Understanding the recovery process

Understanding the recovery process

With the minimal growth figure posted by Nigeria in the second quarter of 2017, expectations are high that the country will record more growth and fully exit the recession in the coming months. This expectation may be realized or cut short, depending on how we handle the recovery process. And much of it depends on how we are able to understand the reasons why we got into a recession in the first place. Every honest person will tell you we got into that bad patch because of the way we had run the economy, not the decline in any commodity price. We are not the only country whose major income earner got hit. If we look dispassionately at the months preceding the recession, we will not be debating our missed steps. However, there is nothing to be gained by looking too much in the rear mirror on matters like this. We have moved forward and we need to follow the right path.

As a general economic decline, a recession is triggered and also promoted by contraction in many economic indices including consumer spending, which drags down aggregate demand. Unfortunately our spending in Nigeria is determined by government spending, a sad outcome of the political structure we run. In other climes, when we talk of expansion of demand we look at household spending and the investment of industrial concerns. But government does all the spending in Nigeria and we then follow. Another cause of recession is inflation. Others are a crisis of confidence among firms due to the piling up of inventories as consumers slack, and a feeling of negativism that pervades the system. When consumers begin to shun goods and services other unsavoury things begin to happen in the system.

As an economy begins to recover from decline, be it recession or even depression, economic managers have to put their eyes closely on some variables, including inflation. Not only is inflation anti recovery, it is one of the original channels through which the decline comes in the first instance. So to make recovery possible and rapid, inflation must be brought down.

One of the key driers of consumer apathy, as we may call it, is inflation. Inflation is dangerous to the health of any economy. It has been described in many terms including cancer, and no country makes progress when citizens cannot benefit from the rewards of their labour – their incomes. Today, domestic price levels remain very high relative to the domestic purchasing power of the citizens. Food inflation is already high at over 20 per cent. Being a critical type of inflation for its pervasive effect on households, we cannot lay back and let it get worse. The role of unstable prices, which is essentially what we call inflation, is very significant in the take-off and even sustenance of recession. 

Nigeria has had a chequered history of inflation management characterised by wide fluctuations that hardly support planning and positive productive engagement. Her inflation rate has fluctuated significantly over the years. For instance, from a figure of about 29 per cent in 1996 it dropped to 6.6 per cent in 1999, only to hit 19 per cent in 2001. Inflation came down to 12.9 per cent in 2002 only to jump back to 18 per cent in 2005. This feature continued to swing until it closed at 15.7 per cent in 2016, according to figures from the World Bank. The inflation figure released by the NBS is for August 2017 and stands at a little over18 per cent. Evidently, we need to fight inflation to ensure our economic recovery gains traction and makes the big run.

Interest rates are very important in the economy when recovery is an issue. They determine the direction to which the cash will flow. High interest rates have remained a challenge to the productive sector of the Nigerian economy. Rates have always been too high for any profitable productive activity. This is part of why the economy has stagnated on the productive side and more or less prospered as a trading entity. This will not help recovery. Bank lending rates need to come own. Unfortunately, government has continued to crowd out private demand for loans. The banking sector has been more or less servicing the needs of government. With high interest rates paid on Treasury Bills it has become difficult for funds to go to real sector production. Meanwhile there will be no recovery without growth in productivity.

How long does an economy take to recover from a recession? This may not be the kind of questions we hear every day. What people want to hear is that recovery has commenced, just as we now have it in Nigeria. But it is an important question. Recovery may take a much longer time than the time spent in recession. In fact, there is research evidence that recovery from the Great Depression, which began in the middle of 1929 and lasted for about four years, took twice that amount of time to heal. Thus economic recovery may be more tasking than the recession before it. And that is not what we want in Nigeria.

A country that experienced a recession naturally trades softly during recovery so as to fast track it and also prevent drags. They avoid controversial policies that increase opposition to policy implementation. They promote peace to avoid creating civil unrest, which naturally allies with other economic drags Unfortunately, some of the things we are doing in 2017, do not lend support to our plan for quick recovery. We must give investors and sundry economic agents the opportunity to recover their lost confidence, build fresh optimism and promote productivity. This is the basic route to economic recovery that we must pursue.

Emeka Osuji

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