People, Politics, Seat of Power

24 mind-boggling effects of a crumbling economy

WHEN an economy is in a grave state, it throws up a legion of ‘side effects’ which are not in the best interest of society, as well as policy makers.  This is almost the case of the Nigerian economy which is showing serious signs of distress.  From a very weak naira exchanging at over N200 to a dollar at the parallel market to a declining national revenue due to all-time low oil prices, over 64 per cent poverty incidence, unemployment, growing inflation, alleged squandering of the Foreign Reserves to Austerity Measures…the centre of the nation’s economy can longer hold.

Here are 24 mind-boggling effects of a dwindling economy.

HIGH COST OF LIVING – The cost of living during hard times is usually high.  The weak and the vulnerable often find it difficult to pay for basic necessities.  Even the rich may have to make adjustments to maintain their luxury status.

LOW STANDARD OF LIVING – Standard of living also drops drastically when the economy is sick.  This obviously affects quality of life.

POVERTY SPREADS – A dwindling economy, according to economic experts, increases the spread of poverty.  Things could get so bad that the majority of the population would live below poverty level.  In fact, the poverty rate may rise to 80 per cent.  Many also live below the one-dollar-a-day United Nations poverty benchmark.

MASSIVE JOB CUT – Another negative trend that trails a dwindling economy is massive job loss.  From the public service to the private sector, workers may be retrenched to save cost and remain in business.

WORTHLESS CURRENCY – With rapid depreciation of the local currency, it loses its value which in turn reduces its purchasing power.  This is a common case in an economy inching towards recession.

HYPER INFLATION SETS IN – Related to the above scenario is inflation.  Here, prices of goods and services hit the roof.  In other words, goods and services are no longer affordable.

LOWER INCOME – Depending on the severity of the stress prevailing in a given economy, the ability to earn higher income is grossly affected.  And even if one does, it wouldn’t command as much value as in a booming economy.

Ngozi Okonjo-Iweala

Ngozi Okonjo-Iweala

DEPLETION OF FOREIGN RESERVES – Foreign reserves which are  assets held by central banks in different currencies, mostly the US dollar to back a country’s liabilities, drops significantly when an economy is going through serious challenges.  This is the case of Nigeria, whose Foreign Reserves reached the all-time peak of $62 billion during the recent oil boom now stands at about $32 billion!

The implication of this is that monetary authorities would find it difficult to support the economy against major shocks like the falling oil prices and foreign exchange rate vitality.

NATIONAL REVENUE DROPS – Another bad effect of a weak economy is the drop in national revenue.  This is expectedly so because of disruption of economic activities and decline in productivity.

And being a lean time, as the income of citizens drop, it largely affects the Gross Domestic Product, which is a measure of the total wealth of a nation.

“In sum, the mismanagement of our economy has brought us, once more to the brink.  The chicken will soon come home to roost,” Professor Chukwuma Soludo, former Central Bank of Nigeria (CBN) governor has observed in his controversial article on the perilous state of the Nigerian economy.

BALANCE OF PAYMENT CHALLENGE – Balance of payment, the record of all economic transactions between the residents of a country and the rest of the world in a particular period, is not spared when the economy is in a grave state.  What usually happens is that it would be difficult for the country in question to have a favourable balance of payment.  Hence, it wouldn’t be able to pay for its imports, even as it earns little from exports (foreign exchange).

DEBT ACCUMULATION – Another sign of a comatose economy is deadly accumulation of local and foreign debts.  And borrowing at an unbelievable rate, the distressed nation finds it difficult to service the debt.  Even if it does, citizens suffer greatly.  We have been told that Nigeria’s debt port folio is well over a trillion naira!  This is a sign of bad times ahead.

CAPITAL FLIGHT – Investors are skeptical when an economy starts showing signs of stress.  Hence, divestment takes a toll on economic activities.

FOREIGN DIRECT INVESTMENT DECLINES – As a result of the above scenario, foreign investors may flee the country since they don’t want to lose their hard earned funds.  This grossly affects Direct Foreign Investment (FDI), which boosts trade relations and grows the economy.

Godwin Emefiele

Godwin Emefiele

CRASH OF THE CAPITAL MARKET – Also badly hit is the capital market.  At lean era, the bears take over the market.  Stocks crumble according to market forces and this prompts investors to sell their shares.  Billions of investors’ funds are lost when this happens.  In January 2015, the market lost N1 trillion.

LOW PRODUCTIVITY – From the discussion so far, it can be observed that general economic activities are at their lowest when the economy is in crisis.  The reason being that the prevailing economic climate works against entrepreneurs.

HIGH INTEREST RATE – Interest rate, which determines the availability of funds for investors to borrow to finance their business, is a big issue when the economy is on the downward trend.  Usually high, borrowers can’t easily access funds to finance their business.

AUSTERITY MEASURES – Like Nigeria recently did, austerity measures are tight monetary initiatives to save an ailing economy.  Recall that in the early 80s, the Shehu Shagari regime enacted the Economic Stabilisations (Austerity Measures) Act, to save Nigeria from imminent recession.  And with rationing and harsh economic policies, it was real hard times for Nigerians.  The Structural Adjustment Programme (SAP) of the Ibrahim Babangida military junta was also an austerity measure.  This is again the situation of things in Nigeria as you read this.  And this is really worrisome.

HIGH DEATH RATE – Life is cheap when there is a recession.  In fact, people die like chicken as basic necessities of life are hard to come by.  Health facilities also collapse and when they are available they are not easily accessible to the masses.

MIGRATION – Like what happened in the Second Republic, citizens ‘check out’ of their countries in search of greener pastures.  Ghana also experienced this when many of its nationals relocated to Nigeria in the 80s.

LOSS OF SOVEREIGNTY – It is also obvious that a nation partially surrenders its rights to manage its affairs to foreigners during bad times.

From donor agencies to international monetary agencies, local policy makers in an ailing economy literarily step aside.  This usually gives room to foreigners to unduly influence socio-economic policies of the affected country which is not always in its best interest.

COLLAPSE OF CRITICAL INFRASTRUCTURE – Critical infrastructures are practically dead during hard economic times.  A sign of a failed state, nothing really works and even when these amenities are available, they are not usually functional.

CRIME RATE RISES – Relatedly, crime rate also soars when the economy is in shambles.  From armed robbery to stealing, law enforcement agents cannot tackle undesirables who kill and rob.  Even economic crimes rise to a dangerous level.

INSECURITY – General insecurity pervades when there are signs of recession.  For instance, the insurgency ravaging the North East part of Nigeria, other than its political nature, it might also be a function of economic down-turn.

A country facing economic challenges would witness more shades of security shocks if the situation is not adequately addressed.

SOCIAL RESTIVENESS/POLITICAL INSTABILITY – It has been established that prosperous economies are prerequisite for political stability.  Hence, countries with good economic health usually have stable democracies.  The United States, the United Kingdom, Switzerland, etc., are practical examples.

But when the economy of a nation is under threat, there are usually restiveness even as democratic structures are threatened.

–  UCHE OLEHI

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