AT its July 2012 meeting, the National Economic Council considered the Jonathan administration’s fiscal consolidation and 2012-14 borrowing plans. Intriguingly, the administration has simultaneously embarked on a revenue-saving programme that includes, firstly, locking away public revenue in the sovereign wealth fund (SWF). There are indications that the level of the SWF has risen to US$7 billion. Secondly, though the exact figures are not available, the excess crude account (ECA) is swelling fast because crude oil output has reached 2.7 million barrels per day (mbd) as against the projected 2012-budget production of 2.48 mbd while Nigerian sweet crude oil has consistently stayed above $100 per barrel compared to the benchmark oil price of $72 per barrel. The administration reportedly intends to retain a minimum of $10 billion in the ECA at any point in time.
Thirdly, notwithstanding the cheery developments in the SWF and ECA, the amount accruing to the foreign reserves appears to be relatively insignificant over the past six months. It may be deduced therefore that the ECA and SWF, not to mention various other special funds such as the dollar escrow account for accelerated construction of power plants, do not form part of the total figure under foreign reserves. The external reserves currently top $36 billion, which surpasses the requirement for the conventional three months’ import cover. Fourthly, despite exceeding the 2012 budget revenue target, the budget is being implemented rather slowly just as with previous budgets in the democratic dispensation, which constitutes another form of revenue savings. Since amounts saved should not be subject for guesswork, there should be legislation requiring lodgements in the various accounts and funds to be published regularly.
The immediate results of the deliberate policy of warehousing federation revenue accruals in the above manner are, firstly, to make direr the financial conditions of practically all 811 governments which already find their internally generated revenue plus disbursements from the Federation Account inadequate for meeting undeferrable recurrent budget commitments besides sorely needed capital projects; and secondly, to force state governments that are unhappy with the federal financial strangulation into borrowing. To this end, the Jonathan administration now advertises multilateral agency loans by stressing that they attract concessionary interest rates, are repayable over 40 years after a moratory period and that, by accessing such loans, state governments would merely be exercising Nigeria’s right to them. That viewpoint is erroneous because multilateral loans are far from being charity and possess several well-known disadvantages including the borrowing country’s loss of freedom to manage its national affairs as deemed fit. It is therefore preferable for the country to utilise the ample national resources to the fullest and rely on internal loans where necessary. However, Nigeria should both welcome any international grants with acceptable terms and throw the door open for multilateral agencies to directly undertake and manage any projects of their choice.
Meanwhile, the official national debt stock is N6.9 trillion with external (mainly multilateral) loans accounting for N919.4 billion ($5.9 billion). According to the Debt Management Office (DMO), external debt service in 2012 will be N47.6 billion with an average interest cost of 2 per cent per annum. The administration is seeking legislative approval for external borrowings of $7.9 billion to be spread over 2012-14. Additionally the domestic debt service in 2012 will be N511.98 billion with an average interest cost of 11 per cent. However, to raise further domestic loans will attract 15-17 per cent interest rate according to the Federal Ministry of Finance.
The administration in 2011 adopted fiscal consolidation programme that would reduce fiscal deficit and domestic borrowing progressively from N1, 104.29 billion in 2010, N852 billion (2011), N744 billion (2012) to N461.75 billion by 2015 “thereby creating more space for the private sector and putting downward pressure on interest rates.” Regrettably, the proposed measures will perpetuate rather than cure the deficit and debt and high interest rate problems. The federal fiscal and monetary authorities are aware that the existing national domestic debt is preponderantly made up of excess liquidity funds mopped from the system through commercial banks and it is non-investable. In effect, it is a derivative or second-stage national debt that does not reflect Nigeria’s total indebtedness. It is, therefore, erroneous for the administration to describe this partial national debt, which represents 17 per cent of GDP (if taken at face value), as marginal in comparison to the international total debt threshold of 40 per cent of GDP.
The first-stage national domestic debt (it is willfully unrecognised) comes from illegal fiscal deficits (which give rise to the unyielding excess liquidity that in turn produces the second stage) created when the CBN inappropriately prints and pumps additional naira funds into the system in substitution for oil export dollar proceeds that accrue to the Federation Account. A crude estimate of such deficit-financing sums superfluously fed into the economy beginning from 1971 (when the Bretton Woods system of fixed exchange rates ended), which may be gleaned from Federal Government finances data published by the CBN, stands at N23 trillion (nominal naira). Consequently the complete national debt (comprising apex bank-financed first stage, commercial bank-sourced second-stage and external loans) amounts to N29.9 trillion and constitutes 74 per cent of GDP. Ruefully, the national debt, which is entirely avoidable and unwarranted, has stunted the economy. For instance, though Nigeria, Malaysia and Singapore were economic peers in the early 1970s, current gross national income per capita in purchasing power parity US dollars for Malaysia and Singapore are over nine times and 31 times Nigeria’s level of $1410 respectively.
To stem the laggardly trend, the federal executive arm should implement sound fiscal and monetary measures in accordance with existing laws by, as a first step, allocating Federation Account dollar accruals to the beneficiaries in dollars (using domiciliary dollar accounts to instill transparency and check abuse) for conversion to naira revenue through deposit money banks. That way, the perennial harsh economic environment would dissipate and give rise to production-enabling conditions characterised by near-zero inflation, a realisatically valued and stable naira as well as lower half –to-mid single digit lending rates.
Given the above key factors, Nigeria possesses enough resources and market for sustainable economic boom that will be driven by private investments that are funded with cheap domestic bank credit. Amidst the prevailing hostile economic environment, the level of bank credit to the private sector (that suffers a significant rate of non-performing loans) is about 30 per cent of GDP. But the experience of Malaysia where domestic credit provided by the banking sector to the various sectors of the economy annually has reached 120 per cent of GDP (it is over 300 per cent for Japan) is a pointer to the untapped capacity of credit at internationally competitive rate in the economy provided the Jonathan administration drops the inherited faulty fiscal and monetary practices.
Clearly, this option, which expands economic activity with enhanced prospects for full employment, is eminently preferable to the ongoing fiscal consolidation programme that promotes economic blight, bloats first and second-stage national debt unnecessarily and subordinates the national economy to foreign control.
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