By Adaighofua Ojomaikre
The following article is courtesy of a guest Â Â Â columnist, Mr. Adaighofua Ojomaikre, who is also an advocate of the views consistently paraded in this column with regard to the correct infusion process of our nationâ€™s export dollar earnings with the instrument of dollar certificates.
The article is a must read, as it explains why our economy will continue to fail so long as our monetary framework is predicated on ignorance or indeed, self interest, as the case may be.Â Â Please read onâ€¦.
FEDERAL Minister of Finance Olusegun Aganga and Central Bank Governor Lamido Sanusi, who have been invited to professionally guide the government aright, are dead set to perpetuate an economically flawed practice. The ministry and the apex bank over which they preside, have customarily financed Federation Account; i.e. funded budget expenditure of the three tiers of government using realised non_oil revenue and Central Bank advances amounting to roughly 20 per cent and 80 per cent of the total disbursements respectively, contrary to provisions of the Appropriation Act.Â The flawed practice also makes the CBN to finance state and local government budget deficits, which is an aberration.
The monthly publication of disbursements by the Federation Account Allocation Committee (FAAC) provides the economic analyst with most of the data required for making independent rough_and_ready estimates of annual actual or ex_post budget deficits. This apparently unrecognized economic indicator has accounted for the woeful failure of all economic managers and national economic programmes over the past three decades. The following sheds light on the flawed long_running extant budget financing process using 2009 data as an example.
Out of the disbursements made by FAAC in 2009 (i.e. December 2008 gross revenue shared in January 2009 through November 2009 revenue shared in December), it can be deduced from the total of 13 per cent derivation fund that oil/gas (assumed dollar proceeds) contributed N3.5 trillion or 73 per cent of the yearâ€™s Federation Account (FA) gross revenue with non_oil realized (presumed naira) revenue accounting for 27 per cent. That represents an ample dollar and scarce naira portfolio, which naturally raises the prospects that during the process of budget implementation the fiscal and monetary authorities would contend with the problem of finding adequate naira amounts in the system to meet the predominantly naira expenditures of the three tiers of government.
That is so because, given our sovereign naira currency, dollar accruals to the FA are intermediate financial receipts which FA beneficiaries may as and when necessary convert into realized naira revenue strictly and inviolably through deposit money banks as indeed already applies to the foreign exchange holdings of individuals and private sector companies in Nigeria.
However, needless to state, FA allocations have over the years instead been wholly in naira with their disbursement resulting in persistent surfeit naira supply in the system. Such a development is not normally associated with disbursing and expending realized qua realized revenue. As a result of the excess naira supply, monetary policy management has over the years become full time preoccupation with fighting a losing and costly war against the attendant inflationary pressures and the ensuring deleterious effect of economic retardation.
In response to the insistent and vocal advocacy of a handful of patriotic critics, the CBN, on 14/8/07 made proposals to reverse the trend, and defend the value of the naira to ensure general price stability.
It proposed that FA dollar accruals would be allocated in dollars and released through special domiciliary dollar accounts opened with deposit money banks where they could be converted into naira revenue as and when required for government expenditure.Â But few elements of the federal executive arm including the Attorney General, in contempt of sections of Chapter II of the 1999 Constitution, the Appropriation Act in any given year, the CBN Act 2007, and the Fiscal Responsibility Act 2007 among others, prevented the implementation in Nigeria of the monetary measure which underpins the prosperity of the worldâ€™s leading economies.
Now, as regards the supposed 2009 gross revenue disbursed by FAAC, the amount of N3.5 trillion attributed to oil/gas proceeds was not realised revenue because, as already noted, the sum was not obtained via deposit money banks. In truth, the amount represents illegal CBN advances whose expenditure is equivalent to deficit financing of the public spending of the three tiers of government. In the context of recent events, the FA advances were like the sum of N620 billion which the apex bank advanced to the troubled banks.
But whereas the latter loan is expected to be repaid, the former unsolicited and unwarranted credit given to the three tiers of government is never repaid in violation of all rules of financial prudence. In effect, the CBN naira advances substituted for the FA dollar receipts constitute the worst form of official corruption. Note that the bloated money supply volume occasioned by the steady stream of non-repayable advances fuels the persistent inflationary pressures and causes the naira to be permanently overvalued in relation to the dollar. That explains the continual fixing by the CBN of monotonically depreciating artificial naira exchange rates to the dollar.
With respect to advances, section 38 of the CBN Act 2007 limits temporary advances to the Federal Government to 5 per cent of the previous yearâ€™s actual revenue subject to their being repaid in the very fiscal year the advances are made. This rule effectively enjoins CBN to ensure ex-post balanced budget, which is consistent with the need for general price stability. However, the approved fiscal deficit limit in the federal Appropriation Act in any fiscal year serves as a formal amendment of the provision.
