Deficit Budgeting, Government Borrowing,
Borrowing Cost, Fiscal and Monetary Stability[1]
BY Prof. Mike
Kwanashie[2]
1.
Introduction
The fiscal behaviour of the state is a critical factor
in the economic life of any nation. The budget and its various components gain
particular relevance within the context of the role of the state in economic
and social development of societies. The
policy choices made by the state and its ability to effect those choices
determine to a great extent the overall environment within which private
citizens conduct their economic activities. The fiscal behaviour of the state
varies from one economy to the other depending on the philosophical orientation
of the state and society. Over the years economists have debated what the optimum
economic role of the state should be in relation to that of the private
citizens. All through this debate has been generally accepted that economic
governance by the state is an essential element in the development process. The
nature and character of economic governance reflects the epoch of development
and the particularity of the society and the economy and is often manifest in
the structure of the budget. Generally the state in every epoch has through its
allocative, distributive, regulatory and stabilization functions ensured
harmony among the various interests in the economy. The budget remains a major
instrument of state policy that has profound implications for the heath of an economy.
The nature of the budget, whether it is in surplus, balanced or in deficit has
significance on how the state impacts on the economy. Indeed governments have various
options in designing the budget so as to meet the challenges and objectives of
state policies.
In matured capitalist economies the stabilization function
of the state has come to be the most emphasized as the fluctuations occasioned
by private choices have led in some periods to socially undesirable outcomes. In
the present globalization process with its associated integration of economies
worldwide, stabilization has become a central issue for all economies. The
state has a role in stabilizing even poor developing countries caught in the
effects of the recurring global economic crises. The counter-cyclical strategy
of government is reflected in the structure of the budget. Economic governance
entails using a deficit budget when it is desirable. It recognizes balancing
the budget when that becomes necessary and running a surplus budget when it is required.
Effective economic management entails proper use of these various form of the
budget to stabilize the economy and induce economic growth.
In developing countries and transiting economies the
state has a particularly central role to play not necessarily in direct
production but in creating the environment for the economy to develop and grow.
Keynes in the post-great depression era postulated that the state was crucial
in ensuring full employment in an economy. This postulation has remained valid and
has supported policy choices made by numerous governments in both developed and
developing countries since then despite serious challenges over the years by
alternative postulates. The reigning neoliberal philosophy promoted by
multilateral institutions downplays the role of the state and the efficacy of
government expenditure in the management of market economies and advocate
fiscal responsibility which most often is tantamount to fiscal restraint. A
well structure market economy, it is postulated, has an inbuilt mechanism that
regulates it and ensures full employment output in the economy. Central to this
postulate is the flexibility of prices and the minimal importance of
distributional issues in the economy. It is argued that the state, more often
than not, simply messes up the adjustment process and in any case most
developing countries are often characterized by state failure. The individual is in the best position to make
choices to enhance his wellbeing rather than the state doing it for him.
Many market economies have been able to approximate
the underlining conditions necessary for the workings of the self regulating
mechanism of a well structured market economy. But prices have not always been
flexible and institutional developments in many of these countries have
resulted in downwards stickiness of prices. Stronger market economies have
devised ways of responding to structural rigidities and imbalances. However the
current global economic crises reveal that markets do fail and individual
choices do result in major challenges to the economic system. The public good
could be undermined by individual choices when the system becomes subsumed
under the influence of strong vested interests. These vested interests could be
corporate, political or social. State policies under these circumstances
reflect the balance of power in society. There are always gainers and losers
but when the power structure determines the gainers the system automatically
marginalizes the majority of the population as is often the case with
underdeveloped economies. In this case we need a developmental state that would
actively champion the cause of the poor and marginalized while ensuring
economic efficiency in the allocation and use of resources. The developmental
nature of the state reflects in the structure of the budget. A pro-poor budget
that accommodates the interest of the majority of the population and still
induces economic growth and human development should be the aim of progressive
governments especially in developing countries.
Lesson from Keynes was that the great depression could
have been avoided if the state had taken quick action to check the deficiency
in aggregate demand. That crisis could have been minimized he explained through
escalation of public expenditure to boost aggregate demand. Since this period
the role of the state in ensuring full employment at equilibrium has become a
well accepted dictum. In situations of deficiency in aggregate demand
government expenditure could help remove the expenditure gap and move the
economy towards full employment equilibrium. For long term growth, public
investments could also assist meet shortfalls in public investments that are
needed to drive economic growth and development.
