Financing 2019 budget: Seize the solution
It is erroneous to hinge the implementability of the 2019 Budget (indeed and federal budget) on the level of the price and output of crude oil relative to the set benchmarks. The (naira) expenditure estimates ordinarily may or may not be achieved and could even be exceeded just as budgeted projects and programmes may or may not be fully met. Also budget implementation should not be narrowed to attainment of government projects and programmes, which form but a small part of the national economy.
A critical consideration is to take necessary steps for the far larger private-sector component of the economy to operate and contribute optimally to the realisation of national socio-economic goals. To that end, it is essential for federal budget implementation to proceed amid stable macroeconomic conditions, which are depicted by low inflation that is consistent with the fiscal deficit ceiling, a realistic exchange rate centred on the budget exchange rate and internationally competitive interest rates. Therefore, a constructive critique should test whether the 2019 Budget harbours the forestated prospects vis-à-vis how previous related budgets performed.
Based on the proposed and/or approved budgets of the Buhari administration, the fiscal deficit/GDP ratios have been set well below the safety ceiling of 3.0 per cent of GDP. Additionally, the 2017 and 2018 Appropriation Act exchange rate (AAR) was N305/$1 and ditto for 2019. Ordinarily, the period would experience inflation in the range of 0-3 per cent with possible short-run lagged but less than proportionate increase occasioned by the 2016 naira devaluation. Also the naira exchange rate would be expected to fall within AAR+/-3 per cent stability band in a single forex market (SFM) just as competitive interest rates would evolve.
In the light of the above prospective economic outcomes, the minister of Budget and National Planning merely engaged in continued public deception during the presentation of the “Breakdown of 2019 FGN Budget Proposal.” The document asserted, for instance, firstly, that “the macroeconomic environment has stabilised” while simultaneously in the ‘Summary of 2018 Budget Performance,’ the inflation rate as at September and November 2018 stood at 11.28 per cent. Secondly, CBN official exchange rate of N305.95/$1 was shown as the applicable 2018 exchange rate whereas over 70 per cent of forex transactions (which occurred via the Importers’ and Exporters’ (I&E) and bureau-de-change windows) recorded between 17.40 and 18.59 per cent devaluation (dishonestly termed premium) relative to the 2018 AAR in the first three quarters of 2018 as contained in CBN Economic Report Q3, 2018. Given the stated inflation figure and I&E/BDC rates that were way outside the AAR+/-3 percent stability band, three was neither price nor exchange rate nor macroeconomic stability.
Sadly, such false claims of macroeconomic stability quiet stakeholders and prevent government from putting into effect standard fiscal and monetary procedures for ensuring the stable macroeconomic conditions necessary for easily solving the country’s myriad socio-economic problems. The dishonesty is all the more troubling because of the full recognition of the prevalent volatile macroeconomic environment (VME) by key MDAs, which, worse still, drew up the government revenue-draining “2016-19 Debt Management Strategy” purportedly to counter the volatile effects. The MDAs were “the Debt Management Office, the Federal Ministry of Finance, Federal Ministry of Budget and National Planning (FMBNP), Central Bank of Nigeria, Budget Office of the Federation (BOF), National Bureau of Statistics (NBS) and Office of the Accountant General of the Federation (OAGF).” It is a national tragedy for the MDAs, which are entrusted with shaping and executing the budget for national advancement, to collusively hoodwink a non-savvy and undiscerning political leadership to the benefit of a few corrupt interests and their foreign accomplices.
Certainly, the VME is the end product of the non-standard fiscal procedure whereby the CBN has since the 1970s been withholding Federation Account (FA) dollar allocations and simultaneously substituting in their place pro-rata fiat printed naira amounts for budgetary spending by the tiers of government. The improper and analogous deficit financing of the budgets of the tiers of government by CBN raises the fiscal deficit level higher than the published proposed and/or approved budget fiscal deficit/GDP ratios thereby precipitating excess liquidity that fuels high inflation. Take some published inconsistencies and adverse economic results. First, in the ‘Summary of 2018 Budget Performance,’ November inflation rate is 11.28 per cent (2018 year average is 12.15 per cent) whereas the consistent inflation expectation rate since government adhered to the approved fiscal deficit/GDP ratio of 1.73 per cent, would similarly be 1.73 per cent (or within 0-3 per cent range).
