What to learn from Nigeria's economic meltdown
It would amount to double jeopardy, if we don't learn from this crisis.
No two economic crises are the same. Nevertheless, policy pundits insist a crisis should not go to waste. We must learn from every economic meltdown. This entails noting both the causes and policy responses. What is learnt can help in warning against future crisis. But more often, the usefulness is in narrowing down future recovery efforts, since even otherwise smart people do repeat previous mistakes.
Latest Nigerian crisis
Nigeria has been contending with fiscal dislocation for more than two years. The problem has become more acute since President Muhammadu Buhari came into office in May 2015. Oil prices, which had averaged above $100 per barrel between 2011 and mid-2014, crashed below $30 in Q1 2016. The country has also suffered quantity shocks from sabotage of oil installations by militants in the Niger Delta.
With the leverage of high oil prices removed, compounded by the quantity shocks, the country has faced serious constraints in financing the record-level, 2016 capital spending plan of N1.59 trillion. Oil perennially accounts for 70 percent of government's revenue and 90 percent of its foreign currency receipts. This enables downside pressure on global oil prices to derail the wider domestic economy. The Nigerian economy has suffered the derailment, quite seriously because of high import-dependence for both intermediate and consumer goods.
The ensuing dollar scarcity has induced sharp depreciation of the local currency; sparked runaway inflation; and priced staple food items, including rice, beyond the affordability of most households. Moreover, the naira has fallen by 53 percent in the official market since June, when the Central Bank of Nigeria (CBN) removed its untenable naira peg to the dollar. Yet, there is a gap of 52 percent between the official and parallel market rates for the dollar. Inflation rose to 17.9 percent in September.
The financial system has consequently been in a crisis mode. CBN's foreign reserves fell below $24 billion in October – a level that doesn't cover six months' imports. Therefore, trade finance by the commercial banks has been constrained. The capital controls imposed by the CBN have restricted importation of even some manufacturing inputs, causing declining outputs, and pushing non-performing loans in the banks into the fearsome double-digit territory.
Under these circumstances, labour redundancy, and layoffs across industries,