Economy: Undo Jonathan's Sealed Failure (1)
This week, we publish the above titled piece by a guest columnist. The content, as avid readers will observe, is in consonance with what we have preached in this column for several years.
It is ironic that an administration whose initiatives include a programme crooning 'Bring back the Book' lacks a bureaucracy that reads. Hence, despite having assumed the Presidency by succession for over a year, President Goodluck Jonathan still had to explain in September 2010 that his decision to run for President of Nigeria was not because he considered himself the most intelligent Nigerian. The President leans on the federal bureaucracy that comprises Civil Service, Public Service and the Presidency. That establishment should ordinarily embody the country's collective wisdom. The bureaucracy is expected to fortify its knowledge base and improve on its functions through training; from non-discriminative gathering, evaluating and honing of useful and practical ideas proffered by Nigerians generally; and by spying as well as stealing beneficial practices from abroad. It is the support base provided by such a knowledgeable bureaucracy that makes the President the best informed, most intelligent and the wisest in the land with respect to national issues. These very qualities are advertised by the title of 'Excellency' that is bestowed on the President.
The steadily declining quality of the federal bureaucracy as related in Goke Adegoroye's valedictory address on his retirement from the Federal Civil Service (see page 19 of The Guardian of September 5, 2010) only reflected the collapsing fortunes of the economy. The economy has persistently underperformed for over three decades. Thus fixing the economy should be the primary focus of the bureaucracy. Yet, a whole decade has passed since the root cause of the unyielding economic failure was conclusively identified to be faulty government fiscal and monetary practices. After government rebuffed discreet intimation of the finding, a patriotic public campaign for the implementation of sound fiscal and monetary measures has been ongoing since 2001. Along the way, CBN in August 2007 formally owned to inappropriate handling of the national currency over the years.
Amazingly, CBN's scheduled formal adoption of the method of infusing foreign exchange into the system that initially would have brought fiscal and monetary management 87.4 per cent into line with the stipulations of the CBN Act, the annual Appropriation Act, the Fiscal Responsibility Act and economic best practice was scuttled by the then Attorney-General on the perverse excuse that President Musa Yar'Adua's approval had not been sought. That action signalled an unwritten illegal presidential suspension of provisions of laws of the federation concerning the economy. And so descended a presidential embargo on adoption of sound fiscal and monetary measures. A dutiful federal bureaucracy, knowing that the presidential assent accorded the laws of the federation mandates their unstinted implementation, should have taken immediate steps to vacate the illegal embargo. Even the legal watchdog, Nigerian Bar Association along with the myriad lawyer activists, has refused to tweet. Those redemptive steps are still being awaited.
For now, the subsisting illegal presidential embargo, which perpetuates the adverse fiscal and monetary conditions responsible for over 30 years of national economic underperformance, countermands any efforts at actualising Jonathan's transformation agenda. Against that reality, the apex bank in a volte-face at pages 113-114 of CBN 2010 Annual Report claims falsely that 'Growth in GDP reflected largely the sound and stable monetary and fiscal policies.' Thankfully, economics is not two-faced in the manner the contrasting CBN standpoints in 2007 and 2010 portray. Economic laws (options, principles or theories if you choose) may be determined scientifically and empirically; they could be simplified through scenario building. But economic laws do not deflect to politics. We therefore proceed and appeal to some economic laws.
It has long been established that Nigeria's permanent economic woes stem from high fiscal deficits. Whence come the country's persistent excessive fiscal deficits? After inducing economic coma for over three decades, do such deficit levels represent a rational option to be perpetuated by fiscal and monetary authorities? A sovereign government has the freedom and capacity to create by fiat unlimited amounts of national currency to spend as it fancies. Government is, however, constrained by the destructive inflation that exercise of that freedom would unleash. Thus, for stable prices and good economic performance, government bases its expenditure mainly on realised revenue. Similarly, for the sake of price and macroeconomic stability, a central bank cannot commercially convert foreign exchange into the currency which it produces and manages exclusively. Price and macroeconomic stability is critically dependent on a central bank's ability to maintain Optimal Money Supply Volume (OMSV) at all times.
Deference to OMSV in Nigeria is mandated by Section 2 of the CBN Act and reinforced by the safe fiscal deficit limit contained in the Fiscal Responsibility Act. The annual Appropriation Act and its implementation must conform to the provision. As a result any exigent overshooting of OMSV attracts punitive interest rate (monetary policy rate plus 1 per cent) as per Section 29(1)(b) of the CBN Act while such chance oversupply of money in the system should be short-lived by withdrawing any extra amounts from circulation through repayment as stipulated under Section 38 of the CBN Act. Unfortunately and to our national peril, Federal Ministry of Finance (FMF), Revenue Mobilistion, Allocation and Fiscal Commission(RMAFC), and CBN have for decades routinely breached the above provisions with impunity in their fiscal and monetary practices regarding Federation Account (FA) oil proceeds. These dollar (foreign exchange) proceeds, not being in Nigeria's legal tender, constitute approximate bullion under Section 29 of the CBN Act notwithstanding the non-convertibility of the dollar since August 15, 1971.