It is necessary to appreciate the role of the fiscal
behaviour of the state and its choices as a basis of understanding the
importance of the public budget and budget deficit. Deficit financing is a
powerful tool of stimulating economic growth and pulling an economy out of
recession. Fiscal restraints are also necessary in some circumstances and it is
part of economic management to realize when fiscal stimulus or fiscal restraint
is most appropriate. The recent global recession from which most of Europe and
the United States are still struggling to come out of has been a pointer to the
important role of the state in managing the economy out of a recession. Despite
the dominance of the neo-liberal paradigm the efforts at bailing out private
business especially those “too big to fail” has demonstrated the fallacy of the
minimalist state. When private choices and decision forces the economic system
towards collapse the state has the responsibility of reversing the situation in
the public good. The unemployment and lose of income that follows a recession
often poses a political nightmare for politicians under whose watch the system
collapse happens. The state is forced to run a deficit in order to bail out private
enterprise and prevent massive lose of employment. It is forced to either tax
and spend which is unlikely in a recession or it borrows and spends. This crisis also demonstrates that either the
individuals or the state can persistently run deficits. The state or private
enterprises cannot continue indefinitely to borrow and spend. The weight of the
interest on borrowing could force a system collapse as has been witnessed in
the last global financial crisis.
2.
The Budget
A government’s budget is an annual statement of
projected outlays and revenue during the next financial year. In most
democracies it is a political document expressing the financial plan of the
government in power. It is a reflection of the balance of political forces
within society. It reflects the financing of the programmes articulated by the
ruling party. Most importantly however the budget is a tool for managing the
economy. The budget in most democracies today has four broad objectives; to
state the scale and allocation of projected government’s outlays; to state
projected revenue profile thereby projecting either a surplus, balance or a
deficit budget; to stabilize the economy and to encourage the economy long term
growth and balanced regional development. The budget acts as a stabilization
rudder and a growth driver. The budget is a key instrument of fiscal policy.
Fiscal policy choices have been proven to have major implications for boosting
long-term growth, stabilizing the business cycle, lowering unemployment,
keeping inflation low and ensuring a stable economic environment. Indeed fiscal
policy role in economic management entails using fiscal tools to ensure these
objectives.
The budget has two broad components – the revenue
account and the expenditure account. The revenue accounts details the expected
sources of revenue for government activities in the coming fiscal year. The
expenditure accounts details planned government expenditure for the coming
financial year under two heading – recurrent and capital. This categorization
leads to the primary balance and the overall balance. The budget balance is a
critical variable in the management of the economy. The government budget balance
is equal to its revenue minus its outlays.
If projected revenues exceed projected outlays, the
government has a budget surplus if on the other hand projected outlays exceed projected
revenue the government has a budget deficit. If both are equal government has a
balanced budget. For years it was considered an act of fiscal responsibility
for governments to “maintain a balanced budget.” The classical philosophy of
laissez-faire equates sound budgeting with that of private budgeting. Just as a
private economic unit cannot and should not run into a persistent deficit,
similarly, the government should avoid repeated deficit. Any deficit, indebting
the government to the market should be wiped out as soon as possible. Like the private household the government
was not expected to live beyond its means. It is considered prudent for
government to spend within its means or even run a surplus when there are
unexpected incomes. This position has changed significantly over the years as
economists now generally recognize that the form of the budget balance should
be dictated by the economic circumstance. Over time, there have been periods
when deficits were called for, others when government should have had budget
surpluses and other when a balanced budget was the best situation. The position
that fiscal deficits are ab initio
and act of fiscal irresponsibility is no longer tenable. It is agreed that an
attempt to maintain a balance budget in the recession will only worsen the
recession. Experience has shown that taxable income will decline and thus
government tax receipts will follow downwards resulting in a budget deficit when
GNP declines in a recession even if government expenditures and tax rate
remains constant. To achieve a balance budget in a recession requires an
increase in tax rates or a reduction in government spending either of which will
tend to further depress the economy.
