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Buhari and debt-free sustainable growth – Part 2

By Editorial Board
29 September 2020   |   3:06 am
For the sake of elucidation, (i) Section 2(a) of the CBN Act enjoins the CBN to at all times “ensure monetarily and price stability” and (ii) both the Fiscal Responsibility Act and annual Appropriation Act


For the sake of elucidation, (i) Section 2(a) of the CBN Act enjoins the CBN to at all times “ensure monetarily and price stability” and (ii) both the Fiscal Responsibility Act and annual Appropriation Act set for FG the annual budgetary spending limit of total realised revenue where possible plus (if need be) fiscal deficit not exceeding 3 per cent of GDP. Those provisions require both FG and CBN to compulsorily keep inflation close to, but not above 3 per cent as denoting price stability.

By way of interpretation, upon implementation of the federal budget, a surplus or balanced budget causes practically zero inflation, but when government incurs a deficit budget, any incurred fiscal deficit level would ordinarily determine the inflation level. The advantage of keeping inflation below 3 per cent is its accompaniment by production-friendly and competitive low 4-6 per cent lending rates that are positive in real terms.

In the context of the initial 2020 Appropriation Act, the single forex market naira exchange rate should have as its anchor the then Appropriation Act exchange rate (AAR) of N305/$1. To be adjudged stable, the SFM-determined rate should float and assume any value ranging from N295.85 to N314.15. (These rates are contained within the stability band of AAR+/-3 per cent.) Emphatically, the three fiscal and monetary laws do not grant CBN the power to unilaterally devalue the naira or operate multiple naira exchange rates. However, FG can exercise the sovereign right to impose a tax on legitimate economic activities. Therefore, apart from paying the floating SFM exchange rate, the government may impose on forex end-users separate tax (call it forex access tax (FAT)), which may be variable depending on the imported goods and services. But technically, any FAT so imposed should not be construed as an integral part of the SFM exchange rate. Thus, given the AAR of N305/$1, the above apex bank multiple exchange rates can be accommodated under the SFM as serendipity-like FAT as follows: (i) the interbank segment rate of N310.57/$1 transforms into separate FAT of N5.57 per forex unit purchased; (ii) the BDC segment rate of N363.48/$1 transforms into separate FAT of N58.48 per forex unit purchased; and (iii) the I&E segment rate of N365.06/$1 transforms into separate FAT of N60.06 per forex unit purchased. (Ignore the recent devaluations to N379/$1, N386/$1, etc in this illustration.) Having been accustomed to paying the multiple exchange rates, forex end-users will not charge FG with imposing extra-multiple taxation when the multiple exchange rates correctly transform to FAT.

It is saddening to point out that to date there has been the unconscionable dash of what should be public FAT revenue to middleman-forex dealers in the guise of multiple exchange rates whereas the federal treasury has been revenue strapped. The middleman-forex dealers do not directly produce goods for export to earn dollars for the country. They simply transfer forex from the holder to the end-user and should, therefore, like stockbrokers in the stock exchange, earn a commission from the forex seller, and also from the forex buyer. However, under the SFM regime, the middleman-forex dealers should perform the additional function of collecting applicable FAT revenue and remit the takings transparently to the federal kitty. The SFM guarantees low inflation and competitive lending rates for DMBs to brace up and play their true role of lending funds to facilitate productive economic activities. 

Now, how much FAT revenue could FG have realised in Q1, 2020? The FAT revenue source has long been highlighted, but policymakers and managers of the economy have so far disdained it. Yet in the recent versions of the MTEF/FSP, government, feigning ignorance, solicits for “What are new incremental revenue sources that government should focus on/?” All revenue sources including FAT should be fully harnessed for accelerated self-dependent national advancement. Because the CBN claims over 70 per cent of forex transactions pass through the I&E segment, for the sake of simplicity, suppose total forex sale transactions passed through the I&E segment. Therefore, the probable effect of FAT on the federal treasury may be assessed under several scenarios.
Scenario (a) In Q1, 2020 CBN sold $13.37 billion. At N60.06 separate tax per purchased forex unit, FAT receipts would have amounted to N803 billion. (b) In that quarter, aggregate forex outflow from the economy was $18.97 billion. Had the amount passed through the SFM, the FAT accruable would have been N1.139 trillion. (c) In Q1, 2020, net autonomous forex inflows of $26.36 billion went AWOL. (i) Had the total amount been converted to legal tender naira funds via the SFM, the pooled external reserves would have risen by the same amount. (ii) Had the hard currency passed through the SFM and had it been wholly applied to fund importation of the 44 items excluded from CBN forex, the FAT accruable would have been N1.583 trillion. Such imports would have attracted both tariff and FAT leading to elevated prices, which could have rendered them less attractive than local substitutes as the FMARD recommended above. Scenarios (b) and (c)(ii) put probable total revenue losses to FG at N2.722 trillion in one quarter or (other things being equal) N10.888 trillion in one year.

Uncannily, but for the pandemic lockdown during part of the year, the amended 2020 Appropriation Act aggregate expenditure of N10.810 trillion would have been taken care of by the projected FAT receipts of N10.888 trillion subject only to the Buhari administration obeying the existing three fiscal and monetary laws which he has taken an oath to uphold. At this point, factor in the traditional main budget revenue sources of oil proceeds, company income tax, customs collections, and VAT and the amended 2020 Appropriation Act, upon implementation, would record a humongous surplus.

Such an outcome is the hallmark of a properly managed national currency under the SFM. The SFM releases ample revenues from the financial and business sectors for the effective implementation of national budgets that cover the various infrastructural and socio-economic needs of the people. Recall also the SFM’s associated low inflation gives rise to competitive low-interest rates that enable businesses, both big and small/medium enterprises to access cheap bank credit to invest in the various interdependent economic sectors which would generate extensive employment and thereby propel inclusive and double-digit GDP growth rates during the first decade (upon adoption of the SFM). Rapid GDP growth facilitates an accelerated reduction in the number of people living in extreme poverty.

To attain self-dependent sustainable rapid national development not only instills national pride but also boosts national dignity. Nigerians do not deserve anything less ennobling.