By Dele Awogbeoba
Nigerians are no doubt appreciative of the fact that we are now getting more of an indication of the fiscal policy direction of the Buhari government. Kemi Adeosun has written about the fiscal policy being pursued by the Federal government. One would have thought that the Minister of Budget and National Planning (who actually controls the fiscal policy of the FG) would have been the minister to explain the thrust of the government’s fiscal policy direction. It seems like he is playing the Gusau role, of absence without leave, in the present administration. That said, Mrs Adeosun made a number of policy decisions clear to us. One, it plans to inject stimulus into the economy through the use of government spending even though its revenue is insufficient to achieve such a fiscal injection. It intends to borrow billions of dollars (like its predecessor) in order to stimulate domestic demand. Its areas of difference are GEJ’s government borrowed to pay wages whilst the Buhari government will borrow to build railways and other capital infrastructural projects. Whilst it’s debt to GDP may in fact be low, its debt to revenue levels are indeed very high. More worrying is its debt to debt service interest is clearly within the unsustainable levels. Which means its cash flow levels will be severely affected by adding further debt to its existing debt especially where income revenue is in for some tough times in view of the side effect of the relative slow down in China that will affect both the price of oil and the market for Nigeria’s solid minerals.
Secondly, it intends to address its massive debt service interest payment obligations (currently said to be 1.45 trillion naira a year per the 2016 Budget) by seeking to restructure its existing loans. To the extent it can achieve this objective, it would save Nigeria a lot of money that can then be redirected back into the domestic economy.
Her article was silent on the role and current policies of the CBN and its current adverse effect on the domestic economy. After all, the fiscal policies of the federal government will be working side by side with the monetary policies of the Nigerian CBN. The CBN’s misguided forex policy will depress imports and consequently significantly reduce customs income from Nigeria’s ports.
The loans sought by Nigeria from the Chinese, World Bank and possibly the AFDB will (if granted) be subject to feasibility studies and bureaucratic red tape between the time when the various loans are signed and actual construction begins. The fiscal injection into the economy will come from the labour hired and the materials (like local cement etc) used to build the various roads, bridges and railway lines. Information is abound that loans emanating from China will be linked to the use of Chinese firms for the execution of the infrastructural projects. That will mean that only part of the financed amount will find its way to the Nigerian economy. There is no disputing the fact that such infrastructure (especially railway lines) will have a positive effect on the economy both as a means of stimulating domestic demand as well as integrating various parts of the country and its various disconnected regional economies to the port states. This route however seems to me to be a more mid term solution to an immediate lack of demand problem within the Nigerian economy.
Additionally, the renegotiation and repackaging of existing loans in order to reduce the debt service interest burden is a wise objective in principle. It may work if one discusses issues with the world bank and other supra national lending organizations. It is most likely to be ineffective vis a vis the Eurobond market. In the Eurobond market, the holders of Nigeria’s debt are private sophisticated corporate investors and investment entities who have no reason to reduce their monthly/ quarterly/ semi annual coupon payment from an entity that as yet is not bankrupt or in default on any of its obligations to them at the current time. Secondly, a significant majority of the bondholders must agree to such an amendment to the bond agreement for such change to be effective. I am not optimistic that Eurobond investors will agree to reduce its interest coupon on the debt already issued because this will affect their bottom line. The question then is to determine the proportion of Nigeria’s debt that consists of Eurobond issues. Until we know what the yearly figure allocated to debt interest payment will be if such re-negotiation is successful, one is not in a position to comment on this part of the FG strategy. What I would say is that it makes more sense to focus on re-packaging its debt first in order to determine the hard naira change in the yearly debt interest service burden to Nigeria before added debt is added to Nigeria’s bottom line. At the moment, Nigeria’s debt is unsustainable because 1.45 trillion naira is likely to amount to more than 65% of Nigeria’s actual 2016 revenue stream.
What is however clear is that there will be a time lag between now and the time by which the renegotiation of debt service interest is concluded or work on the infrastructural projects actually commences in Nigeria.
The minister failed to address the fact that that time lag does not address nor stop or modify the harmful effects on the economy of the current forex, interest rate and liquidity squeeze policies coming out of the central bank of Nigeria. Each passing day of the CBN policies are deterring foreign investors investment, closing domestic Nigerian factories, preventing fuel marketers from accessing foreign exchange needed to import fuel, significantly reducing federal government income and revenue derived by the Nigerian Ports authority, federal government taxes from VAT due to the bankruptcy of many Nigerian corporate entities and increasing the nation’s army of the unemployed.
One hopes that the Nigerian economy would not already have crashed before the trickle effects of the FG fiscal policy starts to find its way into stimulating the domestic economy.
Reducing Recurrent Expenditure
For a government whose stated aim is to reduce recurrent expenditure, the proposed hire of 10,000 police officers does not strike me as a reasonable step for a cash strapped and beggar Federal Government to embark upon. Vice President Osinbajo also indicated that the federal government intended to spend huge amounts on the poor unemployed. By all accounts (and net net), recurrent expenditure is going up and not down. I am not sure of the degree of interaction between the finance minister and the minister of budget and national planning or indeed whether the finance minister has the authority to make statements on matters of fiscal policy which is under the supervision of the minister of budget and national planning (or whether the minister is simply explaining how such fiscal policy of the National Planning ministry will be implemented by the finance ministry) but what is clear is that the recruitment actions within the police force and the spending intentions of the Federal government does not tally with the finance minister’s stated desire to reduce recurrent expenditure.
Nigeria is currently facing an absence of demand within the economy (otherwise called a significant drop in GDP or a near or actual recession). I agree with the minister that this is best addressed by policies that stimulate domestic demand. Our point of diversion is that the FG’s policy route will take some time to reflect itself within the domestic economy without even trying to address the negative and adverse current policy positions of the CBN’s monetary policy. The cheapest, most effective and quickest route to stimulating the economy is to discontinue the forex policy, drastically cut interest rates and have significantly less requirements for banks to keep liquidity with the CBN. Keeping the CBN policies as it currently is and applying an inconsistent stream of fiscal policies to the same environment may actually nullify the positive effects on the economy that the Nigerian Federal Government desires.
As a Nigerian, one can only proffer advice and suggest options for the Federal government to consider. It is for the federal government to choose which course it intends to pursue. It is left to the Nigerian voters in 2019 to decide whether a particular government has the requisite judgment needed to stay in power or not.