Economy: Undo Jonathan's Sealed Failure (2)
Parenthetically, calculate the successive unsolicited and unrepaid CBN loans to the three tiers of government over the years and it becomes clear that Nigeria in reality is several times more indebted than Greece. Notwithstanding the negligent and self-
deluding official non-recognition of the massive national debt arising therefrom, the attendant adverse economic effects cannot be wished away. Singapore, Nigeria's former compeer, transited from Third to First World economy in under 30 years. Nigeria has slightly higher population and far more natural resources than Japan, the world's third largest economy. See where we should have been?
Needless to state, the 19 per cent fiscal deficit is six times worse than Jonathan's 'commitment to keep fiscal deficit below 3 per cent of GDP.' As occurs year after year, the 2010 fiscal deficit level breached the 2010 Appropriation Act. The Fiscal Responsibility Commission should wake up to this reality and strictly enforce the Act. Also the high inflation rate of 11.8 per cent at end-December 2010, the prohibitive lending rates and the devalued rate of the naira in relation to the legislated naira/dollar rate all attest to the apex banks failure to perform its statutory core functions.
The unrelieved national economic malaise since 1978 blighted the multitudinous development plans, perspective plans, development strategies, vision plans, medium term expenditure frameworks, annual budgets; name it. It is again clear that despite the enlistment of the national economic management team, the fate of President Goodluck Jonathan's economic programme is equally sealed. To avert the inevitable doom, the illegal presidential suspension of economy-related laws and the embargo on sound economic management should be lifted. It bears repeating: President Jonathan should direct earnest implementation of correct fiscal and monetary measures today as the laws of the federation and the Constitution command.
It must have become quite evident from the discussion so far that the way to economic vibrancy is disarmingly plain. First, the adoption of the correct infusion method of oil proceeds will end forever ruinous excessive fiscal deficits that led to the naive denigration of oil earnings as a curse. From the ashes of excessive deficits will spring up the economic blessing inherent in a significant portion of government revenue accruing in foreign exchange. Second, through the method, the managed naira/dollar exchange rate contained in the Appropriation Act serves as the conversion rate and ensures a stable naira exchange rate. When supply of foreign exchange (by the public and private sectors) to the primary foreign exchange market exceeds demand, DMBs as a last resort sell the surplus dollars to the CBN for naira thereby boosting foreign reserves. There is no profligate access to foreign exchange anywhere. Genuine demand should be limited to duly specified eligible transactions: that step channels foreign exchange to productive use only.
Third, the right process retains funds in the system to sustain economic activity. In the event of excess supply, the sale of surplus foreign exchange to CBN both boosts foreign reserves and injects additional funds into the system to support economic expansion. That conforms with the economic maxim: produce, export, grow and prosper. It is also in accord with economic teaching that exports inject funds into the circular flow. Contrarily, under the prevailing faulty approach, the CBN deploys public sector foreign exchange (it leaves autonomous foreign exchange to its own devices!) to drain a little part of the corrosive excess liquidity created by its unsolicited advances to FAAC. Thus CBN wrongly uses export earnings to withdraw funds from the circular flow. Treasury bills are similarly wrongly used to mop up excess liquidity as anti-inflation tool. Such government borrowing crowds the private sector out of bank credit. Treasury bills in their transmogrified form of fast growing national domestic debt, attract high debt service charge even though the domestic debt is not invested in tangible projects. The FMF/CBN credo for over three decades has been: produce oil, export, be submerged in inflation, implement measures that restrain and contract the economy with resulting increasing pauperisation. In the circumstance the reported robust growth rates of GDP are manifestly spurious.
Fourth, the right infusion method absolutely has no role for the wholesale Dutch auction system (WDAS) and CBN-funded bureaux de change (BDCs) in the management of foreign exchange already captured in the banking system. The London and Paris clubs of creditor nations in exchange for supposed debt forgiveness fobbed a policy support instrument (PSI) on undiscerning (compromised?) Nigerian fiscal and monetary authorities through which the IMF/World Bank instituted WDAS (February 2006) and BDCs (April 2006) for use in the management of official foreign exchange. Both policy instruments were aimed at continued defoliation of the economy just as the high external debts had done. The PSI was extraneous to debt repayment. It is legally non-binding. Unreflecting and not fired by love for country or the black race, the non-reading federal bureaucracy dominated by the less than elite bunch plays the lackey. The frittering away of massive inflows of foreign exchange since 2006 and the national economic trajectory since then (ignore spurious growth rates of GDP) tell the story fully.
