23

Mar

ECONOMY: MR. PRESIDENT’S UNFORTUNATE MISTEP 20072015

2015-07-20

ECONOMY: MR. PRESIDENT’S UNFORTUNATE MISTEP
BY HENRY BOYO

The recent announcement by the Federation Accounts Allocation Committee, of the disbursement of over N760bn to cash famished states, was popularly regarded as a bailout package, despite clarifications from the President’s Media Adviser that the income was actually the constitutional entitlement of the three tiers of government. The payment package apparently included the sum of $2.1bn earlier paid into the Federation Account as tax obligations from the Bonny LNG and Shell Producing Company; nevertheless, beneficiaries received the Naira equivalent of over N400bn allocation in replacement (at an exchange rate of N197=$1).  Additionally, government also shared N360bn, which was an amount reportedly collected as Internally Generated Income by the Federal Inland Revenue Service; thus, the consolidated sum of over N760bn was shared in the ratio of federal government 52.68 percent, state government 26.72 percent and local governments 20.60 percent, as constitutionally prescribed. 

In addition, a loan package of between N250-300bn would also be put in place by the CBN for distressed states to access, after fulfilling requirements to guarantee appropriate fund application and repayment. Furthermore, the CBN was also directed to intercede with commercial banks and the Debt Management office to restructure the tenure of over N600bn outstanding short term loans of state governments.

Regrettably, the consolidated package may be grossly inadequate to address the depth of distress in most states; nonetheless, the package was welcomed by thousands of workers who had barely managed to survive without salary for several months. Conversely, some Nigerians, have expressed concern that the allocations had become a reward for unrepentant profligacy in the management of public resources; such critics further argue that since the funds were clearly inadequate, states would inevitably still require more cash to clear their huge backlog of salaries and contractor’s debts for several months to come. Worse still, in addition to a consolidated External debt stock of over $10bn, both federal and states governments would still be expected to service their existing domestic debt stock of over N10Tn and N2Tn respectively. 

Thus, in view of the current paucity of internally generated revenue, both federal and state governments may ultimately depend on refinancing and further increase of their already oppressive debt stock just to cover their recurrent expenses; in this event, unless, the political class becomes born again and seriously commits to a massive reduction in the cost of governance, any expectation of a boost in infrastructure and social welfare will remain a very dismal prospect. However, in consonance with the abiding culture of self service, any attempt at promoting frugality, probity or accountability in public service may be stoutly resisted by the current class of political investors, who will, as usual, rely on a weak regulatory system and the support of ethnic and religious adherents to escape sanction for pillaging our common wealth.
Nevertheless, let us take a closer look at the potential impact of the N760bn which was recently shared to the tiers of government. In reality, the constant pressure of the unusual burden of Naira surplus and the extensive credit capacity of banks, has consistently made it impossible for inflation to recede to best practice levels below 3 percent; furthermore, the industrially restrictive high cost of funds above 20 percent is also the result of CBN’s failure to manage the scourge of excess cash, while the Naira exchange rate is unceasingly pummeled by the constant juxtaposition of huge Naira surpluses against dollar rations in the market. Consequently, persistent overwhelming Naira liquidity has made it clearly impossible for CBN to achieve its core objective of price stability, such that inclusive economic growth has unfortunately remained elusive for decades.

However, in response to the above dilemma, common sense would advise, that if a glass is already full, it becomes wasteful to continue to pour more water into that glass, especially when it also cost more money to simultaneously mop up the excess spill. Similarly, since an unending flood of surplus Naira already distorts the critical indices of monetary strategy, it will also be counterproductive to continue to swell the extent of surplus cash in the system, especially when the CBN, ironically, turns round to reduce the naira excess by mopping up the “overflow” when it sells Treasury bill which bear very high interest rates, which are clearly inappropriate for Sovereign risk free loans, which would normally attract rates below 3 percent in better managed economies everywhere. Indeed, with the bonanza returns on such ‘easy’ government loans, commercial banks will clearly care less about job creation or the survival of the real sector. Worse still, the amounts CBN borrows cannot be applied to infrastructural enhancement or indeed for any productive purpose, as such expenditure will only exacerbate the liquidity surfeit.

Thus, In the light of the persistent challenge of surplus loanable funds in the system, additional bloated Naira denominated monthly allocations to the three tiers of government also become counterproductive as a strategy to grow the economy, and improve social infrastructure and the welfare of our people. Thus, the latest infusion of over N760bn into an already Naira suffocated market, will inadvertently also create greater stress in the economy. 

Observers will recall that the CBN Governor was clearly ecstatic when he gleefully announced in a recent TV broadcast, that its erstwhile depleting forex reserve base of about $29b had suddenly spiked above $31b on receipt of the sum of $2.1bn from Bonny LNG and Shell.  Inexplicably, however, despite the resultant swell in dollar reserves, somehow, the Naira equivalent of over N400bn also became simultaneously available for sharing as allocations to the tiers of government! Thus, in a magical twist of fortune, Nigerians could have their ‘dollar’ cake domiciled with the CBN and at the same time still voraciously gulp up the same cake as Naira allocations which further compounded the existing problem of disenabling Naira surplus.

Alarmingly, this “magic” has been practiced with disastrous consequences in our economy for several decades. Consequently, the more dollars we earn from crude export, the greater will be CBN’s reserves and the higher also will be the Naira values substituted as allocations, to sadly make it extremely challenging for CBN to successfully manage inflation, and reduce the cost of funds or to indeed reduce the pressure on the Naira exchange rate against the dollar.

Instructively, therefore, with the spectre of uncontrollable consistent Naira surplus, the impact over the years, of all the extra budgetary, otherwise, ‘well intentioned’ cash interventions, by the CBN would clearly also increase the challenge of creating an enabling environment which will preserve income values and stimulate consumer demand to propel industrial growth, economic diversification and also create increasing job opportunities.

In this event, it is no wonder therefore that the various bailout packages by the CBN to various sectors, such as Textiles, Aviation, Power, SMEs, have all failed to reflect positively on our social and economic welfare. 

Instructively, Mr. President had a great opportunity to begin to reverse this ugly trend in monetary mismanagement with the recent $2.1bn LNG Shell revenue; indeed, if this income was shared as dollar allocations (with dollar certificates) instead of the substitution of over N400bn, the pressure of excess Naira would be checked with a salutary impact on inflation, interest rate, and the Naira exchange rate. Sadly, Mr. President’s failure to adopt this strategic CHANGE can only mean more of the same Economic menu with the attendant suffering and gnashing of teeth.

SAVE THE NAIRA, SAVE NIGERIANS