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President Jonathan - Ensuring Macroeconomic Stability

By Andrew Ehighiator
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On assumption of office, President Jonathan said Nigeria shall be great but greatness cannot be achieved without some sacrifice. One area the citizenry appear to have made some sacrifice is in the area of genuine attempts at entrenching macroeconomic stability. One of the most important aspects of fiscal policy is the management of the public sector's fiscal deficit. Such fiscal deficit refers to the public sector's spending over its revenue. Such fiscal deficits have been at the forefront of macroeconomic adjustment-purposeful and coherent set of measures used to respond to (often severe) imbalances in the economy both in developing and developed nations. This is because it is widely recognized that fiscal deficits – a key fiscal indicator – and macroeconomic indicators (like growth, inflation, the current account, etc.) influence each other in both directions. Consequently, fiscal deficits were blamed in good part for the assortment of ills that beset developing nations in the past: high inflation, poor investment and growth performance, and over indebtedness leading to the debt-crisis. Today they occupy the center stage in the massive reform programms initiated in Eastern Europe and the former Soviet Union and by many developing nation spread throughout all continents.

Meanwhile, the size of the public sector fiscal deficit- averaged over a period of, say, three year – is the most reliable indicator of overall macroeconomic stability or macroeconomics balance and growth. High deficits show up in at least one type of macroeconomics imbalance – a foreign debt crisis, inflation, a shortage of foreign exchange, or a crowding out of the private sector. It has been opined, however, that the type of imbalance depends on the means of financing: respectively, printing money, running down foreign exchange reserves, domestic borrowing, or foreign borrowing.

First, an appropriate measurement of the fiscal deficit is paramount for an accurate evaluation.

One of the most important aspects of fiscal policy is the management of the public sector' deficit-the excess of its spending over its revenue. The fiscal deficit can be assessed using three gauges. The first gauge is the type of deficit to be measured within public sector coverage. The correct way to measure the public sector deficit depends on the purpose. The most obvious objective is to measure the net claim on resources by the public sector; this in turn influences the external deficit, inflation, domestic interest rates, and employment. The standard measure of the fiscal deficit is the “conventional deficit”, which measures the difference between total governments outlays- and receipts, excluding changes in debt. This can be measured on “cash” or “accrual” basis. When measured on a pure cash basis, the conventional deficit corresponds to the “public sector net borrowing requirement” (PSBR). Such PSBR or “consolidated public sector deficit represents the total excess of expenditure over revenue of all government entities (federal, state and local government), all of which must be PSBR is misleading because it does not correct for inflation. A way around this problem is the “operational deficits” which is the PSBR minus the inflation correction part of interest payments (“inflation-corrected” deficit).

In sense, it is the conventional deficit minus that part of the debt service that compensates debt holder for actual inflation. However, automatic rollover of the inflation component of interest payment cannot be guaranteed, because the sustainable level of public debt is not independent of a nation's prospect and stabilization efforts. Another measure is the “primary deficit or “non-interest deficit” which excludes interest payments from the conventional deficit measure but this cannot fully identify the scope for government discretion, since entitlement and the public sector wage bill also be largely predetermined. In addition, it is said that the “structural deficit” remove the effect of temporary factor; the deviation of domestic income, commodity prices, and interest rates from their long-run values, and events such as tax amnesties.

All these fiscal deficit measures provide their own insight into the economic impact of government finances. For example, the PSBR measures some of the distortions caused by high inflation. At the same nation time, in debtor nations the primary deficit indicates the public sector's current contribution to debt difficulties, while in times of abnormal commodity prices or domestic income the structural deficit gives picture of the long-run position.

The second phase to assess the fiscal deficit is the coverage or size of the public sector and its composition. It is recognized that government transaction relevant for measuring the impact of the fiscal deficit are sometimes carried out by non-government agencies. Thus the “general government deficit” (covering federal, state and local governments) must, in many cases, be expanded to encompass the operations of nonfinancial public enterprise (generating the “nonfinancial public sector deficit”) and the quasi-fiscal operation of the public financial sector (generating the “quasi-fiscal deficit”)

The third gauge relates to the relevant time horizon. The conventional annual fiscal deficit is currently being disparaged on the ground that it falls to capture the effects of price and valuation changes. It is, therefore, being suggested that an accurate assessment of sustainability would require the replacement of the annual deficit with a measure of change in government net worth, that is, the change in the government balance sheet from year to year. However, many measurement questions remain to be resolved before net worth concept of the public sector deficit could become operational. Thus annual deficit measures are unlikely to be supplanted, but only supplemented in case where government solvency is seen as a particularly important policy problem

The extent to which any given public sector fiscal deficit can be reconciled with broader macroeconomic goals depends largely on the way it is financed. That is, sustainability of public sector fiscal cannot be divorced from question related to how it is paid for. These questions are usually addressed in two alternatives but closely related ways. The first alternative focuses on the economy's saving investment balance, while the second focuses on the government financial balance.

