Buhariconomics : Walking in a land without floors
In a recession, the amount available to spend declines because people are not spending , and spending also declines because people do not have the income to spend. It’s a big cycle that needs to be broken.
A good way to break the red cycle is to cut the tax on consumption and business.
Cutting tax and levies allow businesses and individuals to spend more. Ironically, the government at the Local, state and federal level is now very aggressive, pushing to increase tax receipt and increase government revenue.
The government should ordinarily pool funds together, spend on projects that create jobs and kick start the cycle of spending. However, some right leaning economists disagree.
I also agree that the Nigerian government cannot be trusted to create that cycle.
Government is inefficient and issues including budget padding , terrible revenue projections, abysmal costing, poor project management, irresponsible decisions and flat attitude towards the economy from Lagos to Lokoja is at its peak.
We can boldly say that the government in Nigeria is a huge constellation of elites working to achieve or protect personal goals.
It is okay to disagree but pipe lifters and hawkers struggling to earn N50 afters hours of hard work understand what I am talking about.
In Nigeria, the fiscal process is designed to ensure control and prevent theft while spending the collective pool of money. Control mechanism is now the primary objective not boosting aggregate demand. That is why we now celebrate the Treasury single account (TSA)- a control mechanism- as an achievement.
Collecting revenue, getting approvals, making investment decisions and finally releasing fund is too slow to end the red cycle. Hence, the government cannot be trusted to walk us out of this hole.
Another strategy out of the dark hole might be lowering interest rates to stimulate spending.
The Central Bank of Nigeria and the Monetary Policy Committee (MPC) seem to have reverted to faith as inflation enters 17.1%.
The MPC looks to be outsourcing monetary policy management to the United State’s monetary authority.
Policy formulators appears to believe that increasing lending rates can make the Naira attractive to investors who can borrow the dollar from the United States at 3% and invest the proceeds in Nigeria at 20%.
In following that, hopefully, investors will move dollars into Nigeria, then the Naira would stabilize, prices would stay stable and everything starts to work wonders.
But will you invest in a country that spends N891bn between January and June on salaries, despite receiving N862bn as revenue or a country that borrows approximately N598bn to service overhanging debt that is now in excess of N8.5tn?
No! Investors and carry-trade strategists looking to gain big from such arbitrage opportunities may not be that irrational.
Another solution is to have government spend to make up for the slack.
The 2016 budget with all its irregularities on the back of exchange rate differentials( N320/$1 against N190/$1 in 2015) is only N6tn( $18.75bn) as against the N5tn($26bn) in 2015.
Are we really spending out or moving deeper in recession?
Pushing further, the fiscal injection will only work if it has monetary policy support from the Central bank, i.e. if the government starts spending newly created money so it doesn’t crowd out private spending.
We are already neck deep in inflation and that option looks like a strange island.
The federal government using the TSA, pulled out almost N2tn from the banking sector.
The government is, however, borrowing heavily from the savings of individuals and businesses after pulling out its fund from the banking system.
In a recession, government should encourage spending- rather than stiff the financial system to close its irresponsible fiscal deficit.
Private businesses are then left to borrow what is left of the residual capital which sometimes command lending rate in excess of 30%.
How do we get out of this hole?
We need an economic team that truly understands economics, not people that are wired to spend.