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Worst recession since 1987 means Buhari’s poverty rollback vow a mirage

Nigerian economy
Before 2016, Kehinde Odekhian was a 36-year old inventory manager at an FMCG firm in Lagos. However, his fortunes changed for the worse in the wake of a recession that year after he got laid off due to a downturn in the economy.
“The company I was working for said they wanted to downsize and I was among the unlucky ones,” Odekhian, who now sells goods in a small provision shop, told BusinessDay. “I felt like dying.”
Odekhian now earns just 33 percent of what he used to earn as a manager, but said he is faring better than most of his colleagues that are yet to find their feet.
With warnings by the International Monetary Fund (IMF) of a looming global recession induced by the coronavirus disease outbreak, Odekhian and many in fragile informal sector jobs are at risk of sliding into the class of extremely poor again.

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Already, Odekhian, like many informal sector workers in Lagos, is complaining that the lockdown is depriving them of their means of sustenance as sales have slowed significantly for businesses permitted to operate during the pandemic.
The informal sector contributes some 60 percent of Nigeria’s GDP and 80 percent of employment, according to Kyari Bukar, onetime CEO of Valuecard and former chairman of the Nigerian Economic Summit Group (NESG).
“Social distancing may result in other ills we don’t want to see down the road,” Kyari said.
Warnings from the IMF that the Nigerian economy could suffer its steepest recession since 1987 signal another wave of poverty spike for Africa’s biggest economy already said to be the global poverty capital.
Before rebounding in 2021 with 5.8 percent growth, the IMF sees the global economy shrinking 3 percent this year, a trend much worse than its 0.1 percent dip in the Great Recession year of 2009.
The 2009 recession threw 90 million to the ranks of the hungry and reversed a 20-year decline in world poverty, according to the United Nations study, “The Millennium Development Goals Report”.
But the lockdown and its attendant flattening of economic activities, combined with a dip in oil prices, mean emerging markets and low-income countries across Africa are especially at risk.
For Nigeria, despite a recovery in 2017, an annual recession four years ago pushed millions into extreme poverty as the country overtook India as global poverty capital, and rendered a quarter of the labour force jobless.
The IMF-projects a 3.4 percent contraction in GDP for Nigeria this year, the biggest in about 32 years, and 13.3 percent inflation rate which will push more Nigerians into poverty and worsen unemployment levels, with some small and medium scale businesses already shutting down in the country.
“If poverty incidence was 55 percent, a back of envelope estimation of increase to 80 percent is not unreasonable right now,” said Bongo Adi, an economist and lecturer at Lagos Business School, who said IMF’s forecast could even be an underestimation.
Adi said national output would shed much weight because activities would be below pre-pandemic levels even after lockdown is lifted.
The lockdown in some states, he said, has caused a disruption in the supply chain across every economic activity.
“The implication for poverty is dire and it goes without saying. Most Nigerians were living hand-to-mouth and now the people that give them jobs to do are out of businesses themselves,” said Adi.
Up to 2,877 or 61 percent of medium-sized enterprises shut down within four years to 2017, according to data from NBS and SMEDAN, who say around 90 percent of businesses in Nigeria are MSME-typed which make up half of the economy and account for 86.3 percent of jobs (59.6 million jobs in 2017).
In 2016, at the depths the recession, the Manufacturers Association of Nigeria said at least 222 small-scale businesses closed shop, leading to 180,000 job losses.
Yet, Nigeria needs 40-50 million additional jobs between 2015 and 2030 to reduce poverty and boost inclusive growth, World Bank estimated then.
In a BusinessDay report on Monday, Degun Agboade, president, Nigerian Association of Small and Medium Enterprises (NASME), warned that many businesses would not be able to recover post-COVID-19.
“The impact will be longer than we expect and the government is not doing enough to support us at this time,” he said.
According to a recent report by Enhancing Financial Innovation & Access (EFInA), a financial sector development organisation that promotes financial inclusion in Nigeria, COVID-19 could affect the livelihood of 50 percent of the 99.6 million Nigerian adult population who earn their income on a daily or weekly basis.
Shutdown of businesses and layoffs could lead to a decline in consumer spending, especially with a fast-rising population, risk of imported inflation on naira devaluation and a sharp rise in consumer prices.
Bleak outlook could worsen inequality as well as regional disparity.
