July 31, 2016

What The Economy Needs to Recover From Recession

Amid the official pronouncement that Nigeria’s economy is in recession and increase in Monetary Policy Rate (MPR) from 12 percent to 14 percent by the CBN, an economist is calling for increase in local production of goods as one of the ways to force down per unit cost, for the country to recover from recession and high inflation rate of 16.5 percent.

A professor of economics, Olu Ajakaiye, in a chat with Vanguard said the declaration by government that the economy is in recession is not unexpected due to low productivity in the economy over time.

He attributed the high inflation in the economy to factors like shock in prices of crude, electricity and foreign exchange. He explained that:

“When the cost of production go through these three factors or drivers of inflation, we expect the per unit cost to skyrocket. Therefore, we expect the prices of goods and services in the economy to rise. Also, most drivers of inflation are cost push from infrastructure, development in exchange rate (exchange rate depreciation) and price of electricity tariff.”, he said. 

Ajakaiye who is the President, Nigeria Economic Society (NES) said: “In the medium term, Nigerian leadership and our investment partners should work together to increase local production to about 70 percent from the domestic sources. As such, the influence of depreciation in exchange rate price would not be too high, so that we could see reduction in pump prices of petroleum products. In the medium term, pump prices may come down to give some respite if 70 percent local production is achieved. 

"If our major customers like China and India could register more growth rate, it would have some economic benefits for our country as well. At this point, it is imperative to make the Niger Delta region stable, in order to make the operating environment condusive for crude oil production. 

“With the flexible exchange rate policy of the Central Bank of Nigeria (CBN), we expect some levels of stability in the system. When we get high volume of exports, foreign exchange earnings would increase. We also need raw materials, machinery and equipment for construction sub-sector. This is because our capacity to produce these capital goods in Nigeria has vanished. Also, I hope that the adjustment in power tariff would be followed by supply volume of production in manufacturing and services. Once the volume of power supply goes up, the cost of production would drop. This implies that power supply must be regular to bring down the average cost of production. 

“For non-oil sector, productive activities are still slow and I do not expect it to grow very quickly. Even the solid minerals that government wants to pursue is slow and would take a longer time, because mining the products is not enough but to add value locally before exporting them. The aspect of Foreign Direct Investments (FDIs) government is talking about are of two types. The first one, is the type where investors just bring their money and put in the stock market, and when there is a little crisis in the economy, they move their investments to another country they think is stable for profit maximisation. 

These are portfolio investments and are not suitable for economic growth, because they are not sustainable over time. The second type is the one where investors build factories and create jobs for the local people. This is what we should be looking at. Therefore, we must look at our engagement with China and other foreign partners to build more factories in Nigeria to encourage production in our economy. 

“In the short term, we hope that the Power Distribution Companies will quickly expand supply base to improve regularity, stability and quality. In some cases, quality is sensitive to production cost, so quality is important. Regularity should be up to between 18 to 24 hours, to enable us produce larger quantity of goods to bring down per unit cost, which led to cost push inflation. On the area of petroleum products, we have to live with the challenge of high petrol price because the large quantity of the product is imported and landing cost of petrol is quite high. So, it is hard to expect reduction in price because the exchange rate is moving in the wrong direction now”.

7 comments:

samaila sulaiman said...

May God save our country

inumidun said...

God help us..

Ay360 said...

Its well, God will help

Harbolarkale Niyi said...

It's well

Harbolarkale Niyi said...

I believe soon our dear Country will survive this storm

SPACO said...

Agreed.

Jeff Kingsley Jr said...

God will help us ooo