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Economic recovery: Implement 2021 Budget correctly – Part 3

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President Muhammadu Buhari Presentimh the 2021 Budget at the Joint Sitting of the National Assembly Abuja. PHOTO Philip Ojisua


Two, when government implements the budget by spending realised revenue or records ex-post budget surplus, the inflation expectation is practically zero. But because inflation tends to exceed zero, the existing (guiding) fiscal and monetary laws clearly specify the economically healthy level of inflation which the FMFBNP and CBN should mandatorily maintain in the process of budget implementation in order for the economy to be efficient and productive. Accordingly, the CBN Act contains principal objects (they are not to be compromised: they are pristine and predated the military era) such as “section 2(a) ensure monetary and price stability”. For the specifics, the FRA and the Appreciation Act (AA) conjointly nail down that government may incur fiscal deficit if need be but only up to a ceiling of 3 per cent of GDP. Because, as noted earlier, actual fiscal deficit level incurred by government equates with the NBS inflation estimates (and vice versa), the interpretation of the relevant provisions of the fiscal and monetary laws is to denote inflation ranging from zero to 3 per cent as price stability in Nigeria.

Similarly, the exchange rate is a price and floating exchange rates which fall within 0-3 per cent of the Appropriation Act exchange rates (that is, AAR+/-3%) mark exchange rate stability. And consistent with Section 16 of the CBN Act there should be in operation a managed float single forex market system (SFM). Note that the preceding corresponds to the practice in the EU where the ECB denotes inflation below, but close to, 2 per cent as the price stability mark which is desirable for EU countries.

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Three, the wide difference between the FRA/CBN Act-mandated 0-3 per cent inflation range and the actual (empirical) NBS inflation estimates is attributable to several breaches such as (I) excessive (over and above FRA/AA-set) fiscal deficit level being illegally and arbitrarily introduced into the system by way of military regime-inspired substitution by CBN of fiat printed naira funds at arbitrary (non-SFM) exchange rate, which are disbursed through FAAC proportionately in place of Federation Account dollar allocations. Since the military era, CBN has been improperly withholding Federation Account dollar allocations to form the abnormally styled CBN’s external reserves.

Contrary to global best practice, only Federation Account oil proceeds constitute Nigeria’s external reserves. For the avoidance of doubt, failure by FA beneficiaries to convert their respective dollar allocations to oil-derived naira revenues via the SFM (no thanks to the ex-military leaderships’ contempt for the three guiding laws) is analogous to unlegislated deficit financing of the budgets of the tiers of government by the apex bank with resulting high inflation and rapid fall in the value of the naira. (ii) As by-products of the improper substitution of fiat printed naira funds for withheld Federation Account dollar allocations, the CBN unleashes other deficit funding into the system including very high interest rates being paid on mopped excess liquidity by way of non-investable treasury bills and several other money instruments along with interest payments to banks on unutilised bank depositors’ funds. Do not forget the nearly one hundred apex bank development and intervention funds. (iii) The constant and arbitrary devaluation of the naira inclusive of the operation of multiple exchange rates all stoke inflation.

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The unlegislated and economy-destroying excessive fiscal deficits give rise to high inflation and symbiotic high lending rates. From 1983 till date, weighted prime lending and maximum lending rates have ranged from about 15 per cent to about 36 per cent. The end product is gross underutilization of potential bank lending capacity amidst bank credit-starved business landscape. Recall for comparison the earlier noted relatively low average lending rates in the EU since 2000. Ruefully, banking sector finance of the economy as a proportion of GDP has been receding from the 20 per cent mark since the 2016-17 recession whereas, for instance, in Malaysia, Nigeria’s quondam peer economy. That indicator was over 140 per cent in 2018. Consequently, far from providing the solution calling for self-congratulation by Buhari in the 60th Independence Anniversary address, CBN’s offer to finance small and medium scale enterprises with largely undersubscribed intervention funds at 5 per cent interest rate (while practically every economic activity sector clamours for CBN intervention fund) is not just admission of the inappropriateness of the extant fiscal cum monetary policies but a strident cry for immediate adoption of correct methods.

Four, the 2021 Budget has set the naira exchange rate of N379/US$1. It represents a devaluation of 19.5 per cent relative to the initial 2020 Budget exchange rate of N305/US$1. The July 2020 virtual MTEF/FSP draft report claimed the CBN adjusted the previous exchange rate to the current rate in response to developments affecting the supply of forex to the economy. Since the 2021 Budget speech on 8/10/2020 a member of the PAC has said that the naira exchange rate will jump to over N475/$1 by 2020 year-end, a barefaced proof that the exchange rate is being arbitrarily dictated to CBN. The unstable and arbitrary naira exchange rates, as has been pointed out, push up inflation, affect domestic production negatively and accelerate the numbers of citizens sinking into extreme poverty.  

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Amid the arbitrary devaluations, the Buhari administration should reflect on the fact that it is 49 years since the Bretton Woods system of fixed exchange rates was discarded and 41 years since the world leading economies along with most open/mixed economies adopted the managed float exchange rate system (MFS). Over the past four decades, Nigeria has been tremendously outdistanced by her quondam peer economies such as Singapore, South Korea and Malaysia. For 45 years running, Federation Account oil proceeds on paper have formed the major proportion of the budgets of the tiers of government. During that period, the ex-military regime and its successor administrations have shunned the MFS by choosing instead to experiment with all manner of naira exchange rate fixing methods. The experiments have all proved injurious to the economy at large while leading government functionaries and their cronies have waxed corruptly rich.

The ex-military regime has bequeathed the following enduring legacies: (a) forex domiciliary accounts came into operation under Abacha; (b) remittances from Nigerians in the Diaspora are re-exported via International Money Transfer Service Operators; (c) Nigerian banks are free to finance local businesses in dollars; (d) there is open trading of forex on the streets; (e) there is massive treasury looting by government functionaries who have self-servingly put in place well-oiled methods for converting the loot to forex for carting abroad and stashing away in foreign bank accounts.; and (f) travellers out of the country can carry unlimited amounts of forex physically upon declaring same for statistical purposes only.
To be continued tomorrow.

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