Now, suppose the 2009 Appropriation Act adopted the initially proposed fiscal deficit ceiling of 3.95 per cent of GDP. Given the 2009 GDP (at current basic prices) of N24.7 trillion, the yearâ€™s projected deficit spending ceiling stood at N976 billion. However, from our discussion, the 2009 actual or ex_post budget deficit comprised the N3.5 trillion in CBN advances substituted for FA dollar receipts plus N620 billion loaned to the troubled banks plus N200 billion lodged in deposit money banks for the Commercial Agriculture Credit Scheme plus any other missed releases outside the Appropriation Act totaling at least N4.32 trillion, which represents 17.5 per cent of GDP.
Doubtless such ex-post fiscal deficit is excessive and ruinous; more disturbingly it is unauthorised, unintended and seemingly unrecognised. Excessive federal fiscal deficits of this nature but of slightly varying magnitude, which have occurred every year since 1974 when oil proceeds assumed the major part of the Federation Accounts, are responsible for the stunted Nigerian economy over the past three decades.
Nevertheless, the mix of dollar and naira accruals to the Federation Account constitutes inestimable economic blessing. And to manage the Nigerian economy within the confines of the existing laws should ordinarily be a source of great delight to the knowledgeable economic manager. For, apart from the authorised fiscal deficit ceiling, the Appropriation Act enjoins government to expend only realised revenue. Stipulating the naira exchange rate to the dollar in the Act informs that the dirty or managed floating exchange rate system is in force. Thus had FA beneficiaries rightly collected dollar allocations in the manner the CBN proposed in August 2007, the three tiersÂ of government, using the stipulated exchange rate, could have converted same (allocations) through deposit money banks of their choice to gross N3.5 trillion realised revenue (portion of dollar allocations used for imports directly is imputed for at the stipulated exchange rate).
That correct approach would have eliminated the illegal CBN advances and freed the large sums devoted to servicing the sterile domestic debt for pressing public projects. The known extra federal expenditure above totaling N820 billion would have put the 2009 ex-post federal fiscal deficit at 3.32 per cent of GDP as against the assumed authorized ceiling of 3.95 per cent.
We may now examine the likely effect of correctly financed overall budget expenditure on general price levels. One, by appropriately releasing FA allocations in the exact mix of dollar/naira accruals to finance the budgets of the three tiers of government, we would have ex-post balanced budgets (based on FA funded expenditure alone) cutting across all tiers of government.
Balanced budgets are ordinarily non inflationary. Two, where part of ex post federal fiscal deficit is financed with bonds, the level of federal expenditure that could induce inflationary pressures is reduced correspondingly. Classically bond subscriptions are undertaken within the existing money supply volume and are non inflationary. Herein lies their attraction for public finance. Three, state and local governments do supplement FAAC allocations with the so called internally generated revenue (IGR). Expending IGR is again non inflationary. Four, some states also raise bonds to top their budgets. As earlier indicated, expending bond proceeds is non_inflationary.
And so, when budgeted FA dollar proceeds are duly and properly infused into the economy and the set federal fiscal deficit level is strictly observed, inflation would be under 2 per cent; there would evolve lower half single digit bank lending rates across the board; the naira would assume realistic value and the naira exchange rate to the dollar would be stable just like in the successful economies. And behold the blessing of FA dollar proceeds: the simple and routine process of converting government dollar allocations voluntarily into realised naira revenue for public expenditure makes available to the productive sectors of the economy their requirements of hard currency for enhanced job_creating investments with surplus foreign exchange being sold as last resort to the apex bank by deposit money banks to swell external reserves.
Given such a business friendly environment, the private sector would readily come by the necessary collateral and access the ample and cheap bank credit for undertaking profitable investments. For the banks the risk of non_performing loans becomes negligible and within a short period of time bank credit to the private sector in a year could equal and even surpass the countryâ€™s GDP as happens in the leading economies. Consequently it is not the place of the CBN to mount pressure on loss averse business folks to borrow fiscal deficit propagating special intervention funds at the unattractive interest rate of 7 per cent. In a word, good fiscal practice and sound monetary management are all it takes for the economy to go at full blast.
In light of the foregoing, the fiscal and monetary authorities can figure out that the supposed FAAC gross revenue disbursed this year (December 2009 shared in January plus allocations for the first quarter) not to mention the CBN governorâ€™s illegal one man show parallel budget of special intervention funds, has already pushed ex-post federal fiscal deficit beyond the ceiling set in the 2010 Appropriation Act.Â It is imperative to end the unauthorised and ruinous excess fiscal deficits today.
*Ojomaikre is a visiting member of the Guardian Edicorial Board.