Nigeria Should Borrow its Way out of Economic Slump

Nigeria has to borrow its way out of the current economic slump.

As most are aware, the construction sector in Nigeria has shrunk considerably over the past three quarters with most workers losing their jobs. This follows fast on the heels of the massive retrenchment in the oil and gas sector. Most firms have also put a hold on recruitment until when the economy recovers. With these telltale signs on show, one does not need a soothsayer to proclaim that the economy is tumbling.  

So far, the Nigerian government has been doing its best to stabilize the economy mostly through monetary policy actions. Understandably, the government, with its dwindling resources, does not have the financial muscle to engage in expansionary fiscal policy. Nevertheless, with the magnitude of economic decline we are currently facing, we need a combination of loose monetary policy and expansionary fiscal policy to get the economy working again. This brings me to my premise: the federal government should borrow to bolster the economy given its extremely low debt profile (Debt-to-GDP ratio of about 11%).

When the economy begins to suffer from slowing growth and rising unemployment, it is usually because there is not enough money circulating in the economy. Therefore, governments usually step in to inject money into the economy. This is done either by adjusting taxes and government spending (expansionary fiscal policy) or by adjusting interest rates and reserve requirements, and buying bonds (loose monetary policy). Sometimes it is expedient to make use of both.

According to Keynesian fiscal theory, due to the inability of the market and the economy to self- regulate especially in times of recession, there is a need for government intervention to jump-start the economy by injecting some money into it. This can be achieved via a mixture of demand-side stimulus (putting money into the hands of middle and lower class consumers, to stimulate spending) and supply-side stimulus (cutting business and corporate taxes to encourage reinvestment into new businesses and large-scale expansion, thus generating more jobs).

With global crude oil prices currently mired in the $40s, the federal government needs to borrow the money it needs to initiate and complete capital projects earmarked for 2015 as well as fund 2016’s budget adequately. Spending on infrastructural projects as well as meeting recurrent expenditure obligations (ensuring civil servants and pensioners are paid) will go some extent to put money into circulation and stimulated economic growth.