Year 2020 and economic outlook of 2021

Everyone agrees that 2020 was a peculiar year. Economies across the globe experienced turbulent economic challenges. In Nigeria, following two consecutive quarters (Q2, 2020 and Q3, 2020) of negative growth, the National Bureau of Statistics (NBS) officially announced that the country’s economy technically entered a recession. A subset of the headline inflation known as food inflation poses a more severe impact on the masses. Food inflation has maintained double-digit numbers since 2017 and unfortunately, food constitutes the most significant share in disposable income of an average Nigerian. Food inflation was around 15.48% as of June 2020. One hopes that these worrisome statistics reveal to the managers of the economy, decision and policymakers in the government circles the untold hardship imposed upon the Nigerian masses.

How did we get here? A multiplicity of factors is responsible for our current economic disorder. Here are the top two: one, a structurally designed deindustrialized (Dutch diseased) economy – a product of over-reliance on the rich oil-endowed resource. Empirical studies have shown that most naturally rich resource economies who bask in the euphoria of their natural wealth often create an economic syndrome, an economic condition where due to over-reliance on the naturally rich resource sector, the manufacturing and the agricultural sectors dwindle while there is the emergence of the service sector which flourishes strongly in the face of the infrastructural deficit.  Another variant of the Dutch diseased syndrome is found in the work of Mohammad Amin (2009), called the Nigerian Disease. This variant portrays how the abundance of natural resources causes poorer governance and conflicts. It is characterized by less accountability by government officials to the people, little incentive for institution building, failure to growth-enhancing reforms, etc. This describes the Nigerian economy.

The rent-seeking spirit of the nation’s powerful elite permeates in the economic life of the country, constituting bottlenecks in the wheel of economic growth and prosperity. It is seen in virtually all spheres of the business space. Consider the existence of multiple currency exchange rate as orchestrated by major bureau de change front-liners; keeping the domestic refineries in comatose; the reality of an oligopolistic stock market structure; an infrastructural deficit in the energy sector; congestion at the Nigerian ports; monopolizing key investments and businesses; restrictions of export licences to a relatively few; the dark operations in and of the NNPC; the vague subsidy policy that is continually used as a tool to siphon financial resources from the public purse into private pockets, etc. All of these connote an element of rent-seeking.

 

Economic forecast for 2021

The monetary authority is much likely to do more of the macroeconomic task in eras of inflationary recession. Hence, we forecast that monetary policy will continue to remain accommodative and there are tendencies that MPR will be lower further for up to the Q4 of 2021 if the second wave of the global COVID 19 pandemic terminates at the end of Q1, 2021. One of the modular refineries in the country will commence operation in 2021. This will ease the pressure of importation of the petroleum products and thus free resources for other government spending that hopefully recirculates wealth in the economy. The exchange rate will climb higher to about N420 if oil prices continue to hover in the neighbourhood of $35 to $45 per barrel globally as oil production (mbpd) is below 1.5m, and as domestic economic activities recover more strongly. The inflation rate will rise to about 19% in the Q2, 2021 if the second wave does not continue to devastate the global economy. But rise to 22% if it does in the Q1, 2021. Food inflation will likely remain high as essential industrial inputs are set as a priority over rice and poultry to access foreign exchange via the CBN widow. In the short run, we recommend that the ban on rice and poultry-related products be lifted in the interim to disinflate food inflation and by extension headline inflation. Contextually, inasmuch as a significant share in government borrowing will continue to be from external sources, the yields from domestic debt instruments (e.g., bills and bonds) will continue to remain low in Nigeria. This will mean tougher days yet ahead for the banking industry given that it partly survives on the significant investments in these debt instruments. Fraudsters are very much likely to seize this moment with rebrand versions of Ponzi schemes. Evidently, positive economic growth in the Q2, 2021 will be non-impactful until 2022.

 

Dr. Eromosele is of the Department of Economics and Development Studies, Federal University, Otuoke, Bayelsa State.

 

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