N1,300bn Allocation: Poisoned Bumper Harvest!
Media reports last week confirmed that the Federation Accounts Allocation Committee (FAAC) shared over N1.3 trillion to the three tiers of government for the month of June 2011. The reports rightly recognized the amount disbursed as the highest in recent times. Indeed, it is hard to recall when monthly payments exceeded N1,000bn in one month in several years. The Punch edition of Saturday, 6/7/2011 (pg 52) indicated under the title 'FAAC Distributes N1.3tn among FG, States, LGs that the unusually massive allocation was made possible as a result of the simultaneous payment of about six month arrears of about N710.7bn. As if in confirmation that the size of the arrears was still inadequate, another sum of N82bn was additionally paid as 'augmentation'; the Punch report under reference further explained that this amount was XX'the result of the shortfall in distributable revenue based on the 2011 budget, and the report further clarified that the actual distributable statutory revenue was N470.97bn!!XX If anyone is befuddled by the foregoing distinctions in revenue source classifications, not to worry, I will confess without remorse that I am in the same bewildered class! What is, however, patently clear is that the beneficiaries of this bumper harvest do not also care how the allocations are subdivided; the important thing is the recognition that 'plenty, plenty money don come!!', and this largesse must be very welcome to replenish treasuries (particularly those of States and Local Governments) which were cleaned out prior to the April 2011 elections. Besides, the ghost of N18,000 minimum wage, which Labour stampeded the Executive and Legislature to enact before the polls has risen with great trepidation to claim its prize! Indeed, the Punch report commended the bumper payment as a bold step by the FAAC towards ensuring that Governors of the 36 States have enough money to pay the new minimum wage. So, what then is the 'grouse' of this column at such a 'timely' and benevolent 'windfall'? Well, it is just that it is difficult to ignore the basic definition of inflation as too much money chasing too few goods! Besides, we recall that CBN Governor and other senior members of our Economic Team are also aware of the grave dangers posed to our social welfare and economic growth by what has been described in this column as the 'Silent Plague of Inflation' (see our article on 'INFLATION: THE SILENT PLAGUE' at http://www.lesleba.com/13062011.doc). Indeed, it would be an uphill task to grow or diversify an economy with annual inflation rates consistently above 10% for several years as is the case with the Nigerian economy; worse still, the inflation rate of the average family food basket has faithfully also regularly exceeded double digit, oftentimes, in excess of 14%!! Thus, with such high inflation rates, nominal salary increases become meaningless if they do not keep pace with the rising price level. Invariably, it makes no sense to save in a climate of such spiral, and this would become reflected in low rates of investment, growth and employment as these indices all depend on availability of savings for funding. Indeed, in recognition of the need to restrain inflation, readers will be familiar with the unceasing CBN regular exercise of mopping up excess cash from the system. Hardly a month goes by without CBN's altruistic posturing and intervention in mopping up excess liquidity from the system! A discerning cynic may wonder at the source of the XX'never dry well'XX of the unending scourge of excess liquidity, particularly when our economic authorities in the same breadth decry the inability of banks to extend adequate credit to the real sector!! This year, the CBN and Debt Management Office (read as debt creating office) would jointly borrow well over N1,000bn from predominantly the money deposit banks in their bid to control the supply of money and stem inflation. The cost of servicing these government debts, which have largely failed to positively impact on our welfare and infrastructure will also exceed N500bn in 2011. So, it is clear that the battle to control and reduce the amount of money in the system and thereby arrest an inflationary spiral is not only very serious, but also very costly!! So, the lesson that evolves from the above is that it is dangerous to flood the system with too much money at any time. In spite of the historical reality of the losing battle against an unhealthy rise in the general price level with comparatively modest monthly average allocations of about N500bn, what then could be responsible for what may be termed, the apparent recklessness of paying over N1,300bn deposits into the banks as revenue allocation to the three tiers of government for just the month of June alone? Of course, the true beneficiaries of this largesse are the banks, who recognize that the deposits would provide them with an appropriate platform to leverage credit expansion above N13,000bn!! If CBN does not give up its fight against inflation, it would have no other choice than to approach the market, invariably with bond sales of the DMO also in tow to try to mop up part of the cash surfeit in the system! In addition, CBN may also have no option than to further increase its Monetary Policy Rate (i.e. the rate at which it lends to cash squeezed banks) above the current high rate of 8.5%. Banks would inevitably