Our Nairametrics audience will be familiar with GDP term as an acronym for Gross Domestic Product. This is a macroeconomic indicator that simply seeks to quantify economic transactions done in an economy for a specific period.
To most economists, the idea behind the importance of GDP as a macro-economic indicator is that transactions should be done in exchange for monetary compensation (economic value), therefore the more value-linked transactions are done by an entity or a country, the wealthier the entity or country should be.
Consequently, as a key measure of a country’s economic wealth, most economists prefer a continuous and sequential increase in the quantity and value of economic transactions done in the country
Unfortunately, as everyone knows, all things are NOT always equal. Therefore, from time to time, there will be events that happen which will adversely affect people’s ability to do business transactions, let alone do more business transactions compared to the prior period.
From a Nairametrics perspective, it is likely that ongoing price inflation for energy products and the resultant actions being taken by businesses pose an adverse threat to Nigeria’s GDP growth rates.
News continues after this ad
Specifically, over the past twelve months, businesses have been under significant cost pressures driven by the increases in key energy inputs for business operations such as diesel (AGO), cooking gas (LPG) even aviation fuel (ATF). However, the spikes in energy prices in March-2022 have been simply astronomical.
For context, consider that a company operating one 100KVA-generator for 12 hours daily would require daily average consumption of 144 litres of diesel. Over the past 12 months, that organization has seen its diesel bill alone spike from a unit rate of N250/litre average in 2021 to N311/litre in February 2022 and now a unit rate of over N650/litre in March 2022.
News continues after this ad
This new cost base is simply NOT sustainable and poses significant demand contraction threats to various sectors of the economy.
As a direct result of the new cost base, Nigerian business owners (who are typically ultra-resilient) have been forced to take dramatic actions such as either withdrawing some services, temporarily shutting down operations or reducing office working hours.
Looking through Nigeria’s Real GDP (adjusted for inflation) trends over the past 5 years, a few things are apparent.
In other words, under the current state, only half the economy currently contributes to GDP growth. Thus, the risk of economic contraction can potentially be viewed from the perspective of these GDP “growth” sectors.
Arguably, excluding agriculture, all the GDP “Growth” sectors are susceptible to demand contractions as a result of astronomical energy price increases (i.e., key sectors such as Telcos, Manufacturing, Financials, Transportation, Health and social services, Utilities, Arts/Entertainment are all susceptible to aggregate demand contractions as energy prices spike and businesses reduce operating hours)
Broad-brush estimates show that demand contraction higher than 1% across these key GDP sectors will result in a recession for Nigeria’s economy. This is especially if ongoing actions by businesses to shut down operations, withdraw services/products, or reduce business hours persists through July/August 2022.
From a short-term perspective, we note that recent energy price spikes are not peculiar to Nigeria, likewise it is worth pointing out that countries across the globe have begun announcing policy measures to mitigate the impact of rising energy prices on their citizens.
If necessary, we suggest that this short-term support be in the form of direct relief for core businesses inputs such as diesel. The economic justification being that should businesses go bankrupt, and the Nigerian economy collapses then the opportunity cost to the Government will lower tax receipts across VAT and Corporate Taxes.
From a longer-term perspective, the Federal and State Governments need to revisit the entire spectrum of energy sources available to the nation to reverse the unrelenting expansion of our import bill. Remarkably our imports energy products remain a stubborn part of the top 10 imports each year.
To be clear, these energy price spikes have only become more alarming in the past few weeks and the future cannot always be predicted with infallibility.
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Sign Up For Our Newsletter
Subscribe to our mailing list to receive daily updates direct to your inbox!
Follow the Money Follow the Market Follow the Deals Crypto on the go
Business News | Stock Market | Money Market | Cryptos | Financial Literacy | SME |
Follow us on social media: