (2015-2019) did damage to the Nigerian economy with oil prices averaging $55 per barrel against $104 per barrel in years preceding that period (2011-2014).
In the later periods, oil production also slumped to 1.2 million barrels after a wave of militant attacks on oil installations.
To put into context, Africa’s biggest economy, Nigeria, relinquished its position as the fastest-growing economy among frontier peers (Next 11) between the periods of 2000 to 2009 to become one of the slowest growing economies (ranked 8th of 11) in the last decade (2010-2019).
Nigeria, which grew at an average GDP growth of 7.68 percent in the early 2000s, slowed growth to an average of 3.81 percent in the last decade.
The above development means Nigeria’s GDP of $447.01 billion delivers only $2,100 per capita while its other African peer, South Africa’s boast of a GDP per capital of $6,206, despite the country’s economic slowdown.
Also, Nigeria proved wrong Goldman Sachs, a global investment bank that named her in 2005 among countries it expected would become the world’s largest economies in the 21st Century.
Instead, Nigeria overtook India as the country with the highest number of people living in extreme poverty, with an estimated 87 million Nigerians living on less than $1.90 a day, coupled with her failure to enact some growth-stimulating reforms across key sectors of the economy. Volatility in the crude oil market, which accounts for over 90 percent of Nigeria’s FX, has contributed immensely to the underperformance of the Nigerian economy.
On average, Nigeria has attracted $1 billion FDI inflows since 2016, an alarmingly low amount for a country estimated to need $31 billion in investment each year for 10 years to bridge vast gaps in infrastructure.
What this means is that despite obvious opportunities, foreign capital is not rushing into Nigeria, even as the government continues to maintain a stranglehold on sectors that can attract foreign investment at the detriment of the economy and the people.
Critics say the government has been content gorging itself on the country’s limited oil wealth and has stalled in aggressively seeking foreign direct investment to provide adequate jobs for the people and entrench investment-led economic growth.
