It is becoming stale news that the Nigerian economy is experiencing a downturn.
But to the regular Joe on the street, apart from the apparent fall in oil prices and the attendant fall in government income, it is still pretty difficult to fully understand how the erstwhile promising growth in Africa’s largest economy is gradually coming to an abrupt halt.
Here in this article, Nigeria’s economic woes will be broken down to bits using the Basic Principles of Macroeconomics for Freshers (ECN121, according to Unilag course codes).
In calculating or measuring the size of economic activity in a country, (or what is known as GDP in economic jargon), several methods or approaches can be employed. One of the easier methods to understand and track is the Expenditure Approach.
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Using this approach, the GDP can be calculated with a simple formula:
GDP = C+I+G+(X-M)_ _ _ _ _ _ (1)
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In the above equation:
“C” stands for Consumption of Households and Individuals residing in the economy;
“I” stands for investments made by Businesses in the economy;
“G” stands for spending done by the Government within the economy;
“X” stands for Exports made from the economy;
“M” stands for Imports into the economy;
“(X-M)” stands for net exports from the economy, it is a proxy for the size of the country’s international trade.
The rationale behind this formula is that every Naira spent within the economy is an income for someone else in that economy. The total amount of money spent in the economy, and the total amount of money received as income by the economic agents in the economy can both act as proxies for the size of economic activity in the country.
Following the rules of simple mathematics, the larger the size of any of the comprising units of the economy as listed above, the larger the size of the total GDP, (and the larger the size of the economy by implication). When any of the components reduce in size, the economy will fall.
What this means is that:
A) The more people spend their money on goods and services in the economy, the larger the economy becomes; and the lesser people spend, the lesser the economy becomes.
(Side note: part of the reasons why Nigeria’s economy surpassed that of South Africa to become the largest in Africa, and why the Nigerian economy is/was attractive to foreign investors, is because a lot more people spend a lot more money in the economy, which is a good thing for businesses and the economy at large).
Continuing in the same logic;
B) The more businesses invest in the economy, the larger the economy becomes, and vice versa.
C) The more the government spends money within the economy, the larger the economy becomes and vice versa. (This is why governments around the world borrow money to spend in their economy).
D) And lastly, the larger the net exports made from the economy, the larger the size of the economy and vice versa.
Now to Nigeria’s woes:
Nigeria’s economy is in trouble for the following reasons:
- Consumption spending is declining sharply. It is declining because inflation is eating up consumers’ purchasing power, and eroding the value of the Naira.1b) Also consumer spending is declining because salaries and wages paid to households and individuals are declining, hence people have less money to spend in the economy.
- Investment spending by businesses in the economy is not growing because companies are not making new investments (domestic investments). They are not making new investments because their sales and revenue are low. Their revenues are low because consumers are not buying as much as they used to, as a result of the factors listed above in point 1.
Since domestic investment is declining, foreign investment ought to come in and lend a hand if the economy is attractive, right?
But foreign investment is not coming, because foreign investors do not yet understand [or agree with] Godwin Emefiele’s (the CBN Governor) experimentation with the foreign exchange regime. Hence aggregate investment spending is down.
According to Mitchell Posner, President of Kirkwood Financial, investing in an emerging market like Nigeria is virtually the same as investing in currencies, because currency movements will eventually determine up to 51 percent of eventual investment returns.
So, as long as the currency remains unstable, foreign investors will stay at arms length.
- Government spending is at a very low ebb because it is not getting enough money from its main revenue earner – Oil. As a result, it cannot pay salaries and embark on projects from which citizens can make some income. If citizens do not get income, they cannot spend. This takes us back to point 1, which takes us further to point 2!
- Lastly, export revenues are declining because the country’s main export commodity – Oil, is languishing in the international market due to an oversupply that is sinking its price. This takes us back to point 3, which in turn takes us back to point 1, which further leads us to point 2!
So, it is fairly easy (I hope) to understand why the economy is facing a downturn. It is a ‘triple-whammy that has plunged the economy into a negative spiral, or what economists call a ‘vicious cycle’.
The economy desperately needs to be stimulated by some fresh spending, either from the government or from business investors.
If any of the sectors listed above are stimulated, the economy as a whole will be stimulated, and growth will be restored to pre-crisis levels.