That the 2017 budget may pave way out of recession

Aerial view of buildings and markets on Lagos Island.

Aerial view of buildings and markets on Lagos Island.

For the 2017 Budget to lay the firm foundation for the Nigeria economy to pull out of recession, a baneful procedure should be exorcised. In its annual budgets and MTEF, the Federal Government projects that borrowing will be kept within statutory fiscal deficit of 3 per cent of GDP. Also, government gives account of budget performance in the preceding year and takes effusive credit for achieving a lower deficit level than the fiscal deficit threshold. In its oversight functions since 1999, a discerning and economics-savvy National Assembly should have been demanding from the Federal Ministry of Finance, the Ministry of Budget and National Planning and the Central Bank of Nigeria explanations why, in spite of achieving the fiscal deficit threshold which is the necessary condition for realising the apex bank’s principal objective of ensuring price and monetary stability, the Federal Government has in reality been waging a losing war against the veritable symptoms of excessive fiscal deficits that festoon the economy such as firstly, inflation figures which are wide off the safe 0-3 per cent range that is associated with the fiscal deficit threshold.

Secondly, there is persistent excess liquidity that has given rise to a non-investable (sterilised) national domestic debt, double digit monetary policy rate and attendant unattractive high lending rates with humongous unutilised financial sector lending capacity amidst massive and rising unemployment. Resorting to palliatives, the CBN dangles special intervention funds that total less than N1 trillion before arbitrarily selected economic sectors. These CBN handouts, which come at subsidised but still unattractive interest rates that are further padded by financial entities through which they are channeled, are difficult to access and lie largely not utilised. Thirdly, the naira depreciates unceasingly. The growing loss of public confidence in the national currency has led to deeply rooted dollarization and unconstitutional operation of dual currency system through rampant use of domiciliary dollar accounts. Fourthly, the production environment is harsh with resulting uncompetitive domestic production.

Although the cause of the high inflation responsible for the multifaceted economic afflictions has been constantly and publicly harped upon since October 2001, the latest MTEF informs as follows: “The year-on-year inflation rate is projected at 12.92% in 2017, 11.88% in 2018 and 12.57% in 2019”. Actual inflation rate in October 2016 stood at 18.3% as against 15.12% projected for the year. The implication is that the Federal Government is unwilling to remove the root cause of high inflation in the lifetime of then Military Heads of State who dictated the baneful procedure. It appears therefore that the statement at paragraph 17 of Buhari’s 2017 budget address, “Government must not be the bottleneck,” is a Freudian slip. To be sure, how does the Federal Government, which sanctimoniously observes the fiscal deficit threshold in the annual budgets, overshot the limit in practice? It is axiomatic (and the Federal Government may approach the assessment Committee on the Nobel Prize in Economics for authentic opinion) that when the CBN routinely withholds Federation Account dollar allocation, the apex bank ipso facto lends the substituted purported naira equivalent to the tiers of government. Such technical borrowings by the tiers of government in the course of one fiscal year regardless of their non-payment, should be added to disbursed CBN intervention funds and other borrowings by all tiers of government in order to arrive at the aggregate fiscal deficit level whose impact on the macro-economy manifests as excess liquidity, double digit inflation, high monetary policy rate, uncompetitive lending rate, over-depreciating exchange rate, and so on. So with the hope in the MTEF of stabilising and positioning the economy for “recovery and the growth trajectory over the medium term closer to the double digit growth rate which the economy actually requires,” the tiers of government should eschew the technical borrowing, collect Federation Account dollar allocations in the form of apex bank dollar account balance statements (for the sake of preventing possible abuse of physical dollar cash) for conversion as and when desired via the single forex market operated by deposit money banks to non-inflationary realised naira revenue.

The advantage is that Federation Account dollar allocation-derived realised naira revenue rightly comes from eligible forex end-users, who use own funds or bank loans that are already part of the existing money supply, the selfsame source of collected non-oil revenue. Thus where substitution of technical borrowings from the CBN for withheld Federation Account dollar allocation swells money supply excessively and fuels inflation, to convert the dollar allocations through the forex market literally wrings and squeezes, sweats and drains liquidity from the system. As a result, the apex bank is better placed to maintain a trim and optimal money supply. Hence, by using this proper procedure, the CBN can bring down the level of inflation to within 0-3 per cent in 9-12 months this year and subsequently fix a low corridor-less monetary policy rate that would give rise to both 5-7 per cent lending rates that would be positive in real terms and a realistic exchange rate that would be stable.

Now, Nigeria is a mixed economy, where the statutory fiscal limit of 3 per cent of GDP is meant to guarantee that the above necessary and sufficient conducive conditions smoothly flower and so position the private sector (which is far much larger than the public sector) to play its expected role of the lead driver of productive economic activities through investment of internationally competitive domestic bank credit in the various economic sectors, including undertaking public private partnership projects. Freed from perennial financial constraints, private sector investment will accelerate as well as generate massive employment, produce robust inclusive growth and propel rapid national development. As concrete evidence, the country’s domestic credit provided by the financial sector as a share of GDP will be expected to rise progressively from its lowly level of 22 per cent in 2014. The distance between Nigeria and some focused economies with respect to this indicator in 2014 was, for example, South Africa (186), Malaysia (140), China (169), India (75) and Japan (374).

The Federal Government should therefore move away from being the bottleneck, begin to correctly manage the economy along the path that it openly professes and thereby put in place the macro-economic stability required for the country to make steady progress.

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