have to also push up their own lending rate to its customers. In this event, it would not be rocket science to foresee lending rates well above 20% and a consequent contraction of the investment climate, as such high rates can only 'successfully' support buying and selling as well as increase in import expenditure on consumer goods!! In other words, the effect of the 'bumper harvest' of N1.3tn may just leave a very sour taste in the mouth of Nigerians as employment opportunities also contract in line with demand and the high cost of borrowing! But, in reality, the impact of the bumper harvest of N1.3tn goes much deeper than that, as it puts the purchasing value of the naira also at risk. The CBN Governor has vowed on several occasions to defend the value of the naira at +/- 3% around the N150=$1 mark by deploying more and more of our dollar reserves to its rescue! This column has in turn decried this simplistic approach to defend the naira and described such process of exchange rate determination as monopolistic and anti naira! Let me explain; you see, there is very little CBN can do to whittle down the cash volume in the system, as huge cash/credit capacity remains with the banks even after each mop up or DMO sale of sovereign bonds. The net result of the availability of such cash surplus is that subsequent dollar offers at the CBN bi-weekly dollar sales will always be oversubscribed by the huge cash/credit in the hands of the banks, and in the same manner that too much money chasing too few goods leads to a rise in the general price level, the huge quantum of naira chasing the relatively fewer dollars offered by CBN every week would also ensure that the naira would remain weak and constantly under pressure as a result of paradoxically increasing export dollar receipts! In the Punch report under reference, Mr. Danladi Kifasi, Permanent Secretary, in the Ministry of Finance attributed the increase in gross (naira) revenue for the month of June to a rise in oil prices, denominated in dollars, at the international market. However, you might ask, how can the naira weaken when we earn more export revenue especially as there is nothing on ground to indicate the objects of rapidly increasing dollar expenditure!! Well, I will invite the reader to come on a short journey of exploration! You may have noticed that the naira rate against the dollar usually comes under downward pressure whenever crude oil prices rise significantly. This is because when such fortuitous price increases align with regular crude output above two million barrels/day, Nigeria earns billions and billions more of dollars every time. The twist in the tale is CBN's capture of the dollar earnings and the substitution of trillions of naira as allocations to the three tiers of government. Here, then is the beginning of the phenomenon generally described as burdensome excess liquidity. So, the more dollars we earn, the greater is the naira cash surfeit in the system, and the greater the threat of inflation. In order to prevent/reduce access to this huge cash/credit capacity of banks, CBN resorts to borrowing billions of naira every month from predominantly the same banks, who are the custodians of the increased naira allocations (triggered by the increasing dollar revenue) to the three tiers of government. There follows thereafter a train of high lending rates, reduced industrial activity, rising unemployment, rising fuel prices, inflation and poverty with insecurity in the land! This, readers will agree, is an inexplicable framework that ensures that our economy will contract rather than grow when we earn increasing dollar revenue! So, it should be easier from the above to understand why the huge allocation of N1.3tn may indeed become a rotten and poisonous harvest!! However, the table can be correctly turned in favour of our economy, if CBN's monopoly of the forex market is broken, so that the instrument of dollar certificates can be adopted for payment of dollar component of monthly allocations, so that beneficiaries can approach money deposit banks to redeem their certificates with naira in separate price negotiations. A market-determined rate would subsequently quickly evolve within a month or so, in an ambience where more dollars chase fewer naira stocks (remember the market will no longer be inundated every month by CBN's humongous cash injections, which lead to naira surfeit excess liquidity and the train of adverse consequences that follow therefrom to the economy and our welfare. Under such arrangement, a bountiful dollar harvest whenever crude oil price increases alongside increasing output will become truly beneficent, as interest rates will fall to possibly less than 5%, while inflation rate should recede drastically below 3%. Industries will thrive, employment opportunities will increase and fuel prices will fall drastically with a stronger naira/dollar rate. Nigerians will in addition save most of the N600bn currently allocated for annual debt service and the unending rise of the domestic debt level will be halted; indeed, with local fuel prices falling much below the current 65/litre for petrol (because of a stronger naira). In this event, government can also raise at least a 10% sales tax on each of the 30 million litres of fuel sold daily and also save ourselves the unnecessary burden of over N600bn in annual fuel subsidies. SAVE THE NAIRA, SAVE NIGERIANS!
BY: LES LEBA