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Economy: President’s unfortunate misstep


Economy-spectaclesTHE recent announcement by the Federation Accounts Allocation Committee (FAAC), of the disbursement of over N760 billion to cash famished states, was popularly regarded as a bailout package, despite clarifications from the President’s Media Adviser that the income was actually the constitutional entitlement of the three tiers of government.

The payment package apparently included the sum of $2.1billion earlier paid into the Federation Account as tax obligations from the Bonny LNG and Shell Producing Company; nevertheless, beneficiaries received the Naira equivalent of over N400 billion allocation in replacement (at an exchange rate of N197=$1).

Additionally, government also shared N360 billion, which was an amount reportedly collected as Internally Generated Income by the Federal Inland Revenue Service; thus, the consolidated sum of over N760 billion was shared in the ratio of Federal Government 52.68 per cent, state governments 26.72 per cent and local governments 20.60 per cent, as constitutionally prescribed.

In addition, a loan package of between N250-300 billion would also be put in place by the Central Bank of Nigeria (CBN) for distressed states to access, after fulfilling requirements to guarantee appropriate fund application and repayment.

Furthermore, the CBN was also directed to intercede with commercial banks and the Debt Management Office to restructure the tenure of over N600 billion outstanding short-term loans of state governments.

Regrettably, the consolidated package may be grossly inadequate to address the depth of distress in most states; some Nigerians, have expressed concern that the allocations had become a reward for unrepentant profligacy in the management of public resources.

Worse still, in addition to a consolidated external debt stock of over $10 billion, both federal and states governments would still be expected to service their existing domestic debt stock of over N10 trillion and N2 trillion respectively.

Thus, in view of the current paucity of internally generated revenue, both federal and state governments may ultimately depend on refinancing and further increase of their already oppressive debt stock just to cover their recurrent expenses; in this event, unless, the political class becomes born again and seriously commits to a massive reduction in the cost of governance, any expectation of a boost in infrastructure and social welfare will remain a very dismal prospect.

Nevertheless, let us take a closer look at the potential impact of the N760 billion which was recently shared to the tiers of government.

In reality, the constant pressure of the unusual burden of Naira surplus and the extensive credit capacity of banks, has consistently made it impossible for inflation to recede to best practice levels below three per cent; furthermore, the industrially restrictive high cost of funds above 20 per cent is also the result of CBN’s failure to manage the scourge of excess cash, while the Naira exchange rate is unceasingly pummeled by the constant juxtaposition of huge Naira surpluses against dollar rations in the market.

However, common sense would advise, that if a glass is already full, it becomes wasteful to continue to pour more water into that glass, especially when it also cost more money to simultaneously mop up the excess spill.

Similarly, since an unending flood of surplus Naira already distorts the critical indices of monetary strategy, it will also be counterproductive to continue to swell the extent of surplus cash in the system, especially when the CBN, ironically, turns round to reduce the naira excess by mopping up the “overflow” when it sells Treasury bill.

Indeed, with the bonanza returns on such ‘easy’ government loans, commercial banks will clearly care less about job creation or the survival of the real sector.

Worse still, the amounts CBN borrows cannot be applied to infrastructural enhancement or indeed for any productive purpose, as such expenditure will only exacerbate the liquidity surfeit.

Thus, in the light of the persistent challenge of surplus loanable funds in the system, additional bloated Naira denominated monthly allocations to the three tiers of government also become counterproductive as a strategy to grow the economy, and improve social infrastructure and the welfare of our people.

Thus, the latest infusion of over N760 billion into an already Naira suffocated market, will inadvertently also create greater stress in the economy.

The CBN Governor was clearly ecstatic when he gleefully announced in a recent TV broadcast, that its erstwhile depleting forex reserve base of about $29 billion had suddenly spiked above $31billion on receipt of the sum of $2.1 billion from Bonny LNG and Shell.

Inexplicably, however, despite the resultant swell in dollar reserves, somehow, the Naira equivalent of over N400 billion also became simultaneously available for sharing as allocations to the tiers of government! Thus, in a magical twist of fortune, Nigerians could have their ‘dollar’ cake domiciled with the CBN and at the same time still voraciously gulp up the same cake as Naira allocations, which further compounded the existing problem of disenabling Naira surplus.

Alarmingly, this “magic” has been practised with disastrous consequences in our economy for several decades.

Consequently, the more dollars we earn from crude export, the greater will be CBN’s reserves and the higher also will be the Naira values substituted as allocations, to sadly make it extremely challenging for CBN to successfully manage inflation, and reduce the cost of funds or to indeed reduce the pressure on the Naira exchange rate against the dollar.

The President had a great opportunity to begin to reverse this ugly trend in monetary mismanagement with the recent $2.1billion LNG Shell revenue; if this income was shared as dollar allocations (with dollar certificates) instead of the substitution of over N400 billion, the pressure of excess Naira would be checked with a salutary impact on inflation, interest rate, and the Naira exchange rate.

Sadly, the President’s failure to adopt this strategic change can only mean more of the same Economic menu with the attendant suffering and gnashing of teeth. • Boyo is a public finance analyst.

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  • AA

    Well said, Mr Boyo. Do u think the president understands these things?

  • Oluseye Adebiyi

    No, sir, the step taken by the President of the Federal
    Republic of Nigeria whereby allocations were made to all tiers of government in
    naira was not a misstep. It was a step in the right direction. The main
    argument in Dr. Henry Boyo’s piece is that the $2.1 portion of the distribution
    should have been in dollar. This follows the line of his postulation that
    distribution of dollar accruals among the tiers of government in Nigeria should
    be in dollar. But the poser is: What is the functional currency of Nigeria? For
    the various tiers of Nigerian government what is the transaction currency? If the
    plausible response to the above posers is: “naira,” then, it may be illogical
    to make distributions in dollar or any other foreign currency. Doing so may not
    reduce the pressure on naira. It may aggravate it as various levels of
    government still need to convert the bulk of such fund into naira. The policy
    being advocated by the doctor may also destroy the mechanism for managing
    foreign exchange in Nigeria. The best option for supporting the naira is to
    increase the inflow of foreign currencies: create the cake. Industries using
    foreign currencies substantially should learn to earn a reasonable portion of
    their import requirements. For long, we have been talking of import
    substitution, establishment of industries to utilize local raw materials. And there
    are institutions in the country facilitating these. Why then do we find it
    difficult to manufacture a pin in this country without imported raw materials?

    Conclusively, I enjoy reading your articles but I hardly
    agree with your postulations. As for now, I am of the opinion that the step under
    reference taken by the President to address the challenges of the domestic
    economy was good and in the right direction. Beyond complains of infrastructural
    decay, let captains of industry lean more on local raw materials, produce
    cheaply to make Nigerian goods more competitive internationally, exhibit more
    ethical supremacy in corporate governance and, before long, our foreign reserve
    will be on the rise again.

  • emmanuel kalu

    Instead of allocating funding in dollars to try to reduce the flood naira market, CBN should use other tools, that doesn’t make our economy dollar base. one, they can increase the interest rate paid to banks to store their fund at the bank. this would lead to bank parking their naira. the action that all federal fund be domiclled in on CBN account would further mop up some more excess naira. finally, there has got to be a program that allo CBN to push banks to lead to the real sector.