Budgeting in Nigeria in the current democratic
dispensation has faced major challenges. While a developing country like
Nigeria is expected to effectively use its budget as a development tool the
Nigerian experience in the last decade has mirrored the failures in budgeting
that characterized the military era. The democratic era was expected to improve
on the budgetary process as the system was to become more participatory given
the involvement of the legislature. Budget oversight by the legislature was
expected to lead to better budget outcomes and more effective fiscal policy in
Nigeria. The government would be held more accountable by the people for the
management of public funds and the people would have more value for more spent
by government on behalf of the people. The experience has not justified these
expectations. There is therefore justifiable anxiety over deficits in Nigeria.
3.
Deficit Budgeting
Conceptually when a government spends more than what
it collects in a given period it has a deficit in that period, when it spends
less than it collects for that period it has a surplus. In Nigeria the
distinction between the primary deficit and the overall deficit is important
because the emergence of primary deficit in some years has raised alarm as to
how a government would borrow to cover the cost of governance. To most policy
observers this is an early warning signal of a fiscal crisis.
|
Table 1 Fiscal Balance
|
||||
|
Item
|
Years
|
|||
|
|
2009
|
2010 budget
|
2011budget
|
2012
|
|
Total Revenue
|
1,704.99
|
3,179.87
|
2,836.43
|
Na
|
|
Recurrent Expenditure
|
2,134.86
|
3,394.97
|
3,220.21
|
Na
|
|
Capital Expenditure
|
919.48
|
1,764.69
|
1,005.99
|
Na
|
|
Aggregate Expenditure
|
3,054.34
|
5,159.66
|
4,226.19
|
Na
|
|
Gross Domestic Product (GDP)
|
24,794.23
|
32,648.31
|
38,427.06
|
Na
|
|
Primary Deficit
|
429.87
|
215.10
|
383.78
|
Na
|
|
Overall Deficit
|
1,349.35
|
1,979.79
|
1,389.76
|
Na
|
|
Source: PARP Review of the 2011 Budget Proposals
|
||||
As reflected on table 1 Nigeria budgeted for primary
deficit in 2009 through 2012. The revenue and expenditure performance for 2009
yielded both primary deficit and overall deficit. In that year, the actual
primary fiscal deficit amounted to N429.87 billion, representing 25.2 percent
of total revenue and 1.7 percent of GDP and the actual overall deficit was
N1,349.35 billion, or 79.1 percent of total revenue and 5.4 percent of GDP. In
2010 the primary deficit was N215.10 billion with the overall deficit amounting
to N1,979.79 billion. In 2011 the primary deficit increased to N382.78 with the
overall deficit amounting to N1,389.76 billion. The fiscal deficit
for 2012 is projected at about 2.77% of GDP in the 2012 Budget compared to
2.96% in 2011. The overall deficit over this period has been within the
threshold stipulated in the Fiscal Responsibility Act, 2007.
The current Minister of Finance Dr. N. Okonjo-Iweala
and her predecessor and current Minister of Trade and Investment summarized the
concerns about the primary and overall deficit during their senate confirmation
hearing as members of the current executive council of the federation. The
primary deficit is the most worrisome in Nigeria today. In her senate
confirmation as finance minister Dr. Okonju-Iwala asserted that;
“we should try as a country as much as
possible live within our means. Right now we need to work very hard because the
budget that we have is such that the current expenditure is almost 74 per cent
of the budget, therefore, there is not as much left for capital, so we need to
work hard to put in place policy that will make it possible to continue to
implement fiscal policies that will enable us to tackle the various challenges
in the economy while at the same time living within our means.”
The message is that Nigeria
has not been living within her means and that this has undermined the medium to
long term development of the country. The recurrent expenditure has been
crowding out other necessary investment in infrastructure especially power and
there is therefore an urgent need to reign in recurrent expenditure in the
country.
The current Minister of Trade and Investment and
former Minister of Finance in his own confirmation hearing before the Senate
said:
“huge personnel cost at 75
percent average is a drain on the nation’s resources which has become a burden
and an impediment to infrastructural development”. “The level of expenditure
has increased significantly. Five years ago it was N1.6 trillion. In 2009 it
went up to N3 trillion. In 2010, N4 trillion and in 2011 it is going to go to
N4.4 trillion that is hard given the level of revenue we have today.” “The
second challenge we have is the level of our recurrent expenditure. In 2009 it
represented 30 percent of total expenditure, in 2010 it represented 73 percent
of expenditure and 2011 it is going to be 74percent of the expenditure. What
that means is that the amount we are investing in infrastructure and
development is less than 30 percent of total expenditure, so how can you
develop as a country?”
