In October the International Monetary Fund issued its World Economic Outlook (WEO) and Global Financial Stability Reports. The message from both reports was similar-the global economic contraction has stopped and growth, albeit slow and sluggish has started. The Fund expects the global contraction of 1percent in 2009, but expects 3 percent growth in 2009, which is low, by pre-recession standards. The recovery is stronger in emerging and developing economies, particularly the Asian duo-China and India, but major challenges lie ahead. Global imbalances that result in some economies accumulating huge current account surpluses while others have offsetting external deficits will have to be addressed; the recession has been fought essentially by fiscal expansion-the so-called “accommodative” policy stances embarked upon by Treasuries and Central Banks all over the world.
The world now has to carefully calibrate its easing of such measures; unemployment remains a major issue across the world; and the root cause of the problem-the financial sector-must be restructured to prevent the type of calamity Western bankers almost plunged the whole world into, with evidence that other economies, (such as ours) have similar work to do on their financial sectors though on a lesser scale. And the problems of poverty and social inequality have probably only gotten worse while the whole world battled to save bankers and their institutions. The GFSR confirms that systemic risks have been substantially reduced, but warns against complacency-the hard work of reform and re-igniting new and sustainable sources of growth and prosperity lies ahead.
The recent Pittsburgh, USA G20 meeting hosted by President Barack Obama reached similar conclusions as the IMF. The leaders of the world’s twenty largest economies agreed to work together to generate strong, sustainable and balanced global growth, to begin to shift back to private, rather than public sources of demand, and to pursue policies geared towards macroeconomic and price stability. The leaders also agreed to reform banking regulation to rein in the excesses that led to the global financial crisis. Policies canvassed include strengthening prudential oversight over “systemically important” banks; raising capital standards; tighter regulation of OTC derivatives, credit rating agencies, securitisation and hedge funds; instituting compensation standards; and protecting depositors and consumers.
Domestically economic prospects are of course much brighter. Oil prices have recovered rising above $70 per barrel and actually hitting $80 in recent days. The question of what the average and sustainable price for 2009 will be remains unclear, but the trend since the end of the first quarter has been clearly upwards. We must caution budget writers to be conservative in setting the oil price budget benchmark for 2010, given expectations that the global recovery will be subdued and the need to restore lost external reserves. We expect that the financial sector clean up will yield fruit in 2010 as confidence, locally and internationally returns and after the equity markets absorb the massive loan loss provisions that virtually all our banks are going to have to make.
But the substantive issues about the structure of our economy remain. External revenue is almost wholly dependent on oil exports, but oil output has declined every year since 2006-by 4.2%, 4.5% and 4.8% in 2006, 2007 and 2008 according to the CBN Report for 2008. On the other hand, the non-oil sector grew by 9.4%, 9.5% and 9.1% in the equivalent periods. Growth in agricultural output in the three years averaged around 7%, services almost 10%, finance and banking-5%, and not surprisingly the fastest growing sector of the Nigerian economy remains communications which grew by 32%, 28% and 37% in 2006, 2007 and 2008. It remains one of the abiding mysteries of our nation that we have refused to apply the lessons of telecommunications reform to other areas where similar approaches will bear results-power, solid minerals and perhaps agriculture. Unfortunately communications in spite of its phenomenal growth constitutes only 3% of our GDP. Imagine if agriculture, solid minerals and manufacturing were growing at similar rates as the communication sector.
The most depressing statistics about our economy however remains the contribution of manufacturing to output-4% even though growing according to CBN and NBS statistics at 9% in the last two years. The CBN also puts manufacturing capacity utilisation at 53%. Again imagine the results in employment generation and other economic indices if we could raise manufacturing output to 20% of GDP and increase capacity utilisation to 90%. We all know what it takes to do this-privatise power generation and distribution as provided in the Electric Power Sector Reform Act 2005 and encourage massive private investment in power, while directing the bulk of government spending into improving transmission. Unfortunately government remains unwilling to follow this path and has chosen instead government-led power strategy. I see no reason to think that strategy will succeed! The other constraints of manufacturing are also well-known-transportation and logistics, multiple taxation and charges, corruption and high interest rates and financing costs.
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