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The growing threat of “moral hazard” to the change agenda of the Buhari administration

By Dr. Ike Udechukwu

In March of 2016, during a National Economic Council retreat, the following was reported, “Mr. Buhari advised state governments to increase their financial support through community groups.” This report implied that President Buhari was keen on seeing that states and State Governors worked towards achieving financial self-sufficiency through internally generated revenue. However, recent actions of the Buhari administration appear to negate this implied goal of encouraging states to be financially self-sufficient. In short, a series of actions so far by the Buhari administration appears to be fueling a concept and problem known as “Moral Hazard” among states and state governors, which negates the possibility that financial self-sufficiency will be achieved by states under the Buhari administration.

Buhari
Buhari

This could also consequently lead to an indirect economic sabotage of the Buhari administration’s change agenda. A creeping sense of “Moral Hazard” is increasingly playing a significant role in the current economic ethos of states in Nigeria. While moral hazard has been evident with previous administrations, the change matra of the Buhari administration makes moral hazard a far more poignant and important issue of concern.

According to The Economic Times, “Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.” There is no evidence that state governments and the federal government are in full alignment with each other’s true economic goals. Thus, the often dysfunctional coordination between state and federal economic policies even though the National Economic Council is partly responsible for setting the agenda for such coordination.

Nigerian states are increasingly dependent on the largesse of the federal government in the current tough economic climate for their survival, and as a result, the creativity and critical thinking that could be induced in these tough times within these states in the meaningful demonstration of their capacity to create internally generated revenue, is increasingly being diminished by the “Moral Hazard” problem encouraged by the Buhari administration. “Moral Hazard” signals to Nigerian states that their poor and often questionable decisions will be rewarded and insured by the federal government of Nigeria. This not only negates the matra of change, it also provides room to fuel corruption, particularly when no consequences are attached to instances of such “Moral Harzard”. Saving Nigerian states from their poor decisions in the present, at the expense of the future, appears increasingly like a faustian trade-off.

For example, in June of 2015, the Federal Government of Nigeria provided N471 billion in special intervention funds and between N250 million to N300 million in soft loans to Nigerian states. What the loans and soft funds were used for remains a perplexing mystery. There was no evidence of plans or ideas submitted by states to the federal government which were publicly declared or communicated in demonstration of a good faith quid pro quo expectation of performance for such funds. In fact, one report stated, “the beneficiaries of the relief package include workers in Federal Ministries, Departments and Agencies (MDAs) who have remained unpaid for several months.”

States have essentially perceived these funds as free money where performance of the funds is essentially deemed to be immaterial. Unfortunately, Nigerian citizens are directly and indirectly bearing the cost of these minimally constrained soft funds to states through sacrifices to other important economic development activities to include limited funds for infrastructure development. This is “Moral Hazard” in action.

This same “Moral Hazard” was repeated and demonstrated again in April of 2016, where the Minister of Finance (Kemi Adeosun) forged ahead with the suspension of loan payment deductions for states. In essence, she suggested that states will not be required to pay their loans, as and when due. When loans are not payed, the provider of the loan and its interested parties suffer. One report even stated, “The suspension of deduction takes effect from April and may be extended, depending on the debt profile and social needs of states.” Again, the Buhari administration encouraged “Moral Hazard” in states, and this time, the moral hazard appears to be in perpetuity. So we ask, when will the next episode of moral hazard be perpetuated by the Buhari administration, whose consequence includes the sacrifice of limited funds which could be used for other national prerogatives?

Moral hazard is economically dangerous because it provides no motivation or incentive for any state to act on its own future economic interests since its current decisions, however poor they might be, will likely be insured in the present. Moral hazard encourages irresponsible behavior in the party being insured. Thus, when states refuse to act on their future economic interests, it is then fairly unlikely that the federal government will be able to achieve meaningful in-roads supporting their economic agenda. We should be reminded that the federal government is essentially a function of the products and activities of 36 states.

If these states fail to induce the necessary critical thinking and creativity required in support of the federal government, then no worthwhile economic development goals can be meaningfully achieved. Moral hazard is economically dangerous and should be diminished by the Buhari administration, if indeed the administration is interested in true economic development drawn from the creative impulses of states whose interests in such economic development activities cannot be over-emphasized.

Moral hazard also raises questions about the acclaimed autonomy of states and the quality of leadership in many Nigerian states. Thus, the change agenda of the Buhari administration could be indirectly crippled with a continuation of this moral hazard with state governments who will have no incentives to act otherwise. The Buhari administration should show state governments how to fish rather than giving them fish every day. Insuring the perpetuation of poor decisions in states through moral hazard, should never be a priority of any federal government.


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