Tuesday, February 27, 2024

Constraining Domestic Production Limits Capital Inflows

In this insightful interview, Mr Jide Akintunde, Managing Editor of Financial Nigeria, delves into the complexities of Nigeria’s economic challenges. From the nuanced relationship between unemployment and inflation to the far-reaching impacts of insecurity on businesses and foreign investment, each question peels back layers to reveal the intricate web connecting fiscal and monetary policies to the nation’s well-being


What is the Impact of High Unemployment on Nigeria’s Economy and Financial Measures?

High unemployment rate means low economic production. In this situation, many people who would have been actively engaged in the production process are either not having a job or the jobs they have under-employ their time (underemployment – which is embedded in unemployment statistics).

High unemployment is a product of economic instability, and it reinforces economic instability. With too few employed people, there would be supply shortfalls in the local economy. With demand outstripping supply, this will trigger and drive a demand-pull inflation. In Nigeria, a number of factors, including supply shortfall – especially in agriculture – are driving the high inflation in the country.

Economic instability would result in social instability, including insecurity. This already tells us that high unemployment is a national security risk. A lot of the financial interventions for fighting high unemployment are in the domain of fiscal policy. The government can use its budget to stimulate employment by investing in initiatives that promote private sector investment in the real economy. With regard to monetary interventions, the challenge is with their effectiveness, given that the contributory factors to economic insecurity are broad and outside monetary policy purview. But if fiscal interventions are robust, monetary policy can play a complementary role through lower interest rates.


In what ways does Insecurity’s Impact on Foreign Direct Investment and Capital Inflows in Nigeria?

Insecurity deals actual and psychological blows to an economy. By constraining domestic production and domestic investment, foreign investment inflows would also be negatively impacted. Insecurity is bad news for foreign investors. Oftentimes, their reaction to insecurity in a foreign market is disproportionate to security risk.

There is no country on earth that does not need foreign investment. It promotes current account surplus and domestic production and savings. Without foreign capital inflows, there would be foreign exchange illiquidity. That will drive up the exchange rate. All of these have been intensifying in Nigeria in recent years.


Can you discuss the link between Government Expenditure, Budget Allocation, and Addressing Unemployment and Insecurity?

The role of government is to protect life and property and improve the welfare of the citizens. The instruments for achieving this are government spending and broader economic policies. I would rate public policy (in action) to be more germane than budgetary spending to achieve security. Again, we have seen in Nigeria that increased defence budget has not significantly addressed insecurity. Meanwhile, there are alleged cases of government officials aiding terrorist attacks in the country – which calls government policy for security into question.

But because of the link we have established between high unemployment and insecurity, economic reform that creates jobs, boosts productivity, and lowers inflation would be quite helpful in Nigeria.


What is the impact of Insecurity on Supply Chains and Business Profitability in Nigeria?

Insecurity can directly prevent business transactions from taking place. A few years ago, because of insecurity, telecoms networks were shut down in the terrorism flash points in northern Nigeria. Such incidents – and farmers who are unable to go to their farms for fear of being kidnapped – would reduce the profitability of businesses, including by increasing their costs.


What strategies can be employed to harness the potential of Nigeria’s informal economy for economic growth?

High unemployment constrains consumption in both the informal and formal economic sectors, impacting businesses’ ability to thrive. Insecurity further accelerates the demise of small businesses lacking financial resilience. Recognizing insecurity as a national emergency requires direct financial support for businesses, including payroll support to retain workers and shifting procurement in favor of locally-produced goods and services. Public financial interventions to boost power supply are also essential for supporting small businesses.


Discuss the impact of Remittances and what mechanisms can be put in place to ensure it contributes to the economy.

High local unemployment and insecurity may increase remittance flows as individuals seek opportunities abroad. However, the potential negative trade-off, particularly in the outflow of skilled workers, must be considered. Government initiatives can promote lower remittance costs through innovative solutions, ensuring that remittances contribute positively to the economy. Balancing the benefits of remittances with potential skill depletion requires strategic financial mechanisms.

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