How reduced deficit will challenge the economy

on   /   in Rational Perspectives 12:18 am   /   Comments

By Les Leba

It was a welcome departure from tradition when the national assembly received the 2013 budget proposals in early October 2012!  Thankfully, the early submission allowed the legislature to effectively sharpen its oversight functions on a host of government ministries and agencies, and in the process, uncover huge shortfalls between approved budget sums and actual implementation in 2012.

Indeed, some critics maintain that the legislative oversight inspection and fact-finding tours could not have been thorough considering the hundreds of government agencies that needed to be examined within the very limited time available.

Critics have hitherto blamed poor budget implementations on late passage of budgets.  However, the evidence of large unspent funds in the coffers of government agencies nationwide at the end of each year may not corroborate this observation.

Incidentally, Dr. Okonjo-Iweala, the Coordinating Minister of the economy had promised at the beginning of her tenure to ensure that budgets were promptly laid before the national assembly, to allow the Legislature and the Executive adequate time to consult and agree on Mr. President’s budget proposals.

In reality, if annual budgets are based on a rolling three to five year medium term framework, it should be possible to present the budget in August/September each year.  Nonetheless, we should commend Dr. Okonjo-Iweala for the earlier than usual budget presentation!

Finance Minister, Ngozi Okonjo-Iweala

Finance Minister, Ngozi Okonjo-Iweala

Indeed, if the budget receives President Jonathan’s assent in the next week or so late presentation would not be a valid reason for failure to fully implement the 2013 budget.  However, it seems Nigerians may have placed too much faith on the impact of comprehensive budget implementation.

After all, total capital budget of about 1.7 trillion naira is equal to just about $9 billion, an amount that is grossly inadequate when compared with the speculated requirement of over $100 billion just for provision of adequate power nationwide!

Indeed Dr. Okonjo-Iweala had also promised to significantly reduce recurrent expenditure ratio below 70% in steps of between 1% and 2% annually!  However, analysts contend that such snail speed adjustment is not in of consonance with the reality of our severe infrastructural deprivations.

Fortunately, the adoption of a crude oil price benchmark of $79 per barrel, instead of the Executive’s insistence on $75 per barrel would mean a daily accretion of about $10 million (i.e. $3.6 billion annually) to budgeted revenue.  Thus the earlier projected 2013 budget deficit of almost a trillion naira would fall by over 550 billion naira with the higher benchmark.

The additional $4 per barrel would consequently reduce the need for additional government borrowing to finance the proposed trillion Naira deficit, which evolved from the earlier deliberate understatement of crude oil price benchmark.

Indeed, with prevailing interest rates of between 15% and 17% for government borrowings, we would also avert liability for additional debt service charges of over N75 billion if crude oil benchmark had remained at $75 per barrel.  These huge savings are undoubtedly positive outcomes, as our debt burden will fall commensurately by over 550 billion naira in 2013!

The additional $4 per barrel has an ugly flip side;  the resultant increase in total dollar revenue of over $3.6 billion would paradoxically create severe challenges in the economy,  as the substitution of naira allocations for the increased dollar revenue will exacerbate the specter of surplus cash (excess liquidity)  when over N550 billion is lodged into the bank accounts of beneficiaries of the federation pool in 2013.

This huge cash inflow into the vaults of commercial banks will sustain additional liquidity and increase credit capacity of the banks by over N5 trillion.  In such event, the CBN would ‘altruistically’ step in to deepen the ‘racket’ of mopping up excess liquidity with greater vigor!

Consequently, CBN would be induced to borrow hundreds of billions of naira it does not need, while paying interest of between 10% and 15% for the joy of just warehousing idle public funds and sequestering the funds from a credit starved real sector!

The profits of commercial banks and other investors in government securities will ultimately become bloated by an additional sum of over 100 billion naira with such government borrowings.  Thus, the increased dollar revenue engendered by higher crude benchmark will ultimately also inexplicably deepen our debt burden!

We may deduce from the above that our economy appears severely challenged by the prospect of increasing dollar revenue!  The CBN’s response to excess liquidity also crowds out the real sector from available credit in the market, and the resultant high cost of borrowing will further precipitate inflation, industrial contraction and increasing rate of unemployment.

However, the hydra headed dilemma of increasing dollar revenue and increasing debt and the paradox of increasing wealth and deepening poverty will only be satisfactorily resolved when CBN ceases to substitute Naira allocations for distributable dollar derived revenue.

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