Monday, December 8, 2008

Global Recession and The Nigerian Economy

The CBN Governor was quoted in the Nigerian media today saying that the Nigerian economy could slow but cannot enter into ‘recession’. His words, I quote from Guardian newspapers “the global system is in a recession and from all indications, the Nigerian economy will not be in a recession. What could happen is that the rate of growth could be reduced but this will not make us slide into a negative growth rate for three consecutive quarters that would officially lead the economy into a recession".

To say the least, I’m disappointed that a statement of this nature is attributed to a man who is supposedly responsible for setting the monetary policy for a nation of 180 million people. I’m not an ‘Economist or pretending to be one, however it is right to say that the chain of events on the global economic scene has left the so called financial/economic experts ‘clueless’. The fact remains that; no one can categorically predict the future of its local economy not to mention the world economy. The world is now a global village that no country no matter how small is immune from this global crisis. The impact of the crisis will only be limited by the level of exposure.

Let’s remind ourselves, the economic crisis started in the US sometime last year as a result of the ‘sub-prime’ lending boom that later went burst! This quickly translated into decline in house prices in the US housing market. When everyone thought the problem was only in the US, then came the crash of Lehman Brothers (which I will describe as the September 11 attack on Wall Street), and the world economic landscape changed for good (?). Currently, the US, Asian, and European stock markets are struggling, house prices have been on steady decline, credit facilities for personal and business have almost dried up, oil price dipped from $147 to $40 per barrel. As I write the biggest car manufacturers in the US are on the verge on collapse, with about 3 million jobs at risk. So, the impact of the reckless lending to innocent residents in small towns in America is now affetcing every part of the economy, in almost all parts of the world.

So why this commentary? It is worth noting that no one predict these problems 12 months ago (even Prof. Soludo). For example, the Australian economy had a $17.5 billion surplus last year, the UK housing market was at its peak, major oil producers were making phenomenal profit as a result of increased energy demand from places like China and India. On the local front, Nigeria was stashing funds away in its excess crude account (but not invested in any infrastructural development).

I’m interested to know the basis upon which Prof. Soludo made this assertion. How can he say that an economy that is 95% dependent on proceeds from crude oil is not at a risk of recession. The govt is already struggling with 2009 budget as a result of the dip in oil price. What will happen if oil price returns to 1990 price of $22 per barrel? I guess all those ‘Mallams’ doing ‘ran ka de de’ will go and find other jobs to do.Prof. Soludo keeps on saying the recent capitalisation will help the country starve off the risk of economic downturn.

While I agree that the bank capitalisation is arguably the best thing that happened to the Nigerian banking system, I fail to agree that this will be enough for the reasons I noted earlier. For argument sake, are US or European banks not well capitalised?From my point of view, the fundamentals of the Nigerian economy are very ‘weak’. We are all aware of the recent events in the Nigerian stock market. Some will say, the market correction was needed as the value of some of the stocks are overpriced, hence the need to remove the so called ‘circuit breakers’. But it highlights what can happen when there is lack of confidence by investors, as also been noticed in the western world. The lack of key infrastructure to support growth like energy, transport etc will have a major impact on how the economy develops in the medium to longer term if this global crisis persists. Instead of the government to pump money into key infrastructure, there were busy paying off external debts and stashing money in foreign reserve.

Don’t get me wrong, I’m not saying paying off our foreign debts was a bad idea. But, of what purpose is the debt repayment to the lay man on the street, when he cannot feed his family?So Prof. Chukwuma Soludo instead of boasting that the economy cannot go into recession because of your bank capitalisation, it will be better if you tell us how you intend to shore up the economy through sustained investment in infrastructure. Because at the end of the day, nobody really knows……

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