A shiny light at the end of the tunnel?

Has the CBN made the right decisions after all and to what end or is there a shiny light at the end of the tunnel?

My attention has been drown to the recent activities by the CBN and the Federal Government in terms of raising capital to fund its budget deficit.

First and foremost the Central bank of Nigeria is to promote and maintain stability and a sound financial system i.e help encourage long term planning, aid infra development, attract foreign investors and beget economic growth. While the CBN is responsible for the above, the formulation of fiscal policies which affects the attainment of the earlier stated objectives falls on the Ministry of Finance. Undoubtedly, fiscal policy is central to the health of any economy, as governments power to tax and to spend affects the disposable income of citizens and corporations as well as the general business climate.

In this regard, the interrelationship between public spending and private sector performance is of paramount importance. On one hand, Government expenditure can provide an impulse for private sector growth, while on the other, it can be harmful if it results in budget deficits and leads to competition for scarce financial resources from the banking sector as the government seeks to finance the deficit. In such circumstances, the crowding out of the private sector by the Government sector can outweigh any short term benefits of an expansionary fiscal policy. The key to all these therefore lies on striking a good balance in fiscal management. Having enough expenditure outlays to meet the needs of the government and support growth, but not so much as deny the private sector the resources it needs to invest and develop — Dr. Ngozi Okonjo-Iweala

Have we crossed this path of fiscal indiscipline?

Let me narrate a short history

In the 1970’s the CBN directed that aggregate credit to government outstanding at the end of 1970 was not to exceed 20 per cent of the1969 level. Furthermore, increases in credit to the industrial sector. Commerce and services were limited to 40, 10, and 50 respectively. In the same year, the CBN directed commercial banks to grant on the average a minimum of 35 percent of its loans, advances to indigenous borrowers — control of inflation in subsequent years became a concern of the CBN — the oil boom and the Government fiscal indiscipline ensured this. Loans and advances continued to rise as per in the spirit of indigenization fever — increasing from 70 per cent in 1979 and 90 per cent in 1984. In order to engender rural dev, the CBN also introduced the rural banking scheme in 1977. In 1982 all banks were directed to lend a minimum of 30 per cent of their total deposits generated from their rural areas of the customers in the rural areas. This was increased to 40 per cent in 1985.

There are so many errs to this. We throw money at a problem without looking at the underlinings here in regards to the rural development programme. Serving in Ebonyi state, and observed indeed the government is ready to support SME’s with credit and inputs in this case farmers, as we are heavily dependent on imports not a bad idea though but to what end? Are we looking at it for the short term or the long term? Nigerian farmers in this case cannot compete globally if a standard is not implemented and economies of scale is overlooked. Education which has been overlooked and underfunded — EBSU farm does not have a standard irrigation system.

Not to digress, most African economies which are commodity based — in its boom tend to spend money lavishly and forget to save for the rainy day. Back to my story.

With the failure of the monetary authorities to engender a stable economy in the face of fiscal dominance led to the adaptation of the infamous SAP (The Structural Adjustment Programme) in 1986. Despite the adoption of the SAP very little changed with respect to government fiscal policies. Even General Ibrahim Babangida admitted this in his 1993 budget speech.

The lack of fiscal discipline is the bane of our economy. Inspite of realized revenues being above budgetary estimates, extra budgetary expenditure has been rising so fast and resulting in ever bigger deficit…..To say the least, this is a sobering and we must all ensure that the deficit is not only minimized but eliminated……… The practice of financing the fiscal deficit through the banking system especially the central bank’s Ways and Means facility, results in rapid growth of domestic liquidity which in turn, exerts immense pressures on prices, interest rates and exchange rates of the Naira. As an illustration, between 1988 and 1991, an average of 77 percent of the overall deficit was financed by the CBN while in 1992 the deficit had been largely financed by the CBN.

Such fiscal indiscipline occurred despite the regulations were put in place to limit the exposure of the CBN to the federal government through the mechanism stated above. The above screen shot — Section 33 of the Central Bank of Nigeria Act of 1991 stipulates that the bank may grant temporary advances to the Federal Government in respect to temporary deficiency of budget revenue at such rate of interest as the bank may determine. The total amount of such advances shall not exceed 12.5% of the recurrent budget revenue of the Federal Government for the year in which the advances are granted. The section further stipulates that all advances made pursuant to this section shall be repaid as soon as possible and shall in any event be repayable by the end of the Federal Government financial year…. if not no more advances until government pay its outstanding advances… but still the Federal Government always find a way to flout the rules this then questions of the independence of the CBN…

From the image above which states the budget estimate since about 2014, the revenue expectations in the budget have been very optimistic. The 2014 budget projected revenues of N6.2tn but actual revenue was N5.5tn. The 2015 budget projected revenues of N5.6tn but actual revenue was N3.99tn. The 2016 budget projected revenues of N4.6tn but actual revenue was N2.9tn. In short, not only have we been planning record deficits, but we have also been overestimating expected revenue, meaning the record deficits were even larger than the record deficits we projected.

Thus far the government has been unable to reign in its deficits. This has negatively impacted on the effectiveness of the CBN’s OMO policy. From 2013 to 2016, for instance, the Government consistently ran deficits. This has, at least in part, been responsible for the unenviable and continuing increase of both domestic and external debts of the country and an increase in money supply in the system and would lead to inflation/higher interest rates which is a perennial consequence of Government deficits. In December 2016 to April 2017 credit to government increased from N5tn to N6.5tn — over a trillion in four months.

Questions to ponder on — how is the debt going to paid at the long run come ten to twenty years from now? Any other source of revenue at the moment apart from oil rents? We have been told that its been used to finance infrastructure , which one precisely? Is it even a sustainable project other than roads? Are we still waiting on high oil prices — wishful thinking…..

One option is to put in place a fiscal policy rule, because the fiscal rule and budgetary management would help begin to build government credibility in fiscal management and over time promote strong fiscal discipline across all tiers of government. Although the solution to the problem is more complex than it seems until some powerful pro-stability stakeholders strong enough to challenge government fiscal recklessness emerge.