The Application Of Bizarre Monetary And Fiscal Policies And The Nigerian Recession
Nigeria is truly an interesting Country. Within the space of 2 years it has moved from a country governed by a President completely incompetent on matters of security and warfare that Nigeria was on the verge of having a rebel group numbering no more than 1,000 men (and with little or no sources of income) overtaking most of the North Eastern part of Nigeria and threatening parts of both the North Central and North western parts of the country. At the height of that erstwhile government, money allocated to arm its troops found their way into the pockets of the politically influential members of society.
Now, Nigeria’s economy is being run into the ground not necessarily due to the actions of its predecessor but because of the actions of both the Central Bank of Nigeria and the actions of the Federal Government of Nigeria.
For the purposes of fairness and as a background, the Buhari government inherited a slowing economy with the GDP growth having slowed to 2.7% (the lowest since 1999) in 2015. The Buhari government also inherited an economy with a significantly increased debt profile. I believe over 48% of its yearly revenue in 2015 went to service accumulated debt. The oil price (high by historical standards) fell substantially lower than the prices obtained during the unusually high periods of both Yar Adua and Goodluck Jonathan.
It is and would be most uncharitable and dishonest to place the onset of the current recession or its entrenched nature at the doorstep of the previous government. The previous government can be blamed for the high debt acquisition, mismanaging of buoyant economic indicators, under-performing in its economic performance, reckless management of government revenue and government savings. the reckless and inappropriate application of fiscal policies that produced declining GDP growth relative to income but it definitely cannot be blamed for the eradication of growth in all its forms under this Government.
Most governments around the world conversant with the management of economy in good times and bad knows’ to follow certain rules. The rules are fairly simple. At times of excessive economic growth (which is tending to lead to the overheating of the economy and the build up of inflationary pressures), employ a cocktail of monetary and fiscal contractionary policies such as Interest rate rises, tax hikes, government spending cut-backs and the likes.
Alternatively, if an economy appears to be heading to a recession (as it appeared the Nigerian economy was prior to President Buhari taking office), employ expansionary monetary and fiscal policies geared to keeping the economy afloat. Such policies would take the form of Interest rate reduction, CRR reduction, reduction of the rate of individual and corporate taxes and increased public spending.
As in most things Nigerian, economic policy (both fiscal and monetary) are being employed back to front. Contractionary policies are being employed to a liquidity challenged environment thereby exacerbating the recession. These contractionary policies are at odds with the stated federal Government goal of using fiscal policy to reflate the economy through spending on capital projects.
Let us examine Federal government fiscal policy for the moment. Its stated aim was to run an expansionary budget. Its 2016 budget was 6 trillion naira. Of that figure, 2 trillion naira was to be sourced from foreign or domestic lending sources because it believed its generated revenue will come to about 4 trillion naira. Its strategy was to use capital spending sourced from foreign and domestic loans to pay for road and rail infrastructure whilst its generated income of 4 trillion is to be used for debt service payment and recurrent expenditure.
What we do know is that FIRS raised 3.3 trillion Naira in revenue for 2006 (as reported in Thisday newspaper online webpage of April 11 2017 captioned Fowler: “FIRS Collected N3.03tn Tax in 2016 Says national tax roll hits 14m”). The Customs service raised 898 billion Naira as revenue in 2016. This was captioned by the Vanguard website of the 9th January 2017 titled “Customs generates N898 bn as revenue in 2016- spokesman”. Allied to this, the managing director of the NLNG (Tony Attah) disclosed (and was reported by the vanguard online website on the 9 March 2016) that 15 billion US$ was paid to the FG as dividend between July 2016 and March of 2017 (“NLNG has paid $20.5 billion to FG since 2016-MD”). The Nigerian equivalent at the artificial FG exchange rate of 1 $USD to 306 Naira brings the amount from NLNG to close to 4.5 trillion Naira. This brings the revenue accrued from internal sources to 8.8 trillion naira alone. Added to this figure, we can estimate that Nigeria’s crude oil exports for 2016 fluctuated between 1.2 million barrels a day and 2 million barrels per day at prices ranging from 42$ and 50$ a barrel.
We also know that Nigeria has successfully borrowed a billion dollars from the Eurobond market and got a 600 million dollar loan from the African development bank (reported in the Financial times on November 2 2016 under the title “Nigeria gets $600 million loan from African development Bank”).
In essence, Nigeria is swimming in money but is also neck deep in a recession that it seems unable to extricate itself from.
FIRS has been very efficient in expanding its tax net to cover 14 million people. Its increased efforts, though good and fair, only makes economic sense in the midst of a recession if spending power extracted from individuals and corporations are immediately spent by the Federal government on its infrastructure needs using Nigerian workers. However, the auditor general of the federation (Ahmed Idris) disclosed in the Sun online webpage (of the 17 April 2017 titled “ TSA Account hits 7trn deposit-FG”) that the Federal Government was in fact hoarding over 7 trillion naira in its TSA account outside the banking system and therefore outside of the economy. The FG is in effect, carrying out contractionary fiscal policy contrary to its stated budgetary policy goals and at a time of unprecedented income generation from non oil exporting sources.
When one then considers the extremely high interest rate environment and high CRR rate from the CBN, one quickly realizes that this recession is a recession experienced in the midst of much and caused by a lack of understanding of the uses, purposes for and consequences of the various macro economic fiscal and monetary tools.
Having written many articles in the past (especially in November 2015 titled “the choice between depreciation and the fixed value for the Naira”) warning about the certainty of a recession if the fiscal and monetary policies then being applied is continued, one is less optimistic about the positive effect this article will have on those in government.
However, the Nigerian people should be aware that its’ economic circumstances has more to do with sheer incompetence of the President, his fiscal and monetary policy team than any thing vaguely related to the price of oil, militant sabotage in the Niger Delta or the economic incompetence of the Jonathan government.
Nigerians will have to (like it did in 2015) make the necessary changes in leadership in 2019 out of its own self interest and economic survival. In 2015, Nigerians were asked to choose between 2 leaders whose skill set or lack thereof was certain to bring either death or poverty. Nigerians chose the bearer of poverty. In 2019, Nigerians must be clear to avoid being placed in the position where it must choose between the lesser of two bad choices.