In his 2012 budget speech
the President stated that “starting in 2012 for the medium term, we shall focus
on cutting recurrent expenditure to sustainable levels through reducing waste,
inefficiency, corruption and duplication in government”.
The concern of the President
and the two ministers is that Nigeria has been budgeting, such that a
disproportional amount of funds are expended on recurrent costs of government.
Government has become too expensive for Nigeria and as noted by the President
due to waste, inefficiency, corruption and duplication in government. This
development has diminished the capacity of the budget to drive investments in
critical areas for economic growth. A situation where the country is borrowing
for recurrent expenditure as has been the case since 2009 is undesirable. The
biggest item of recurrent cost is the personnel cost. Personnel cost increased
from N851 billion in 2008 to N1.3 trillion in 2010. This is an increase of
about 61 percent and it has gone up to about N1.4 trillion in 2011.
Deficit as a policy choice
There are many economic reasons why governments have
surplus and deficit budgets but in the long run tend to balance their spending
with their receipts. The fiscal responsibility Act requires that deficit does
not exceed 3 percent of GDP but the government has consistently violated that
provision until most recently where the deficit has been within the limit. The
Act recognizes that government might have to run a budget deficit as part of
her fiscal policy package. A budgetary policy is supposed to be an important
and effective tool in accelerating the process of capital accumulation and
economic growth. There are key infrastructural investments that are required to
unblock major constraints to development. Failure to make these investments
undermines the entire development process. This is often the case with
underdeveloped economies. The government might deliberately as a fiscal policy
choice borrow to finance these investments. There are other catalytic
investments that are expected to open up the economic system to private
investments that would enhance economic growth which could conveniently be
financed through borrowing. Such borrowings are often for investments that
yield returns to the economy.
A distinction has been made between ‘deficit of
strength’ which a direct action by government to move an economy out of a
recession. A policy option adopted to strengthen domestic consumption needed to
prop up investment in an economy. The massive bail out of private enterprise to
halt the decline of the economy from a recession to a depression with its
attendant social consequences is considered a ‘deficit of strength’. When a
deficit occurs from the declines in revenue due to an economy entering a
recession or further into depression we have a ‘deficit of weakness’. In the
Nigeria case since most of government revenue accrues from the oil sector which
is volatile a budget that projects revenue too high is likely to face sudden
falls in revenue which could lead to unanticipated deficit particularly when
expenditure cannot easily adjust. This may be done through borrowing and
investing those funds in various projects.
Despite the dangers of deficit financing developing
countries have found themselves running persistent deficit. The philosophy of
functional finance requires the state to borrow and spend as is required to
promote economic growth. Government can borrow and spend if returns to spending
in the long run can cover both the principle and interest accrued in financing
the spending. Growth-oriented programmes which are quick results
yielding are often easily defended in selecting programmes for deficit
spending. Other growth oriented programmes such as building capacity through
training and education and investments in the capital goods sector do not yield
quick returns but in the medium to long run account for the strength and
sustainability of the growth process. It is very important to note that the
budgetary investment policies will have both a ‘multiplier’ effect which will influence
the aggregate demand and the ‘capacity’ effect in varying forms and with
varying lags.
A more contentious issue is the relationship between the deficit and subsidies.
In many developing countries subsidies are active policy instruments use to achieve
specific economic objectives. In Nigeria today there are serious questions as
to the rationale for sustaining the subsidy on petroleum when the budget
continues to be in primary deficit. Subsidies are used even in advanced market
economies to encourage production in sensitive sectors that are either
threatened by external developments such as trade or are use to supplement
incomes of underprivileged in the society. Both ways government must find the
resources to sustain such support and this crowd out other spending and might
result in deficits.
Politically induced deficit
When deficits results from the political business
circle it most often result in problems for economic management and
stabilization of the economy. In most democracies in election years government
tends to over spend the budget in an attempt to create a conducive political
environment for winning elections. In most cases this tends to overheat the
economy and create problems that are then difficult to correct after the
elections. The artificial boom created in an election year is often not
sustained causing a downswing after. In advanced democracies the increase in
expenditure is targeted at the economy to create an impression of good times
for the electorate. In developing economies most often they are siphoned into
the electoral system to corrupt the system and undermine the electoral process.