In the Nigerian context, it is opined that lack of fiscal discipline has been the bane of the economy before now. Despite the fact that realized revenues are often above budgetary estimates, extra-budgetary expenditures have been rising so fast and resulting in ever bigger fiscal deficit. Indeed, such fiscal deficits have become unsustainable effects on the productive capital stock, of persistent and large government deficits, which inevitably has resulted in increased government debt as a ratio of the GDP and total private wealth.

Too great a strain on any of these sources of finance creates macroeconomic imbalances, as has been the case in Nigeria in recent times. Overreliance on money creation prompts higher inflation. Over-reliance on foreign loans causes appreciating real exchange rates, widening current account deficits, unsustainable external indebtedness, and dwindling foreign exchange reserves. Over-reliance on domestic borrowing means high real interest rates and falling private investment. Viewed from the alternative perspective of production and expenditure, an increased budget deficit is an additional claim on the supply of goods. The only ways to meet this extra claim are by driving up domestic inflation and interest rates to make the private sector purchase fewer goods, by importing additional goods from abroad (that is, increasing the current account deficit), or by increasing domestic production. These are hardly desirable options and outcomes.

The above scenario shows that Nigeria had been caught in the deficit trap with extra-budgetary expenditure posing the greatest threat to fiscal viability and macroeconomic stability. Thus, to extricate ourselves from the problems of fiscal indiscipline and hence restore fiscal sanity the PGEJ led administration has appreciated the linkages among deficit finance, money supply, inflation, interest rates and the exchange rate for the naira. In other words, the administration has embraced prudent fiscal policy that maintains the public deficit at a level that is consistent with other macroeconomic objectives; controlling inflation, promoting private investment, and maintaining external credit worthiness. Indeed, high growth in exports, real demand for money, and overall financial savings means a higher deficit can be financed without violating the objectives of external credit-worthiness, low inflation, or reasonable real interest rates

Recently, from the available statistics, the federal government will fund ₦794 billion of its 2012 budget through domestic debt, even as Nigeria's total debt stands @ about $40billion. One must appreciate the fact that since inception of the Jonathan administration, Nigeria has not been doing badly when its debt is compared with the Gross Domestic Product (GDP). Ideally, the ratio of Nigeria's debt of GDP is 19.6percent, which is less than the 40% global benchmark. Nigeria, under the administration of PGEJ has set a limit of 25% for itself, which means that the nation will not go beyond such limit by 2015. Considering this facts and figures, it means that Nigeria under the present administration is doing well, and by economic implication, the Nigerian economy is robustly growing.

Further research has also shown that Nigeria's debt as at September 30, 2011, federal Government bonds stood at ₦ 3.356 trillion, Nigeria treasury bills stood at ₦ 353.730 billion

To keep deficits at levels consistent with low and stable inflation, an acceptable external debt service burden, and reasonable real interest rates, some sound public finance policies must be undertaken. One of such measures taken by the administration was to adopt prudent fiscal management. A country like Nigeria that depends on commodity exports, mistakenly treating a temporary boom (e.g. the oil boom or temporary oil price rise) in revenue as permanent carries heavy long-term costs because it can take years to cut spending and reverse the accumulation of debts incurred during the boom. Contrariwise, erring on the side of caution – treating a permanent boom as temporary – is easily put right later in which case boom revenue can then be used to accumulate external assets or repay debt, thus avoiding the risk of inflation and an appreciating exchange rate. Also, with unsustainable deficit, macroeconomic stabilization becomes a top priority but structural economic adjustment cannot occur alongside major macroeconomic imbalances just as stabilization without structural measures to support growth may itself prove unsustainable. Thus, stabilization and structural adjustment must be coordinated to avoid inconsistency in policy. In this sense, adjustment should allow for complementary fiscal reforms to replace any lost revenue.