At this juncture, the top brass of the earlier noted federal agencies along with the Fiscal Responsibility Commission should dismount off their high horses, don their thinking caps and listen more attentively than until now. The naira equivalent of oil proceeds in the 'revenue' disbursed by RMAFC through the Federation Account Allocation Committee (FAAC) is NOTIONAL revenue because that component is a loan. To obtain the loan, FAAC pledges as surety but retains ownership of FA dollar proceeds or bullion cover. For purely custodial purpose, CBN retains the bullion in its coffers. The NOTIONAL naira revenue loan obtained from CBN is made up of freshly minted currency additions to money supply thereby distorting OMSV. The loan should therefore be repaid (that is, withdrawn from circulation) in the manner, terms and conditions spelt out under Sections 29(1)(b) and 38 of the CBN Act.
The FAAC pays back CBN loan with naira funds realised from selling the pledged FA bullion through Deposit Money Banks (DMBs). It lies with DMBs, the banks of first recourse (or resort) to convert available foreign exchange belonging to all economic agents (including all tiers of government for the sake of undistorted results) into naira as and when holders of foreign exchange choose to do so. The FAAC would have to pay both dollar-to-naira conversion transaction cost of, say, 1 per cent and the punitive (MPR+1) per cent on the loan principal. Clearly, this option is rather circuitous and costly. It is tidier and cheaper for FA beneficiaries to have their shares of pledged FA dollars in CBN custody credited to their respective dollar domiciliary accounts with DMBs (these certified dollar funds may alternatively be termed dollar certificates). That method was what CBN endorsed in August 2007. It proposed an initial stage involving the federal and state governments only, but the exclusion of local governments was wrong and arbitrary. The apex bank also set the takeoff exchange rate, but the Appropriation Act provides a binding exchange rate. At the budget naira/dollar exchange rate (the legislated managed or dirty exchange rate fixing system), FA beneficiaries convert their dollar certificates into REALISED naira revenue, which matches projected revenue but less the conversion commission.
Note some advantages. One, duly approved government imports have neutral impact on the volume of naira in the system because they are settled directly from the dollar domiciliary accounts. Two, when DMBs intermediate between FA beneficiaries and dollar-seeking importers, they use naira funds already in the system. Thus the impact on the system of revenue derived from converting oil proceeds through DMBs accords with tax-derived revenue, which involves deductions from incomes made up of naira funds already in the system. Economics teaches that when government expends realised revenue prices remain stable.
Armed with the above truth nuggets, we can now examine what the fiscal and monetary authorities chose to inflict on the economy these past three decades. Data in CBN 2010 Annual Report show that FAAC pledged US$29.1 billion FA oil proceeds for a loan of N4,367.7 billion (13 per cent of net oil revenue (NOTIONAL) amounted to N567.8 billion) in freshly printed currency. The loan, which swelled money supply, imperiled 'ensuring monetary and price stability' as enjoined by Section 2(a) of the CBN Act whereas the high end-year 2009 inflation rate of 13.9 per cent made necessary further reduction in the existing level of money supply in order to attain OMSV consistent with zero-hugging inflation level that defines price stability. The derelict apex bank set neither limit nor repayment date for the loan. It waived (MPR +1) per cent accrued interest charge in breach of Section 29(1)(b) of the Act; it demanded no repayment in violation of Section 38 of the Act; the apex bank alacritously and lawlessly assumed ownership of its client's pledged security; it then disrobed by dumping its raison d'etre as bank of last resort and the bankers' bank as it covetously took up primary dealership in the foreign exchange market where it collected 1 per cent commission. CBN competed with DMBs and individuals holding autonomous foreign exchange in the primary foreign exchange market. Abomination! Having brought central banking to its nadir, CBN has proceeded to designate its routine participation in elementary trading in foreign exchange as intervention. Sham! Sham!! Sham!!!
The serial breach of the statutes by FMF, RMAFC, FAAC and CBN have had lasting ruinous economic implications. FAAC's unrepaid advances of N4,367.7 billion raised fiscal deficit unnecessarily by 14.8 per cent of GDP. (It is highly inflationary and, over time, accounts for the enduring inhospitable economic climate.) From the 2010 total import bill of N8,666.6 billion, DMBs could have transacted dollar certificates to obtain for the three tiers of government non-inflationary REALISED revenue amounting to N4,367.7 billion from within the financial system. To arrive at the actual 2010 fiscal deficit, therefore, above unappropriated and unintended fiscal deficit caused by faulty fiscal and monetary actions should be added to the acknowledged 4.2 per cent deficit of N1,235.0 billion, which gives fiscal deficit of 19.0 per cent of GDP.
Mr. Ojomaikre is a visiting member of The Guardian Editorial Board.