This has always had a negative impact on the economy.
The politics-development nexus is one of particular
interest in new democracies especially those that have endured dictatorships
that undermined human development. It is generally acknowledged that there is a
relationship between political and economic development and that this
relationship is critical for the overall development of modern societies. Its
manifestation in the budgetary process has been problematic to a large extent
in Nigeria. There is the tendency for the legislature in Nigeria to insist on higher spending
in the budget than the executive suggests even in the face of projected decline
in the rate of growth of revenue. Politicians in the legislature are interested
in as large spending as possible to justify to the people their relevance in
the legislature. Constituency projects are constantly been introduced even when
such projects are not properly evaluated and in line with the general thrust of
fiscal policy of government. When these additions to the budget by the
legislature result in the widening of the deficit they tend compound the
management of the budget.
Financing the deficit- the
mode of financing a deficit has its particular implications for any economy. On
the whole when a government incurs a deficit, it can meet this deficit by running
down its cash reserves, selling some of its assets like properties, printing more
currency and using it – financing the budget deficit through ‘ways and means
advances’, or it can engage in short term borrowing from the banking system –
more specifically by means of Treasury Bills. The treasury bills are mostly
purchased by the Central Bank.
|
Table 2 Fiscal Deficit and Its Financing
|
||||
|
Item
|
Year
|
|||
|
|
2009
|
2010
|
2011
|
2012
|
|
Overall Deficit
|
-1,349.35
|
1,979.79
|
1,389.76
|
Na
|
|
Deficit Financing
|
1,008.30
|
1,979.70
|
1,389.76
|
Na
|
|
Domestic
Sale of Government Property
Privatization Proceeds
Excess Crude Account
Signature Bonus
Stabilization Fund
Borrowing
|
914.70
--
7.00
--
--
--
907.70
|
1,904.79
9.56
107.21
300.13
132.31
--
1,346.58
|
1,389.76
--
242.21
--
132.31
150.00
865.24
|
Na
|
|
External
International Bond
|
93.00
|
75.00
|
--
|
Na
|
|
Source: Review of the 2011 Budget Proposals
|
||||
The main source of financing fiscal deficit in Nigeria
is domestic sources. This has been the case since 2006 when Nigeria benefitted
from debt relief, predominantly from the Paris Club. As shown on table 2
domestic borrowing constitute the major source of financing the deficit in
Nigeria in the last four years. Government has also drawn from the excess crude
account and the stabilization fund.
4.
Government Borrowing
Domestic borrowing by the government to finance the
deficit has its implications for the economy. If a nation borrows and goes into
debt it must pay interest on her debts. It is, however, the use to which
borrowed funds are put that determines their ultimate impact on the economy. If
the country borrows to finance consumption, it must eventually have to cut
spending to repay the debt as well as pay the accrued interest. But if it
borrows to invest in a business that earns a lot of profit, it can repay its
debts from the profits and the interest too. Borrowing on its own is not bad it
all depends what the borrowed funds are used for. Nigeria has a poor history of
borrowing to finance both consumption and investment. After the Nigerian civil
war the impression was that the country had to borrow to put the country back
on a sound footing. The military
regime abrogated the law putting a ceiling on the national debt and paved the
way for massive foreign borrowing targeted at infrastructural development and a
number of capital projects considered critical for the development of the
country. The result was the sudden jump in external borrowing which eventually
resulted in a severe debt crisis. Projects such as the Iwopin paper
project as well as the Adjaokuta and Aladaja steel projects were financed with
loans. The
country’s external debt rose from N641 million in 1977 to N1.6 billion in 1979 and
subsequently to N10.5 billion in 1983. Private sector debts in the early 1980s
began to be a source of foreign indebtedness.
At the inception of the democratic governance in 1999
Nigeria took new interest on her debt overhang. The general consensus was that
the debt burden was a legacy too dangerous for the new democracy. Seeking debt
relief was therefore a major policy thrust of the new democratic government.