Another measure adopted by the present government was to reduce the costs of raising revenue by imposing user charges where they are feasible and appropriate for economic goods while subsidies can still be targeted to the poorest groups to alleviate poverty and meet basic needs for education, health and sanitation. Another way the government is doing this is by engaging in tax reforms that target administrative feasibility and better tax administration but ultimately simplicity in tax design so as to reduce administrative costs. Marginal tax rates have been lowered to reduce distortions and promote compliance. The government recognizes that taxes should be simply structured with few rates and few exemptions. Essentially high threshold exemptions in the personal income tax and exemption of unprocessed products from value added tax had also gone a long way in lowering taxes on the poor while concentrating administrative resources where they are most productive in raising revenue. This has been the doctrine of the supply side tax reform measures currently sweeping the system.

Critical to the reformation agenda of the present administration is to strengthen the autonomy and accountability of decentralized public entities. It has been opined that decentralized decision making and accountability help to link costs and benefits, and hence improve efficiency. Local decision makers can be more flexible and responsive to the needs and preferences of their constituents; equally, citizens can better watch over local entities than over central ones. Public economic enterprises have also be granted the autonomy to cover costs through pricing (under general guidelines and limit with managers held accountable for the quality of services and for the financial viability of their enterprises). Also; regular and reliable auditing by Federal authorities can increase central, state and local accountability for the use of borrowed funds, subsidies, grants, and other revenues. For many commercial public enterprises greater competition from private provider or increased private sector involvement – through leasing, or private management contracts – have also come into play to help reduce inefficiency as well as the budgetary burden.

Worthy of note is that relating to efficient and effective public expenditure. Indeed, spending needs to follow sound priorities and such priorities emerge more forcefully when all parties are aware of their specific resource constraints. Setting overall expenditure limits means balancing needs against the cost of raising revenue. This is best attained through a coordinated process of medium-term fiscal planning, annual budgeting and regular monitoring of revenue and expenditure. In fact, binding expenditure limits haven't only been applied just to finance and planning ministries, but also to sector ministries. Other tiers of government, and public enterprises.

One area the Jonathan administration must be applauded is that of observed trade-off between maintenance and new investment, with the government favouring the later despite past rhetoric to the contrary. Incidentally, among recurrent expenditures, adequate allocations for operations and maintenance are essential for efficient use of the existing capital stock. This present government has also decided to spend more on investment in public infrastructure and human capital and less on subsidies and support to those with the most political clout. Another aspect is to devote more to the nation's welfare and less to warfare in addition to financing our expenditures with a more equitable tax system. In addition, with a sound and balanced fiscal policy which is already being put in place, we must look all the more to a monetary policy that permits the economy to move at full speed.

The Federal Government has also taken concerted efforts to increase export volume as well as minimize the balance of payments. The implications are steady growth through increased longer term bilateral trade and technical agreements with willing and sympathetic foreign countries, including South-South cooperation

Also, the government is looking at proposing over the next few years' budget deficits that would be scaled down, largely by cutting expenditures to a level consistent with a stable ratio of federal debt to national income (GNP). Indeed, the debt to GNP ration, apart from being one of the most reliable measures of fiscal policy stance, provides a good measure of the interest on the national debt as a share of total government expenditure. More debt means that more of existing revenues must go simply to pay interest on the debt, thereby requiring either a tax increases or a reduction in other government programmes if they are not to contribute further to the deficit in a self-reinforcing manner.

Unarguably, the federal government has shown a semblance of commitment to sustainable debt management through the office of Debt Management Office (DMO) by creating measure that will guarantee prudence and sustainability.

By following the tenets of his transformation agenda holistically President has shown that he is ready to meet and satisfy the need for a radical shift from the rhetorical policy formulation to a more pragmatic policy order specifically designed to solve, favor, & address economic problems, needs and agenda. He has also demonstrated a huge chunk of political will to learn and adopt some radical rudiments of economic growth that will localize globalization from emerging economies like Malaysia, India, South Korea, Singapore, and the other emerging, fast developing nations

In the final analysis, President Jonathan has also initiated a 25% pay cut from the salaries of all political office holders, including himself. Rate of overseas travels has been reduced drastically to ensure minimal expenditure and prudent management of resources. It will only be appropriate and certainly not out of proportion to rally round the present cabinet of President Jonathan with a view to ensuring that his transformation agenda is truly a reality in the end, and thus making Nigeria of the most developed nations by year 2020. There is no doubt that if government's efforts are not sabotaged by the cabal, Nigeria may inch near the Millennium Development Goals in 2015.

Andrew – a Public Relations Officer, Niger Delta Integrity Group

Disclaimer: "The views/contents expressed in this article are the sole responsibility of Andrew Ehighiator and do not necessarily reflect those of The Nigerian Voice. The Nigerian Voice will not be responsible or liable for any inaccurate or incorrect statements contained in this article."