Looking through the front windscreen of the economy, there is a bifurcation in our path. Continue towards Harare. Or like they just did in Turkey, bite on a large chunk of humble pie, and push interest rates northwards. Cheap money was always bad recompense for a government struggling to get a hold on its spending.
Much of the past weekend was given to agonising over the state of the domestic economy. On Friday, the National Bureau of Statistics (NBS) reported that the economy shrank by an annualised 3.62 per cent in the July to September quarter. Coming immediately after the 6.10 per cent contraction in the preceding quarter, it was to be expected that “recession” ― defined as two back-to-back quarters of an economy contracting ― was last week’s most popular noun. The proximate cause of the economy’s current failure, according to the NBS’ report, was “the restrictions to movement and economic activity implemented across the country in early Q2 in response to the COVID-19 pandemic”. And the economy hurt badly ― both its oil and non-oil sectors.
Still, there are more remote reasons for the economy continuing to tread water. Anyone who has paid even casual attention to the economy’s performance since it contracted by 1.58 per cent in 2016, could not but fail to notice that it has struggled in the last four years. Growth of 0.82 per cent, 1.91 per cent, and 2.27 per cent in 2017, 2018, and 2019 respectively, barely qualified as improvements. Put together these yearly performances were not strong enough to return the economy to its pre-2016 level. Nor with population growth much more robust was the economy in a position to improve the lot of its most vulnerable, without damaging the prospects of its barely managing.
My preferred prognosis is that the economy opened 2020 with pre-existing conditions, which made the incidence of the pandemic far more severe than it ought to have been. The public expenditure management framework has been severely weakened by a burgeoning debt burden. The naira’s exchange rate has struggled, even as we have run through the gross external reserves trying to support it at the official rate. An unorthodox monetary policy regime has warped the domestic economy’s capital allocation capability. Macroeconomic policy continues to stumble from pillar to post with far more proficiency than would a drunk on a wet moonless night. And as evidenced by the violent events that succeeded the federal government’s ending of the #EndSARS protests, our social fabric has frayed dangerously.
Take a look at the side mirrors, though, and worries over the effect of the #EndSARS debacle on the economy’s performance in the current quarter loom large. The detritus from that episode ― damages to both public and private commercial property on which the formal and informal sectors of the economy run, heightening of a sense of vulnerability… ― litter the horizon.
Yet, we are an optimistic people. Accordingly, there are those who see a silver lining in the clouds: The output numbers for the third quarter were, at least, an improvement (of 2.48 percentage points) on the second quarter performance. The only problem with this is that output numbers are a look in the rear mirror ― what the experts describe as a lagging indicator. These indicators become apparent only after the economy has moved. And so, while they may be useful for describing trends, they are not helpful in forecasting them. Take a look at the side mirrors, though, and worries over the effect of the #EndSARS debacle on the economy’s performance in the current quarter loom large. The detritus from that episode ― damages to both public and private commercial property on which the formal and informal sectors of the economy run, heightening of a sense of vulnerability that is unhelpful for businesses, and a breakdown of trust between government and a large part of the youthful population ― litter the horizon. In a quarter in which the effect of the new coronavirus pandemic on in-store end-year sales was already a major talking point, the damage to the economy from the recent country-wide riots was always going to hurt.
By how much? And for how long? This is where it helps to think of the economy by looking through the front windscreen. Unconfirmed reports have the International Monetary Fund (IMF) releasing its Article IV Consultation report on the economy this week. The fund has estimated a 4.3 per cent shrinkage in the economy this year ― much worse if the effects of the recent social unrest are as bad as anecdotal evidence suggest. The IMF does expect marginal growth to return next year. Wide off the mark, though, is the Fund’s 12.9 per cent projected change in consumer prices this year. The NBS had earlier reported that on an annualised basis, domestic prices rose last month by 14.23 per cent. In the twelve months to October 2020, the average composite CPI was up 12.66 per cent from October 2019.
I have long worried that inflation matters. (Incidentally, until our recent policy pivot, it was the most important of that gauges on the central bank’s dashboard). It hurts the poor and the vulnerable disproportionately more than it hurts other population segments. But it hurts our ability to trade with ourselves even more.
I have long worried that inflation matters. (Incidentally, until our recent policy pivot, it was the most important of that gauges on the central bank’s dashboard). It hurts the poor and the vulnerable disproportionately more than it hurts other population segments. But it hurts our ability to trade with ourselves even more. The naira is useful because it is all of three things. We use it to keep account of most things that we do. Without it, exchange can only take place with great difficulty. And it is a store of value. Of late, inflation and the central bank’s zero-bound interest rate policy have rendered the naira completely useless as a store of value. Continue along this trajectory for long enough, and it will be unable to function as a unit of exchange or a value store.
Looking through the front windscreen of the economy, there is a bifurcation in our path. Continue towards Harare. Or like they just did in Turkey, bite on a large chunk of humble pie, and push interest rates northwards. Cheap money was always bad recompense for a government struggling to get a hold on its spending.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
