by Olamide Eyinla

It is no longer news that Nigeria’s economy has slid into a recession. By definition, recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

What this means is that either aspects or all sectors of the economy has taken a decline in productivity. There are several factors that lead to a decline in the Economy, including reduced Aggregate Demand (global and local), Natural Disasters, strengthened and weakened currency (both affect net exports), Improved Competition, Raw materials availability, government policies, etc.

The immediate cause of Nigeria’s recession was the inflation recorded, highest in a decade leading to a decline in aggregate demand. Inflation is not always a bad thing as the monetary policy body – the Central Bank of Nigeria tries to keep a lid on inflation while monitoring Interest rate and Exchange rate.

Generally, inflation is the increment in general price level, while the purchasing power of the currency falls.

There are majorly 2 kinds of inflation – Demand Pull and Cost Push.

Demand-pull Inflation arises when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as “too much money chasing too few goods”.

Cost-push inflation is a phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials. Cost-push inflation develops because the higher costs of production factors which decrease in aggregate supply (the amount of total production) in the economy. Because there are fewer goods being produced (supply weakens) and demand for these goods remains consistent, the prices of finished goods increase (inflation).

There is little or no argument that the inflation currently experienced in Nigeria is a cost-push inflation. The cost of production in Nigeria rises and this can be traced to the increase in the price of the dollar. Interestingly, a lot of inputs for production in Nigeria are dollar based as majority are imported from countries ranging from China to Italy, India to UK.

The payment for these imports is in dollars, hence, the increase in the price of dollars increase the cost of production locally. The consequence which leads to a recession has been explained earlier, hence, if the recession is to be stopped, we need to reverse this trend.

As the economic situation bits harder, I have heard and read a lot of ‘Economists’ advise government that she needs to spend her way out of recession. These calls led me back to study researches and recent economic histories on how the government can spend her way out of recession.

While it has happened that the government spends her way out of recession, I am not particularly sure how this can work when it is a cost-inflation we confront. If the crux of the current inflation in Nigeria is foreign exchange driven, then, the solutions proffered should be focussed on increasing foreign exchange supply.

If dollars become more available, then, the value of the dollars decreases thereby reducing the value of the imported materials. If the value of the imported raw materials reduces, that will affect the cost of output thereby reducing general price level – inflation.

There are indeed various ways to improve foreign exchange supply; however, they require long term as well as structural changes to be made. I am of the opinion that Government increasing spend will not change the current lot, it can even worsen same.

An increased government spend would mean that contractors get paid, and probably recruit more staff. But the problems remain if not aggravated. A lot of the contractors employed by Federal Government are either foreign firms or will need to import raw materials to deliver on projects.

Being foreign companies would mean they will need to repatriate some funds out of the economy or needing to import raw materials. Either of both actions continually put foreign exchange pressure on the naira as dollars is required.

Economic theories have shown that the solution to a cost-push inflation is never curtailed by increase in spend by government. As a matter of fact, increase in government spend will probably come from an increase in taxes (government currently pondering increase in VAT and introduction of the communications tax) will lead to increased production cost for producers in the economy, thereby re-enforcing the cost-push inflation they seek to manage.

In summary, the economic hassle currently ongoing in Nigeria is majorly caused by a cost-push inflation which is a consequence of the over-reliance of local production on imported raw materials which is exposed to the dollar scarcity as a result of the crash in crude oil prices.

The best solution is to improve dollar supply through whatever realistic method possible. Once there is an improvement in the supply of dollar, the price of dollar reduces to the point where the prices of the final goods reduce.

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Op–ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija

@olamideyinla’s thought from Lagos, Nigeria.