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MPC avoids path to 2018 budget surplus

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The CBN’s Monetary Policy Committee met on November 21-22, 2018, but as usual avoided the shortest and easiest path to turning the 2018 Federal Budget (running for a course of 12 months from late June) into a budget surplus after implementation. It failed to decide that the longstanding improper monetary and fiscal procedures be removed with the aim of furthering the government goals of economic diversification, raising employment and ensuring rapid development and accelerated GDP growth. These goals plus more are attainable based on the economy’s inherent strengths.

But disappointingly, the MPC over the years abetted CBN’s erection of obstacles to realising set national goals and all the while not only condoned CBN’s failure to provide sound economic advice to the Federal Government as statutorily mandated by the CBN Act but also exploited a series of official lapses such as the dereliction of duty by the President who did not insist on conformity with budgetary fiscal and monetary provisions; the shirking of responsibility by relevant NASS committees which did not monitor and ensure strict compliance with the budget; the naivety of the Ministry of Budget and National Planning which merely churned out all manner of computer-generated figures for budgets and economic plans without additionally drawing up a matching comprehensive revenue list to cover every budget for the Federal Ministry of Finance to collect as the precondition for both ascertaining the degree of actual project-by-project execution and determining achieved budget deficit level, balanced budget status and size of budget surplus recorded as the case may be.

But what are/were the erected obstacles? Contrary to official claims till date, the tiers of government have not since 1975 been financing over 50 per cent of their budgets with oil-derived revenues. (Had that been the case, the country would have by now ranked among the world’s top 10 economies.) In reality, the government deployed throughout the period pro-rata CBN fiat-printed naira funds that were constantly being substituted for withheld Federation Account dollar allocations. Being over 50 per cent of budget expenditure, the substituted fiscal deficits were excessive.

The infliction of excessive fiscal deficits cumulatively in excess of 3.0 per cent of GDP annually stilted the macroeconomic indicators by way of elevated inflation levels, uncompetitively high lending rates and artificial naira exchange rates. The tripodic rates in turn begot the symbiotic tight monetary policy stance in which the MPC has become entrapped like a baby in a cot. Consequently MPC Communiques including that of the November meeting and personal statements of the MPC members are repetitive and dwell helplessly on the excessive fiscal deficit-induced unfavourable indicators, which mirror a difficult economic situation.

Take, for example, two odd outgrowths. Firstly, the IMF/World Bank now capitalise on the entrenched negative indicators (they are revealingly dubbed vulnerabilities and fragilities) not only to predict gloomy high fiscal deficit levels and low GDP growth rates but also to talk condescendingly to the gullible Federal Government over the poor state of the economy almost fortnightly. Secondly, the MPC and the Bretton Woods institutions now second-guess each other as the economy flounders along. After several revisions in the course of the year, the IMF predicts 2018 GDP growth rate of 1.95 per cent. On the other hand, the initially projected ERGP 2018 GDP growth rate of 4.8 per cent as at August 2017 was slashed to 3.5 per cent and as at September 2018 again halved to 1.75 per cent by the MPC ahead of NBS estimates. Given that realised GDP growth rates are lower than the population growth rate, GDP per capita has steadily declined despite the country’s exit from recession since the second quarter of 2017. And so, in under two years of its implementation, the ERGP has been robbed of both its recovery and growth edges by CBN-foisted vulnerabilities and fragilities.

Amid the decades-long blundering, however, Nigeria’s economic strengths are yet to be appropriately tapped owing to non-normalisation of the national currency. The strengths here in, firstly, the partial dollar component of government revenue buoyed up by remittances from abroad of at least $20 billion annually, which largely absorbs declines in oil receipts; and secondly, strict observance of the fiscal deficit ceiling of 3.0 per cent of GDP. These factors provide the foundation for self–reliant economic management and facilitate keeping the naira exchange rate stable around the Appropriation Act exchange rate (AAR).

The CBN is mandated to have the country’s entire forex supply transacted in a single forex market (SFM) within a forex price stability band of AAR+/-3 per cent.

There should be neither forex dealers nor domiciliary dollar accounts. Forex brokers should earn commission on effected transactions. Given the fiscal deficit constraint, the inflation expectation would fall within a range of 0-3 per cent just as will be the case in the event of a balanced budget or budget surplus. The monetary policy rate and lending rates would similarly drop thereby yielding a normalised macroeconomic base and accommodative monetary policy stance. These ambiences would permit bank credit to the economy as a proportion of GDP to climb rapidly above the lowly 20 percentile mark (chalked up over the past decade) just as investment expansion in various sectors would raise the employment level, diversify the economy and propel GDP growth rates that would surpass the projected ERGP rates.

The operation of the SFM opens the way for the MBNP to effectively control forex demand by drawing up an updated revenue list, which would also serve as a means to grow (conserve?) external reserves, protect domestic production and make forex end-users to fully pay applicable import duties. Initially, all items (whether visible or invisible trade items) being procured via the various forex market segments should automatically attract the difference between AAR and the rested segments rates as forex access tax (FAT), which should be payable in addition to the applicable AAR. Thus without increasing the cost of imported inputs, productive economic agents and the productive sector would benefit from substantially reduced cost of borrowed funds. The large FAT-shielded domestic market would consume the increasing local output and export any surplus.

Meanwhile, the Minister of Works, Power and Housing has reportedly tasked critics of the government borrowing spree to show where otherwise the Federal Government would find funds to implement its budget. For quite a while, it has been shown that from July 2017 through June 2018, FATable forex transactions on the Importers’ and Exporters’ forex segment alone (which should be rested) accrued a sum of 2.9 trillion naira. So, whatever the relative change in forex transactions during the 2018 budget year, it would be a walkover to bridge the 2018 Budget’s total fiscal deficit of N1.95 trillion by supplementing the traditional revenue sources with FAT collections. In other words, the 2018 Budget after implementation should ordinarily record a budget surplus. There is clearly no justification for domestic and external borrowing by the Federal Government.

Therefore, it is imperative for the Federal Government to embrace proper fiscal and monetary procedures and also involve those patriots who know what to do to run the Nigerian economy successfully.


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