The burden of a sale

There is a peculiar challenge facing Nigeria’s economy OBODO EJIRO writes.

They can be seen even when it rains heavily. Young men in their early twenties or late thirties braving the cold, chasing vehicles in desperate efforts to sell loaves of bread in front of Nigeria’s National Stadium in Lagos.

What is changing however is that their number is increasing, while the number of those who patronize them is reducing. Among the young men who hustle to make a living in this process, the desperation keeps rising.

“I used to work at a factory in Ikeja,” one of the sellers says. Clothed in a faded jeans trouser and a shirt that has seen better days, the 21 year old tells of how he thought his job at the factory was his route to the good life.

“Three years ago, I was hustling here on the streets,” he says. “When I eventually got a job at the factory, my living condition improved, I was so sure I had made it off the street.” But the decline in Nigeria’s economic indices pushed the factory owner to downsize and Kunle, as the young man is called was affected.

In the last ten months Nigeria has plugged into an era of negative growth on the back of policy inertia, low crude oil price, and reduced oil output after almost a decade of 6.5 percent average growth.

The oil sector which had traditionally lubricated Nigeria’s economy with much needed foreign exchange has largely been incapacitated (in terms of the price of its output and the quantity of that output). The result is that other sectors have been hit; leading to low patronage both by businesses within those sectors as well as from individuals they employ.

In the second week of July, the Ojuelegba market, one of the biggest markets in Lagos was shut because its leaders had set aside a days to offer sacrifices to the gods, “because patronage was consistently low.”

In Kano, a cup of tea (prepared without milk) and a piece of bread amounting to N40 (used to fight hunger) is now called Buhari mixture. And the number of those requesting for this potion is increasing as the pangs of lack of economic growth, squeezes low income earners harder.

Beyond the naked eye

But beyond the surface there are deeper issues which face Nigeria and its policy makers as it grapples with rising inflation, unemployment and negative GDP growth. And this is the issue: Policy makers have to think within and outside the box as the country faces the same economic conundrum which faced the United Kingdom in the Thatcher years.

In traditional economics inflation and unemployment are negatively correlated that is to say as inflation increases unemployment tends to decrease. Therefore policy makers have traditionally boosted money supply (by lowering interest rates) in the face of rising unemployment; this in turn translates to higher GDP growth and employment.

But in the Nigerian situation both unemployment and inflation are rising at the same time; which is an anomaly that is referred to as stagflation in economic theory. The problem is that monetary policies used to curb inflation often increase unemployment. Therefore if policy makers focus on curbing inflation, they could make the unemployment situation worse.

The term stagflation was born out of the prolonged economic stagnation of the 1970s that rendered void the Philips inflation-unemployment trade-off. The term simply connotes a situation of rapidly declining GDP growth rate in the face of rising unemployment and rising inflation. The current movement of macroeconomic aggregates in Nigeria is a classic case of stagflation (stagnating output and rising inflation).

From the trend, inflation which was 7.78 percent in Q1,2014 has since risen to 17.13 Percent in July 2016. The increase in the general price level is accompanied by declining real GDP growth rate which has fallen significantly from 6.21 Percent in Q1,2014 to -2.06 percent in Q2,2016. Added to the declining output is rising unemployment which was 16.39 Percent in Q1,2016 from a lower unemployment rate of 10.86 Percent in Q1,2014.

Economists have made bold attempts to explain the immediate and remote causes of the current economic tremors. “A major cause of the current negative growth in output associated with rising unemployment and inflation in Nigeria can be explained by supply-side shocks triggered by changes in the management of the foreign exchange market in response to declining oil price between 2014 and 2015 and shrinking reserves,” Ikechukwu Kelikume, a don at that Pan African university explained in a note to BusinessDay in mid May 2016.

Indeed the data shows that the current supply-shock in Nigeria was triggered by falling oil price and massive devaluation of the Naira. The fall in oil price led to massive devaluation of the Naira at the BDC segment with the exchange rate rising from N168.64 to $1.00 in September 2014 to N289.78 to $1.00 in January 2016. The value of the Naira at the BDC segment depreciated further in the months of April 2016 and the Naira exchanged for N344.66 to $1.00

The immediate effect of a fall in the value of the Naira was a rise in the price of Nigerian imports which drove the cost of imported raw materials need by the productive sector eastwards, but the fund managers who constitute the bulk of the loudest voices that shape macroeconomic policy these days would argue otherwise. These decisions have had rippling effects across Nigeria.

The typical cure to stagflation is not so straightforward. It involved a decisive and complex manipulation of aggregate supply and demand to meet certain predetermined goals. Policy makers have to also be patient to watch policy play out (and not just fire from all cylinders without aiming at any specific goal).

One solution to stagflation is to increase Aggregate Supply through supply side policies, for example privatisation and deregulation to increase efficiency (But Nigeria being what it is in term of infrastructure and the size of the informal economy will struggle to see any meaningful progress in this direction). And these will take a long time in affecting.

In 2011, the Bank of England kept interest rates at 0.5% – despite a rise in cost push inflation. This is because the Bank of England felt it was more important to try and escape from recession, rather than deal with the temporary cost-push inflation. Nigeria’s Central Bank has done the exact opposite. However, cost push inflation is often a temporary affair (Though this is not exact for the Nigerian situation).

In the heart of Kokori Inland, on September 1, after Nigeria was officially declared to be in recession, Pa Ejerimetor Patrick, 73, leaned on a stick in his country home. “What’s happening he asks, how can things turn from good to bad so suddenly,” he asks. His sons who work in Lagos and Abuja are unable to send him the stipends they used. The poor vulnerable will be the worst hit as the country grapples with these trying times of recession.