Economy and Policy in 2009

The critical questions that will determine the outlook for the global economy and politics in 2009 are clear-will the on-going recession in the US, Europe, Japan and parts of Asia be just a recession, a deep and sustained recession or a depression? Will the price of oil be around $40 per barrel, $75 or somewhere in between? Is the worst of the global financial crisis over, or is more to come? What will be the effect of the incoming Obama Presidency on US and global economic and foreign policy? Will the “Obama Effect” mean a major test as predicted by Vice President-elect Joe Biden or will he positively affect the situation in the Middle-East and international terrorism? And to what extent will the so-called BRIC economies particularly China and India and other high-growth economies be slowed down by the adverse global economic conditions?

Given the emerging severity of the data from the US, it will be naive for any economic analyst to rule out a depression in America. I do not however expect one, precisely because US policy makers have learnt from history and will take action, (particularly the major stimulus plan being pushed by the Obama administration even before its commencement date) to avoid that eventuality. So we can predict that most of 2009 will remain a recessionary year. Those economists who have been heard to say incredulously that the US economy will bounce back in the first quarter of 2009 do not know what they are talking about! We know as pointed out in the earlier paragraph the range of possible oil prices-$40-75 per barrel. It is prudent to expect the average in the first half of the year to be closer to $40 but rising as the year unfolds.

The easing of the global financial crisis may now also be tied to the fortunes of the US economy, so return of confidence in financial markets may now be inextricably connected not just to a perceived bottoming-out of the financial meltdown itself, but also now to US economic recovery as well. I believe President-elect Obama will be a positive factor in these dynamics and will take the short-term (stimulus package, public works, relieving mortgage foreclosures, emergency job creation, reduction in war spending etc) as well as longer-term measures (stronger and revamped financial sector regulation, investments in education, science and technology and energy independence, deficit and debt reduction amongst others) that will revitalise the US economy and aid global recovery as well.

In Nigeria, the reality that we live in interconnected economies should be finally hitting home by now. The sharp drop in the price of oil has already distorted our domestic budgetary calculations and hints of tighter economic conditions in 2009, including exchange, interest rates and level of foreign reserves. On the positive side, these may yet lead to a more sensible policy environment. The drop in the oil price for instance reminds us of the folly of a policy that seeks to redress our debilitating power situation through exclusively government investments reportedly to the tune of $85billion. We simply do not have the money, and even if we did it would be more sensible (as we did with telecommunications) to use private capital while using our scare dollars for investments in those areas where private capital may not be interested. And there are a lot of such areas-education, health, security and law and order, rural development, rail and road infrastructure etc

Will our policy makers be encouraged along the path of a reality check by the new budgetary realities? I hope so. There are cautionary signs for optimism. For one I think we have a slightly better cabinet than the Yar’adua regime’s first assemblage. In some critical ministries, we actually have some first class people-Dr Mansur Muktar in Finance has a track record from the Debt Management Office, and as a member of the Ngozi Okonjo-Iweala economic team; Dr Lanre Babalola we are told worked on the Power Policy while at the Bureau of Public Enterprises and should have an idea of the type of policies and actions that will resolve the power situation, if he is allowed to; And Professor Babatunde Osotimehin is an excellent choice in my view for the health ministry, given the success he made of the anti-AIDS effort, probably the most important health policy success in Nigeria in the last decade. And contrary to the predominant view in the ‘commentariat’, I actually think Dora Akunyili is a good choice for Information and Communication.

I also think there are elements of Dr Rilwanu Lukman’s oil sector reorganisation that are worthy of support even though I suspect more fine-tuning will be required along the way. The Infrastructure Concessioning and Regulatory Commission (ICRC) is finally in place and I hope there would be increased support for mechanisms that utilise private capital such as resumed privatisation and concessioning if the oil price stays low. The private sector, particularly the financial sector may also be in for a reality check in 2009. The losses sustained by the banks and capital market operators as a result of our stock market collapse and continued liquidity crunch will not disappear and institutions will have to account for them one way or the other. The financial sector will more closely reflect domestic economic conditions since growth fuelled by government revenue will not be realistic this year, as those revenues are constrained by the oil price.

On the whole, it appears clear that 2009 will be tight economically-both globally and domestically. However this scenario represents an opportunity for Nigeria to more sharply and sensibly define our policy choices and return to economic reform and sustainable progress. If we make that choice then we may have gained something from the adverse conditions in 2009.