Second, owing largely to the monthly disbursement of statutory revenue containing CBN substituted pro-rata naira deficit amounts (the improper action which sustains the VME), the apex bank in 2018 expended N2.4 trillion to mop N18.7 trillion excess liquidity funds, but still left in the system liquidity surfeit to fuel the year-on average inflation of 12.15 per cent noted earlier. Instructively, (a) the mopped excess liquidity using treasury bills would through subsequent rollover, elongation and restructuring become part of the federal national domestic debt. It is quite odd for FA oil receipts to transmute into federal public debt bearing high interest service cost for the benefit of a few subscribers amidst the impoverished masses. (b) The huge N2.4 trillion paid to banks represents unearned income for a few beneficiaries. Any wonder that banks have become averse to lending to the productive sector?
Third, the monetary policy rate (MPR) has since 2016 been raised to 14 per cent purportedly in order to fight inflation. Because positive interest rates (in real terms) stay above the inflation rate, prime lending rates have for decades settled above 15 per cent with maximum lending rates topping 30 percent. In 2017, for example, total depositors’ funds in the banks stood at N19.4 trillion while total bank credit to the economy was N20.2 trillion. Banking sector lending capacity was grossly underutilised no thanks to both CBN’s vaunted tight monetary policy stance anchored on high MPRs and the regime of investment-unfriendly lending rates. Clearly, CBN’s faulty monetary measures contributed to the 2016/17 economic recession and the sluggish GDP growth rate since then. In sum, CBN in cahoots with the earlier named MDAs has turned FA forex receipts into Nigeria’s economic bane.
By contrast, under standard practice, forex inflows into a country constitute economic boon. Towards attaining the benefits of FA forex, Nigeria’s single economy (for the public and private sectors) requires a normalised single naira exchange rate. Accordingly, public and autonomous (private sector and individual) forex accruals should be converted to naira sums in a single forex market where banks act as commission-earning forex brokers. But contrarily, the defunct 1995 forex decree continues to be purposively misapplied by the CBN as if it overrides the CBN Act 2007. The NASS should therefore reassert the supremacy of the 1999 Constitution (as amended) and the primacy of the national currency by passing the 2016 draft amendment law submitted by the Nigerian Law Reform Commission, which requires domiciliary forex account holders (and by extension all other forex recipients) to convert to naira sums forex lodgements within 30 days (why so long?) of receipt. That amendment will uproot the lingering negative economic problems originated by the military.
With regard to public sector forex, the monthly FAAC revenue disbursements should contain dollar allocations in the form of CBN dollar account balance statements instead of the ruinous pro-rata fiat printed CBN deficit funds. Public and autonomous forex holders should transact their forex holdings with eligible forex end-users (duly certified by FMBNP) in the SFM at floating rates within the AAR+/-3 percent stability band. The normalised or SFM-procured naira funds would not bloat liquidity in the financial system thereby enabling the CBN to control expansion of liquidity (that is consistent with economic growth targets) through lending to the economy by banks which would no longer have windfalls from apex bank-created excess liquidity to depend on.
Through the SFM, the forex end-users’ list is a multipurpose tool in the hands of FMBNP to (a) control forex demand, (b) conserve and/or accumulate external reserves qua external reserves, (c) protect domestic industries (these are tax payers and job providers) from economy-wrecking international trade sharp practices, (d) terminate the net loss of the country’s forex to predatory foreign portfolio investors including dollar-wielding Nigerian impostors who subscribe to Eurobonds, and (e) retrieve humongous indirect forex access tax (FAT) revenue being lost to a few apex bank-installed interlopers. For a painless transition, FAT should be the difference between the floating AAR in the SFM and the terminal I&E (or any other forex segment) charge for any item imported into the country. FAT should be collected and remitted to government coffers by forex broker banks.
The SFM fosters stable macroeconomic conditions as defined earlier. It is in such a production-friendly environment that the economy would grow inclusively, diversify extensively and industrialise heavily. The huge pile of depositors’ funds being held by banks would facilitate rapid increase in bank credit to the economy as a proportion of GDP from the current lowly level under of 20 per cent. This indicator for Malaysia, Nigeria’s erstwhile economic peer, exceeds 100 per cent. Growing investments would boost tax revenue.
Once the naira exchange rate is normalised and internationally competitive interest rates set in, the service cost of the sterlised excess liquidity-based federal national domestic debt (if not cancelled outright) would similarly drop to as low as one-quarter of the level currently being paid. So in the course of the 2019 fiscal year, total revenue takings from the traditional revenue sources plus the new revenue collection openings plus savings on domestic debt service provisions would far outstrip the proposed budget expenditure. Yes, the 2019 budget is exceedingly implementable. And assuming there is enhanced efficiency in budget execution, a supplementary budget could be tabled to take up additional socio-economic projects and programmes.
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