The Obasanjo administration succeeded in securing a debt deal with the Paris
Club which paved the way for drastic reduction of the nation’s external debt
stock. Public debt declined substantially from about 74.8 percent of GDP in
2003 to about 11.7 per cent in 2009. In 2004, Nigeria’s stock of debt amounted
to about US$46.6 billion, comprised of US$35.9 billion of external debt and
US$10.7billion of domestic debt.
|
Table 3 Debt Profile of the Federal
Government
|
||||
|
Item
|
Year
|
|||
|
|
2009
|
2010 b
|
2011 b
|
2012
|
|
Debt Stock (US$ b)
External Debt
Internal
Debt
|
25.74
3.95
21.80
|
35.05
5.05
30.60
|
37.29
6.26
31.03
|
Na
|
|
Debt Stock (N b)
External Debts
Internal Debts
|
3,812.63
584.60
3,228.03
|
5,347.27
757.28
4,589.99
|
5,593.16
938.63
4,654.53
|
Na
|
|
Debt Service Payments (US $ m)
External Debt
Internal Debt
|
3,660.25
428.00
3,232.25
|
3,615.88
259.44
3,356.44
|
3,615.88
259.44
3,356.44
|
Na
|
|
Debt Service Payments (N b)
External Debts
Internal Debts
|
542.09
63.39
478.70
|
542.39
38.92
503.47
|
542.39
38.92
503.47
|
Na
|
|
Source Review of the 2011 Budget Proposals
|
||||
Since the debt relief
Nigeria has again gradually started to accumulate debt at a significant rate. President
Jonathan noted in the 2012 Budget that “Our domestic debt profile has risen
sharply in recent years, currently standing at about 16.4% of GDP. This cannot
be allowed to continue and become a new burden on our children. So in addition
to looking at the expenditure side of our national balance sheet, we are also
paying strong attention to the revenue side”.
|
Table 4 Debt Ratios for the Federal government
|
||||
|
Item
|
Year
|
|||
|
|
2009
|
2010
|
2011
|
2012
|
|
Total Debt to GDP
|
15.4
|
19.4
|
14.6
|
Na
|
|
Total Debt to Revenue
|
144.3
|
129.4
|
197.2
|
Na
|
|
Debt Service to Revenue Ratio
|
20.6
|
11.7
|
19.1
|
Na
|
|
Source: Review of the 2011 Budget Proposals
|
||||
Going by conventional debt sustainability ratios, the
debt profile of the federal government is within sustainable limits according
to the debt Management Framework for 2008-2012 and the Debt Sustainable Report
issued by the DMO. Despite this assessment government is uncomfortable with its
debt position. The 2012 budget observed that apart from personnel costs, debt
service payment constituted the most significant item of recurrent expenditure
in 2011. This has made it imperative for government to take seriously the
impact of debt and debt servicing on the Nigerian economy. In this regards the
2012 budget aims “at steps to increase revenues by blocking
leakages from various sources, improve corporate tax collection, and boost
internally generated revenue” so as to reduce the deficit and the need to
finance it through borrowing.
5.
Borrowing Cost and the debt
burden
Borrowing necessarily involves a cost in the interest
payments that must be made in the future. Interest payments on public debt
represent a ‘burden of debt’. The debt burden is a major issue of concern when
considering borrowing to finance the deficit. When the government fails to
collect sufficient tax revenues to pay for expenditures, it finances its
deficit by selling bonds to the public. The government must pay interest on
these bonds for many years in the future. The generation on which the
expenditure is made does not necessarily bear all the future interest payments
depending on the life of the bond. But is the interest payment necessarily a
burden? If the bond issue was used to finance investment project it creates no
burden if those who benefit from the future payoff of the project are exactly
the same people who have to pay the future taxes required to finance the
interest payments on the bonds. If it is spent on consumption no future returns
are expected and the burden falls on all those who have to pay the taxes in the
future required to service the debt. The issue of burden to future generation therefore
depends on how government spends the borrowed funds. Future generation benefits
from investments done today. Most capital projects have long gestation period
and begin to yield return far into the future. In Nigeria most of the
infrastructure that is been enjoyed by the present generation were constructed
by previous generations and paying any outstanding interest on them if they
were financed by bonds will not be considered a burden to the current
generation.
The debt service burden decline drastically following
the debt relief in 2005. In 1999 it was 33 per cent of yearly export earnings
with service arrears amounting to US$3.5 billion annually. This was a severe
burden on the economy as most of the projects financed by the loans were not
performing. In fact they were a drain on the public purse. So apart from
servicing the loans the country still had to pay heavier price to maintain
unproductive projects. This debt overhang was too heavy that it clearly
undermined development and economic growth. It frustrated efforts at providing
basic infrastructure and social services like health and education.