The chilling fact is, given the swollen money supply caused by CBN loans to the FAAC, the WDAS by its nature continuously depreciates the naira. The failure to correspondingly adjust the exchange rate leaves the naira permanently overvalued. The WDAS is contemptuous of the annual Appropriation Act as it disregards the legislated naira/dollar exchange rate while it makes the CBN to lawlessly and whimsically engineer artificial unrealistic and continually sliding naira exchange rates that aggravate imported inflation (including petrol subsidy), all of which are deliberately tailored to provide the basis for periodic IMF demand for unending naira devaluation. The BDCs on their part facilitate the dissipation of available foreign exchange to fund unrecorded anti-economic activities such as smuggling, stashing abroad of treasury loot and large-scale speculation in foreign exchange.
It is pertinent to note that the CBN 2010 Annual Report indicates aggregate inflow of foreign exchange was US$88.15 billion (including $58.0 billion inflow to domiciliary accounts and foreign exchange sales by oil companies). Although the inflow more than offset the entire import cost of $57.66 billion (C&F unadjusted for balance of payments), there was unexpected drop in foreign reserves from their end-year 2009 level. Expenditure on imported invisibles was disproportionately high. And with aggregate outflow of foreign exchange put at $39.16 billion, the whereabouts as well as the use to which the country's ample inflow of foreign exchange was put has not been satisfactorily explained by the apex bank. By contrast, with the correct infusion method, all bona fide importers possess and make use of bank accounts that would retain transparent and verifiable trail of all foreign exchange purchases and the end-use to which they were put. Incidentally, the Federal Minister of Finance who negotiated and brought in WDAS and CBN-funded in their current form as poisoned parting gifts from our erstwhile external creditors has just returned to the portfolio. As clearly shown, the PSI is extraneous, legally non-binding and economically hemorrhagic. The minister should therefore explain the purpose of WDAS and CBN-funded BDCs to the Fatherland.
Fifth, the cauterisation of unbudgeted deficits will bring about the benefits of ex-post or actual budget surplus, actual balanced budget or actual budget deficit not exceeding 3 per cent of GDP. Let us examine practical options. The CBN 2010 Annual Report acknowledges overall deficit of N1235.0 billion or 4.2 per cent of GDP. But simultaneously sheltering in the excess crude account was N1906.7 billion comprising N465.9 billion leftover from 2009 and N1430.8 billion replenishment in 2010. It is not benefit-maximising for government to go aborrowing in order to fund its expenditure while it bottles up realised revenue. Thus the known revenue/expenditure profile points to a budget surplus of N671.7 billion or 2.3 per cent of GDP. In that scenario, the proportion of the budget devoted to recurrent expenditure and capital expenditure respectively, that is, the recurrent to capital expenditure ratio would have remained 74:26 as in the report. But there would have been no increase in the national domestic debt. Indeed, over 95 per cent of the national domestic debt of N4.55 trillion (2010) could have been avoided in this way. Total debt service payments amounted to N415.6 billion in 2010. Because debt service payments on debts raised in 2010 are not shown separately, this factor has been overlooked in the analysis. Note that CBN data understated the accrued oil proceeds. The published 2010 OPEC oil export volume (which even excludes condensates) exceeds the CBN figure just as the CBN average oil price is below the Brent crude price. Nigeria's sweet crude commands a higher price than Brent crude. The missing revenue would have swelled the budget surplus, the excess crude account and foreign reserves.
Nonetheless, assuming the Federal Government averted the aborted 2010 budget surplus of N671.7 billion by spending the amount on capital projects, government would have achieved a balanced budget with the aggregate expenditure of N4.87 trillion. Whereupon the recurrent to capital expenditure ratio would be 64:36. Government still had a third option of boosting capital expenditure in order to tackle the infrastructure gap by incurring fiscal deficit of N884.9 billion or 3 per cent of GDP. In that case, aggregate expenditure would have risen to N5.75 trillion while recurrent to capital expenditure ratio would have been 54:46.
Besides the above advantages and possibilities, budget surpluses, balanced budgets or 3 per cent deficit budgets evolve and sustain stable and realistic exchange rate, zero-hugging inflation rate and low to middle level single digit lending rates across the board. These conduce to a business-friendly environment where, in place of the impulsively contractionary measures that have become the preoccupation of the CBN, fiscal and monetary policies implemented by the authorities would spur private sector investment, massive employment, economic expansion, sustainable high growth and rapid development, Welcome to a vibrant private sector-driven economy at last! Does Nigeria deserve less?
For ten years, top bureaucrats and politicians have resolutely turned their back on the practical route to economic success. Aptly labelled the less than elite bunch by Oby Ezekwesili, the bureaucrats and politicians persist in recycling failed economic measures that hamstring the economy only to lie with cooked statistics. They all desecrate their oaths of office and betray the 1999 Constitution. They should now turn a new leaf or make way for the able and patriotic. Chapter Two of the Constitution so commands. The Nigerian economy can be turned around overnight. Overnight literally.
Mr. Ojomaikre is a visiting member of The Guardian Editorial Board.