According to the World Bank, 87 percent of all the poor in Nigeria as of 2016 are concentrated in the Northern region compared to 12 percent in the South.
The emerging trend of a growing disparity between the Northern and Southern part of the country has seen income levels, poverty rate and critical development measures diverge significantly.
At the turn of the new year, the World Bank had warned that by 2030 one out of four poorest in the world would be Nigerian, prompting President Muhammadu Buhari to reiterate his promise of laying the foundation for lifting 100 million people out of poverty in the new decade.
Expectations were that after a first term of delaying reforms, Buhari would take bold steps necessary to unlock growth.
Already, the country has weakened the official exchange rate and removed petroleum subsidy, among other things. But experts are wary that such moves, which are half-steps, might just be a crisis response rather than proper reforms.
Soft landings
Adi said the problem Nigeria faces isn’t an economic one but a health crisis which means economic recovery cannot be left to isolated individual decisions of economic agents.
He said the impact of the virus fallout would be lessened and Nigeria would see a “V-shaped recession”, which means quick rebound if the government can protect assets with human capital and jobs as top priorities.
Adi said the FG can organise negotiations with lenders at a national level to extend the moratorium on loans, bringing all stakeholders to the table to fashion out a deal.
He said the government can offer guarantees to companies so they do not lay off workers while tax breaks would be a big stimulus for the economy.
The government should also raise capital, however it can, to invest in energy and transportation which would reduce cost for businesses and support the real income of consumers, Adi said.
In addition, Nigerians must be willing to freeze interest rates to allow the financial system to stabilise.
The IMF estimates that Nigerian growth would rebound by 2.4 percent in 2021 but economists express worry over the volatile oil earnings and what an elongation of a low-growth cycle would mean for its 200 million people.
Other economists say to reduce the impact of the looming economic contraction on Nigerians, a broad-based stimulus and liquidity facilities to reduce systemic stress in the financial system are needed. This would lift confidence and prevent an even deeper contraction in demand by limiting the amplification of the shock through the financial system and bolstering expectations for the eventual economic recovery, they said.
Although partial recovery is projected by the IMF in 2021, the level of GDP will remain below the pre-virus trend with considerable uncertainty about the strength of the rebound.
Much worse growth outcomes are possible and may be even likely if the pandemic and containment measures last longer, they say.
Nigeria’s economy would be severely hit if tight financial conditions persist, or widespread scarring effects emerge due to company closures and extended unemployment.
Godwin Emefiele, governor, Central Bank of Nigeria, said the monetary authority would strengthen the economy by providing a stimulus package of about N3.5 trillion to targeted households, businesses, manufacturers and healthcare providers.
According to him, as part of measures, the apex bank also announced the establishment of InfracCo plc, infrastructure development vehicle that would be focused solely on Nigeria with combined debt and equity take-off capital of N15 trillion to be managed by an independent infrastructure fund manager. It is expected that it would be utilised to support the Federal Government in building transport infrastructure required to move agriculture products to processors, raw materials to factories and finished goods to markets.
The apex bank should also encourage banks to renegotiate loans to distressed households, MSMEs and firms in a bid to reduce the impact of a slowdown in the economy while maintaining a transparent assessment of credit risk, analysts said.
Beyond the stimulus from the apex bank, Nigeria and several emerging market and developing economies without similar assets and confronting simultaneous health, economic, and financial crises would need help from advanced economy bilateral creditors and international financial institutions, they said.
Compared to the last time the world economy last faced a crisis of this magnitude in the 1930s, the absence of a multilateral lender-of-last-resort forced countries to scramble for international liquidity, adopting futile mercantilist policies in that pursuit, which further worsened the global downturn. A crucial difference in the current crisis is that countries now have a stronger global financial safety net with multilateral lenders that are already actively helping vulnerable countries.
Olaolu Boboye, an economist at CSL Stockbrokers, said there is little the government can do to avert the contraction, noting that the country was in the same situation in 2016, hastened by a decline in oil prices, and the government has done nothing to drive revenue from other sources.
“The fiscal and monetary stimulus is tilted towards the demand side leaving behind the supply side as seen in the March PMI, which saw the first contraction in three years. This shows that businesses and production activities have been battered by the coronavirus pandemic, meaning output would contract significantly in Q2 and Q3, maybe a slight rebound in Q4,” he said.
Boboye said the contraction would be between 1-1.5 percent over 2020, noting that the impact was not severe in Q1.
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