The successful debt negotiation process with the Paris
Club in 2005 was greeted with great relief. But Nigeria still had to pay outstanding
arrears of US$6.4 billion, while receiving a debt write-off of US$16 billion on
the remaining debt stock. The country had to purchase its outstanding $8
billion debt under a buyback agreement at 25 per cent discount for US$6.0
billion. The entire debt relief package totaled US$18.0 billion, or a 60 per
cent write-off in return for a US$12.4 billion payment of arrears and buyback. Government
capitalized these arrears through issuance of three- five- and ten-year bonds
at competitive interest rates. The debt relief did not come cheap as Nigeria
paid for debts incurred for capital projects that yielded no future streams of
income and that became a burden until they were privatized.
It has been argued that financing of current
expenditure leads to a burden upon future generation of the society. As the
Nigerian case portrays the government has been running primary deficit in the
last few years that is financed through borrowing. This means that the cost of running government
today is being transferred to future generation who have to pay the tax to
service the debts. Is this intergenerational transfer of burden justifiable
when the future generation would expect no income from such outlays? The
general wisdom is that government should not run primary deficit unless it is
absolutely necessary. The cost of running government today has a relationship with
the investments the government is making today. As for the transfer of burden the
question is whether future generations who would benefit from investments that
result from current generation - who had to reduce current consumption to make
investments - could be made to contribute to the present utilization of
resources through debt financing. The future generation would suffer if the
current level of investment is reduced because of debt service as this will
reduce the productive capacity of the coming generations and they will
accordingly lose. The future generation will suffer if the present generation
reduces its savings to meet the debt finance and thereby leaves a smaller
amount of capital resources for the future.
6.
Fiscal and Monetary Stability
The fiscal behaviour of the
state has implications for the stability of the economy and the ability of
monetary authorities to pursue monetary policy that would stabilize the economy
at a non-inflationary level. The budget plays a very important role in the flow
of funds in the economy. In the Nigerian case, where oil revenue which drive
economic activities accrues first to government before it finds its way through
the system, government fiscal behaviour is very important in determining the
impact of the oil sector on the economy. The budget occupies a strategic place
in the transmission mechanism of policy impact on sectors of the economy.
Recognizing this fact and being able to form a clear picture of the impact of government
transactions on the economy has become a requisite for making fiscal and
economic policy decisions. Because
the country relies heavily on oil it is subject to the volatility of the world
oil market. Economic activities are subject to the risk of the volatility of
oil revenue due to frequent changes in world oil market conditions. Since the
budget is the mechanism through which oil revenue is transmitted to the rest of
the economy the budget if not properly crafted can also be the means through
which the volatility of the oil sector is transmitted through the economy. A
larger than envisaged deterioration in the global environment could result in
substantially lower world oil prices which can force the budget into greater
deficit. The budget must be flexible enough to handle such volatility to
cushion its effects on the economy.
The monocultural nature of the economy has made it incumbent
on fiscal policy to perform the stabilization function more actively. The fluctuations in the global oil market when
transmitted to the Nigerian economy require that government through monetary
and fiscal policies to act to stabilize the economy and minimize the effects of
these fluctuations. In the same vain efforts at diversifying the economy are
crucial to ensure greater stability of the economy. Government recognizes that it has to press
forward with key structural reforms. The government’s transformation agenda and
the Vision 20/2020 are geared towards strengthening the economic base and
restructuring it to support a self sustaining economy capable of addressing the
daunting issues of development. The government has shown commitment towards
“implementing the privatization of the power sector based on the Power Roadmap”
as indicated in the President’s 2012 budget speech. He asserts “the power
sector can benefit from liberalization and privatization by attracting
investors in the same manner as the telecommunications sector has done”. The
2012 budget aims at improving the performance of the budget especially the
economic returns on capital projects. Greater efforts to make capital spending
more effective with particular attention on economic rate of return of
projects, their job creation capacity and their environmental sustainability
are expected in 2012. “Government will continue to prioritize its expenditures
while focus will be on the completion of viable on-going capital projects”.
These initiatives are necessary to stabilize the economy and promote growth by
a more responsible fiscal policy.
