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Economic recovery and the overdue reforms – Part 2

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Godwin Emefiele of CBN. Photo: NAIRAMETRICS

Continued from yesterday
So in the context of money supply necessary for the price stability (or the primacy of price stability as the IMF put it), which again CBN is mandated to ensure, only revenue collected from the system and deposited with CBN as banker to the government and also partly to help control liquidity levels such as treasury single account funds and customs revenue collections, may be released for government spending as and when required without instigating any inflationary pressure. Any other amount obtained from the apex bank (like the ubiquitous CBN development intervention funds, high-interest rates paid on government instruments and the substituted N5.76 trillion) not only increases money supply but also constitutes excessive deficit spending with inflationary consequences. The substituted N5.76 trillion represents excessive and illegal deficit spending because it is additional to the expressly stated fiscal deficit spending ceiling of 3 per cent of GDP contained in the Fiscal Responsibility Act and the relevant Appropriation Act. Note that the size of incurred excessive fiscal deficit attributable to the improperly withheld FA dollar allocations varies from month to month according to the volume of disbursal accruals from oil export proceeds.
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As a result of the substituted excessive deficit spending, the country has been facing persistent volatile macroeconomic environment (VME) since the 1970s. Predictably, the process of government spending the excessive deficit funds made (and still makes) the system awash with naira funds that provided the wherewithal to buy up part of the withheld FA forex being auctioned purportedly to define the naira via the mongrel exchange rate markets with the naira monotonically depreciating to the point where, as earlier noted, the retained value of the naira now asymptotically approaches zero percent relative to its peak value in 1980.
 
The VME is an apt characterisation of the economic situation by frontline ministries, departments and agencies (MDAs), which in June 2016 drew up the document titled Nigeria’s Debt Management Strategy, 2016-2019. The MDAs identified the root cause of the VME, but instead of correcting the problem, they prepared the economy for corrupt vested interests to milk. To expose institutions that acted collusively and bore (they still bear) responsibility for midwifing the collapse of the economy, the frontline MDAs which drew up the debt document were the Federal Ministry of Finance, the Federal Ministry of Budget and National Planning (these two have currently been merged), Central Bank of Nigeria, Debt Management Office, Budget Office of the Federation, National Bureau of Statistics and Office of the Accountant General of the Federation. The meeting had in attendance representatives of the World Bank, IMF and WAIFEM.
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Although MDAs are expected to appraise and evaluate policy options and guide the FG correctly, the above MDAs have unstinted implemented the ex-military regime-dictated improper withholding of FA dollar allocations by the apex bank along with substitution by CBN of fiat printed naira funds for budgetary spending by the tiers of government. To contain the attendant unrelenting VME, the CBN has devised various measures, all of which have not only proved futile but also constituted extra economic burdens. For example, (i) the apex bank keeps mopping excess liquidity funds using high interest-bearing treasury bills not for investment spending by FG but for sterilisation. The mopped funds subsequently transformed into FGN Bonds. Over 90 per cent of FGN Domestic Debt Stock is traceable to the mopped excess liquidity-based debts. At the 2016 debt strategy exercise, the MDAs decided that part of the high interest-bearing domestic debt should be refinanced in dollars while additional external loans should be contracted owing to their relatively low-interest cost. Currently, debt service to FG revenue ratio exceeds 60 per cent and has been deemed unsustainable going forward. That is because withheld high FA oil accruals, which the loans were meant to drain away, have plummeted. Note the inherent blessing in disguise!
 
(ii) The VME gave rise to the monetary policy rate-in-corridor method. The lower border of the corridor corresponds with the standing deposit facility (SDF) interest rate. The SDF rate peaked at 10 per cent for a period of time. The SDF serves as a reward to the so-called risk-averse deposit money banks, which do not eagerly lend bank depositors’ funds to bank loan seekers for fear that they could not repay the loans under the harsh economic environment. (iii) The VME-fuelled high inflation instigated high MPRs, which in turn produced high bank lending rates. The ensuing restrictive or contractionary monetary policy stance not only discourages businesses from borrowing but also shrinks GDP growth below the economy’s potential. That explains why by May 2018, Nigeria became and has remained the poverty capital of the world.
 
The above three outcomes highlight the bitter end product of the persisting military regime-instituted withholding of Federation Account dollar allocations. The principle of economic rationality ordinarily should have led the frontline MDAs to change the detrimental procedure a long time ago. But they knowingly failed to guide the FG aright. Yet the CBN Act, the Fiscal Responsibility Act and the annual Appropriation Act prescribe the adoption of best practice procedures. The world’s leading economies by 1979 settled for the managed float exchange rate fixing system (MFS). In a single forex market system (SFM) based on the MFS, FA beneficiaries (upon collecting dollar allocations in a secure form) would have to convert as and when required their respective dollar allocation to naira funds for government business in Nigeria. A broad outline of how the SFM works have been shown in some previous editorials. In terms of the illustration using the 2020 AAR of N360/$1 as the anchor, the tiers of government would realize roughly N5.76 trillion. The important point to note is that the gross amount realised by the FA beneficiaries through the SFM would be provided by eligible forex end-users. Naturally, forex buyers could use their own funds or sums borrowed from banks or whomever.  But the funds would emanate from within the existing money supply volume just like any other government tax takings. In effect, assuming optimal money supply, oil export-derived naira revenue obtained through the SFM would not increase the money supply and thereby they are non-inflationary.
 
So through this best practice method, in the event government runs a balanced budget (with revenue matching expenditure) or budget surplus (with revenue exceeding expenditure) inflation expectation for the particular year would be zero. But should government incur fiscal deficit falling within the FRA/AA ceiling of 3 per cent of GDP, the inflation expectation would be proportionate to the deficit level and fall within the range of 0-3 per cent. In such circumstances, the naira would be firm and stable while there would be a low single-digit minimum rediscount rate without any corridor and 4-6 per cent bank lending interest rates, which are positive in real terms, would prevail. Under the SFM, the economy would not have been plagued by a volatile macroeconomic environment together with its detrimental accompaniments just as Nigeria would not have become the poverty capital of the world. And certainly, capitalist sharks would not have succeeded in using their planted collaborators to saddle the FG with 90 per cent fake national domestic debt.

To be continued tomorrow.

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