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November 29, 2020

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What to know about Nigeria’s recession and how it affects you

4 min read

The Nigerian economy has slipped into a second recession in five years, culminating months of battering by the coronavirus pandemic.

The National Bureau of StatisticsNational Bureau of Statistics announced Saturday the nation’s GDP declined 3.62 per cent in the third quarter of 2020, better than its 6.10 per cent contraction in the second quarter.

It is the nation’s second recession since 2016, and the worst in almost four decades.

But what really is recession and how does it affect you?

What is a recession?

Recession occurs when a country’s economy declines for six months at a stretch, or two consecutive quarters. If recession lasts long enough, it turns into depression.

Minister of Finance, Zainab Ahmed
Minister of Finance, Zainab Ahmed (PHOTO CREDIT: Official Twitter Handle)

Normally, the economy of a country, like Nigeria’s, grows, measured as the gross domestic product, GDP. It is the aggregate value of all goods and services in the country within a specific time – usually a year.

Nigeria’s GDP in the third quarter of 2020 stood at N39 trillion, the largest in Africa.

When an economy grows, citizens do well and get richer, even if marginally, as they have jobs, good salaries, profit-making firms and and generally improved quality of life.

The government benefits by collecting more taxes and having more money to spend on public services, benefits and workers’ salaries.

When things don’t go as they should and the economy (GDP) fails to grow for two successive quarters, then recession sets in.

It is a serious problem for any country, and until now, the last time this happened in Nigeria was in 2015/2016.

That can happen for many reasons, primarily, when a country runs out of money, perhaps as a result of debts, or shock like the coronavirus pandemic.

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This year’s recession is not a unique Nigerian problem. The COVID-19 crisis has guaranteed all countries have suffered economically.

How could a recession affect you?

Slowed economic growth or a decline affects a country and citizens badly. It translates to shortage of money, lack and loss of jobs, and could see companies cutting salaries.

ALSO READ: Despite recession, Nigeria fastest growing economy in Africa – UK Envoy

Revenue shortage can stall public services and projects on the part of the government as budget financing becomes a problem. This could affect any sector from health to education to security.

It is generally a period of austerity and rise in poverty and inequality.

What can the government do?

Countries generally approach economic problems like recession using monetary and fiscal measure.

The central bank uses monetary policies to control the quantity and supply of money in the economy, with implications for growth, inflation, consumption, and liquidity.

The CBN can modify the interest rate, buy or sell government bonds, regulate foreign exchange rates, and change the amount of money banks should maintain as reserves.

If economic growth is slow or very poor (during recession), the CBN can expand economic activities by lowering interest rates and promoting spending.

Lower interest rates mean businesses and individuals can take loans on convenient terms to expand productive activities, hire and pay more, and spend more on big ticket consumer goods.

The opposite is contractionary monetary policy, usually applied to tame inflation that may arise from increased spending.

The first option seems best for Nigeria now, which explains why the CBN has cut policy rate twice this year alone.

For fiscal policy, coordinated by the finance ministry, the government uses spending and tax policies to influence economic conditions. It can also be expansionary or contractionary.

For an economy in recession, the government may lower taxes to increase aggregate demand and fuel economic growth.

The logic is that when people pay less taxes, they have more money to spend and invest. That spending leads firms to hire and pay more.

Rather than lowering taxes, the government may seek economic expansion through increased spending, through the budget. Both are expansionary.

To do this, the government may borrow or fall back on savings. That’s where reserves like excess crude account and the sovereign wealth fund should help. Those accounts don’t seem to be doing well though.

This approach can cause inflation and may be difficult to reverse as citizens like low taxes.

The opposite — contractionary — is for the government to reduce public spending and cut public-sector pay or jobs to tame inflation.

What Nigeria needs now is the former, however, the government has chosen to impose an array of taxes and charges on citizens, from VAT to fuel and electricity prices increase.

Whatever happens economically, coronavirus must be solved first for full recovery to happen.



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