Generally Nigeria’s fiscal policy has been
expansionary in recent years. The pressure of fiscal activism has come from two
primary sources - political and economics. The current democratic dispensation
has added a huge resource burden on the economy and has witnessed persistent
pressure from the legislature for expansion of expenditure in the budget. The
need to stabilize the economy and at the same time ensure public expenditure on
critical infrastructure has informed the executive continued increase of the
size of the budget. Nigeria’s fiscal federalism has also posed some challenges
to the efficacy of the budget. This is particularly the case with the efforts
to stabilize the economy through a stabilization fund. The states of the
federation have persistently opposed the establishment of any stabilization
fund without their consent and active involvement in the management of the
fund. Although the Excess
Crude Account has been used by government effectively as a stabilization rudder
it remains a major source of contention between the two tiers of government in Nigeria.
The excess crude account was initially established to warehouse windfalls in
oil revenues that could be used to stabilize the economy in times of
unanticipated worsening of the global oil market. The Sovereign Wealth Fund,
which is in the process of being activated would also be useful for
stabilization purposes if the objections of state governments could be
addressed.
Fiscal
activism in Nigeria has implication for monetary authorities. There is need for
greater harmonization of fiscal and monetary policy in the country to achieve
the objective of non-inflationary growth. While there is certainly an urgent
need for investment in critical sectors considered catalyst to growth the
monetary authorities might not be able to accommodate fiscal expansion when it
is too fast, indeed they are forced to tighten monetary policy to ensure that
the inflation target are met. The central bank currently targets single-digit
inflation. However, the benefits Nigeria gets from tighter monetary policy must
be balanced against its cost - higher interest rates can only be
maintained for so long before growth starts to really suffer. Deficit financing
can be used in accelerating economic development, but it has to be prevented
from helping inflation. It is not only the recurrent budget that is
inflationary, mismanaged capital budget can cause more harm than is often
assumed. Capital expenditure can add to the inflationary pressure. This is
because while the demand in the market keeps on increasing on account of the
additional money incomes, the supply takes time on account of the long
gestation periods of capital goods industries.
Generally
Nigeria’s fundamentals have remained strong despite recent challenges to the
economy. The country has sustained relatively strong growth although it remains
non-inclusive with growing unemployment, the debt stock though increasing and
causing concerns have not reach the crisis point and the external balance sheet
has remained respectable. The country has made deliberate efforts to build up
and stabilize a strong international reserve position in recent time despite
increasing public expenditure and growing public sector deficit. The budget
must be part of this success story unless state failure becomes a reality.
7.
Conclusions
Budget deficit and its financing are strong elements
in the management of the economy. The Nigerian experience has shown that there
are many challenges in the use of the fiscal deficit to promote growth and
regulate the economy. Despite the strong fundamentals Nigeria still needs to
critically review her fiscal policy to ensure that there is a balance in most
of the various elements of fiscal policy. There is need to harmonize elements
like public expenditures, expenditure outcomes, tax revenue, revenue allocation
– horizontal and vertical, debt management, to achieved the overall objective
of a pro-poor growth strategy in Nigeria. System reengineering is required to
ensure that Government can effectively use deficit financing to stimulate
economic growth and stabilization in Nigeria. The challenge so far is that the
budget in Nigeria has not been able to drive the growth and development process
because of weak institutional base, poor management of public resources and
poor implementation of budgets. Capacity constraints have also undermined
proper planning of the use of public debts with the result that heavy
intergeneration burden are associated with government borrowing.
Policy reforms in Nigeria must address the
inadequacies of the public budget at all tiers of government. The integrity of
public finance and the budget remains a major challenge in Nigeria. The
allocation of resource function of the budget has been consistently distorted
by political considerations and the clash between the legislature and the executive
over control of the budget. Budget implementation has remained poor in most
years with outcomes not reflecting value for money spent. The federal structure
has compounded the challenge of managing the overall economy. Fiscal actions of
state governments have not been within the control of the central government
and no authority therefore has a firm control over total public sector spending
in the country. Lack of budget discipline and the level of corruption
associated with the budget in all tiers of government have in the past
constituted a major roadblock to development and will continue to undermine
development if not addressed. The continued bickering between the executive arm
and the legislature over the budget has remained a constraint to effective
management of the budget. Fiscal prudence will be required to ensure that the
volatility of the primary source of public finance in Nigeria – oil, does not
constitute a destabilizing factor in the economy.
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