The Nigerian economic is currently in recession, yes! according to economic analyst and the world bank. The country has witnessed negative Gross Domestic Product (GDP) growth in more than 2 quarters.
In this article, we examine the meaning of recession, how it relates to Inflation and Depression and the policy option that the government should deliberately target for a quicker economic recovery.
“Recession is a business cycle contraction which results in a general slowdown in economic activity. Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise”. Wikipedia
“Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time, resulting in a loss of value of currency. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy”. Wikipedia .
Depression is defined as “a state of the economy resulting from an extended period of negative economic activity as measured by GDP. It is often described as a more severe form of a recession that leads to extended unemployment, a spike in credit defaults, broad declines in income and production, currency devaluation and a deflationary economy”.
Inflation is the starting point of economic deterioration, an unchecked inflation leads to recession and an economy in recession if not tracked with the right policy and programs will leads to depression.
An economy that is in depression is about being in anarchy, it is a period when unemployment rate is very high, wages reduces for people still in paid employment, business activities takes a downturn and the country’s GDP continue to growth in the negative direction. Nigerian economy is close to depression. Unemployment rate is currently above 18%. Businesses are shorting down their offices and sending workers home, factories are closing down for lack of FX to import raw materials.
These are the policy options the government need to implement so the Nigerian economy does not slip into depression against the prediction of the world bank that Nigeria will be out of recession this year 2017.
1. Increasing Government Spendings.
This is a veritable fiscal tool that have been used by various economies world over to change the course of economic growth from negative to positive. Deliberate increase in government spendings stimulates the economy by making more money available to be spent thereby saving the idle production outputs and hence sustain the production activities. The continued productions helps the economy by keeping people on their jobs and gives them wages. This in turns translates to rents and rates being paid and profits accruing to entrepreneurs and business owners with the spiral effect of increase in income and purchasing power of the people.
2. Cutting of Taxes.
Another approach that could help move the country from the part to depression is deliberate reduction of government taxes on citizens. Just as this policy may seems not to be very effective in a developing economy like Nigeria because the number of the population that pays tax is very low compared to developed economy. It is still a veritable tool to help increase the disposable income of households so that people can spend more money in the market places and hence sustain the economy.
3. Expansionary Monetary Policies
Deliberate reduction in interest rates on savings, government securities and loans is another policy that must be pursued to halt the countries road to depression. Low interest rates discourages savings and investment in treasury bills and government bonds, hence money is either spent to boost the economy or put into production activities.
Low interest rates on loans will also encourage companies and entrepreneurs to borrow money from bank to grow their businesses, growth in business will result in increase in employment and consequently increase in disposable income of households.
These policies have proved to be very effective in economic recovery during recession. The same policies were pursued to recover US economy during the Great Depression in the 1930s and in different European countries in the late 2000s.