By Dele Sobowale
On Wednesday, July 21, 2010, several newspapers carried the same news item about the President sending a Supplementary budget request for N237 billion to fund the Niger Delta Development Programme.
Yet the Niger Delta is part of the seven-point agenda of the Yarâ€™Adua administration which President Jonathan had publicly embraced and progress in that region is key to achieving the dream of VISION 2020 to which he is also committed.
Two weeks earlier, the same President had forwarded a request to the National Assembly slashing the 2010 budget by about N300 billion. His reasons for the cut could not be faulted – oil revenue had fallen below the level that would sustain a N4.4 trillion budget.
While the two measures taken in isolation can be defended, they nevertheless occur within the context of a delayed budget which in the seventh month of the year is scandalous by itself and which will breed other social, economic and political demons later.
The fact is, in the modern state,Â budgets are not voluntary, they are mandatory especially in the global village where virtually everybody is a stakeholder in every countryâ€™s economy. Greece is threatened with insolvency and German lawmakers are at each others throats and the Dow Jones Industrial Averages plummet. Why? Because whether we like it or not no nation is an island anymore. Nigeria cannot be an exception; we either get going or get crushed.
budgets and the gross domestic product, GDP
The major elements influencing GDP still remain, by and large, the same – private consumption (C), aggregate investment(I), government spending (G) and balance of trade (Exports and Imports).
Even in a well diversified economy where the private sector constitutes the major contributor to GDP, government spending, mostly represented by its budget proposals still constitute a significant determinant of theÂ wealthÂ of nations and their people. In an economy like Nigeriaâ€™s where one commodity, controlled by government, provides the lionâ€™s share of income for majority of people, then budgets are vital for national and individual survival.
Furthermore, when the same economy had developed a parasitic private sector, heavily dependent on government patronage and continuing support, late passage of the budget invariably slows down every factor – government spending, investments and private consumption. Let me quickly explain the last one – i.e how budgets affect private consumption.
With perhaps four or five exceptions, none of the thirty-six states of Nigeria and the FCT can survive for more than a month without the monthly revenue allocation from the Federal Government.
Again with the exception of perhaps two or three, people in all the states virtually live on governmentsâ€™ handouts – federal, state and local governments.
They can all be classified as civil service states. So, without budgets being passed on time, and expenditure pegged as a percentage of last yearâ€™s expenditure, civil servants in all the states and the federal curtail consumption and there is a proliferation of strikes to register their displeasure.
Capital expenditure, for which the budget normally provides, also accounts for the bulk of contract awards by our local contractors. At the same time the governments owe contractors over a trillion naira already. Unfortunately, capital expenditure is held in abeyance when the budget is delayed. Public servants get paid but nothing else happens.
Again the impact of this on consumption and investments has never been adequately quantified, but, it will amount to a colossal sum annually. Even if the contracts are eventually awarded late in the year, as they will be in 2010, most of the lost consumption will never be recovered. Rushing contract awards, late in the year, also fosters two evils -inadvertent waste and deliberate fraud.
Anyway you look at it, delayed budget is detrimental to at least one important element in the GDP equation – the consumption function. But, because these elements are inextricably linked, we shall soon see how it negatively affects all of them.
Consequences of Delayed Budget on Investment
Investment in that equation does not refer only to government investment as represented by the capital expenditure voted. It includes both private and public investment as well as foreign direct investment, investment by multinational donor agencies, NGOs etc.
Invariably, the budget which normally addresses the fiscal and monetary policies underlying the figures can usually be summarized as proposed expenditure, sources and applications of the funds and whether it is going to be a balanced budget or surplus or deficit.
Where deficit is projected, as the 2010 budget will certainly do, then all the stakeholders globally are interested in how the deficit will be financed. In addition, every stakeholder wants to be convinced that the budget is realistic. They also want to know what direction government fiscal policies will take. Without a completely articulated budget, they are condemned to guesswork.
Let me again illustrates the test of realism as it pertains to budgets.
In 2009, the Yarâ€™Adua/Jonathan proposed to finance the deficit that year by, among other measures, floating a $500 million bond denominated in naira. The international bond markets were supposed to participate.
It was also proposed to draw down the $100 million which the Gowon administration had given to the African Development Bank in the 1970s to create a fund for poor African countries to borrow from. As it turned out, 2009 was the year of the global financial meltdown. Foreign and especially Western investors were in no mood to take risks with any nationâ€™s deficit financing. Predictably, at least I predicted it, this country did not receive the funds and the bond offer had to be withdrawn.
It was clear from the start that the budget was unrealistic, but the government stubbornly pressed forward until it was too late to secure alternative sources of financing the deficit. Since the funds were meant to finance capital projects, to improve the appalling infrastructure nationwide, it is now clear why the results were so devastating that late President Yarâ€™Adua himself confessed that â€œgovernment has failed to implement the budgetâ€.
Indeed, that budget could not have been implemented as proposed and passed, very late, by the National Assembly. Thus in 2009, as in any year for that matter, late passage of the budget precluded the possibility of finding other options and the government resorted to two tactical devices -borrowing from banks and ways and means.
The consequences of the two have been known to economists as long as the profession was first recognized. Public borrowing not only drives out private lending, it also drives interest rates through the roof. Private sector investors were mostly deprived of funds and when secured they paid exorbitantly for it. That was no way to promote investment.
Ways and means simply means that the government borrows from the Central Bank, the banker of last resort.
And, the CBN would do what every central bank does under the circumstances – print more money (as the late Idi Amin asked the Bank of Uganda to do). When money supply goes up without commensurate increase in aggregate productivity inflation results; prices escalate. So instead of the single digit inflation promised in the budget, the CBN had to battle with double digit inflation and usurious interest rates.
The combination of inflation and high interest rates is almost always guaranteed to discourage investment and job creation and to result in agitation for higher wages.
Thus by the end of 2009, the agitation for wage increase gathered momentum; its passage in 2010 will add another N500 billion annually to the Federal wage bill, untold amounts to the payroll of states and local governments, spark private sector agitation for salary increases and end up igniting a hyper-inflation spiral which will leave everybody perhaps worse off than when we startedâ€¦..
*Next week: Budget: instrument of social engineering.