Tuesday, 2 February 2016


President Muhammadu Buhari
The 2016 Federal Budget as proposed will not spur economic revival, the desired objective. Ordinarily, the proportion of realised revenue in the funds expended in implementing the budget accounts largely for the level of inflation, which in turn influences macroeconomic stability. As regards budgetary spending and inflation, economics teaches that it is non-inflationary to expend realised revenue. Thus, to record actual (that is, post-implementation) budget surplus or balanced budget does not leave a trail of inflation. But a little or low inflation level poses no harm to the economy. The federal budgets make provision for borrowings or deficit spending to be kept within three per cent of GDP, which policy makers term a mark of prudence. However, the economic rationale of that limit is to control inflation within the safe bounds of three per cent. Nonetheless, economic literature also liberally holds that in developing economies, deficit financing is non-inflationary to the extent of the growth rate of the economy.

Against that backdrop, the proportion of realised revenue in the funds used to execute federal budgets over the years may be deduced. The expended funds fall into three broad categories: realised non-oil naira revenue, borrowings purported to be within three per cent of GDP and FAAC naira allocations supposedly ascribable to Federation Account (FA) oil receipts. Available official data show the annual actual fiscal deficit to be below three per cent of GDP (it was even 1.0 per cent of GDP in 2014). To use recent years, between 2006 and 2015, annual economic growth rates averaged six per cent (the growth rate was eight per cent in 2010). The above low fiscal deficit levels and robust growth rates would be expected to have low inflation levels as accompaniment. On the contrary, annual inflation averaged 10.8 per cent between 2006 and 2013 (the average in 2014-15 is not significantly different). The upshot is yearly actual fiscal deficit incurred far exceeded the official level claimed to be within three per cent of GDP.

More explicitly, the mix of funds expended on the budgets comprises (a) realised non-oil naira revenue, which by definition, is non-inflationary, (b) borrowings within three per cent of GDP that should keep inflation within that limit, and (c) FAAC naira allocations supposedly ascribable to FA oil receipts. Hence, the high inflation rates indicate that category (c) funds were a contributory factor to raising the inflation level just like normal borrowings or deficit financing. Note that the robust growth rates could not neutralise the inflationary pressures induced by both categories (b) and (c) funds. Therefore, like the category (b) funds, technically and economically, the category (c) funds do not qualify as realised naira revenue.

Interpretation? Firstly, naira and dollar amounts accrue to the FA, but gross revenue allocation to the tiers of government is wholly in naira amounts. That is because, as the CBN Press Release of March 1st, 2013 confirms, at the instance of the Accountant-General of the Federation (read the President), FA dollar allocations are withheld by the CBN and replaced with freshly printed naira amounts. Such naira funds are purportedly the equivalent of the withheld FA FOREX, which they are not. Just like their fruits designate trees, the naira amounts procured from the CBN, being contributory to inflation with its offspring, are designated economically as substituted deficit financing of the budgets of FA beneficiaries. In other words, the tiers of government over the years have been deprived of genuine and non-inflationary realised naira revenue derivable from FA oil receipts.

Secondly, from 1974 to 2015, the contribution of oil proceeds to the annual budgets on paper exceeded 50 per cent. Thus, the full extent of actual fiscal deficits incurred annually by the tiers of government combined is the sum of the proportion of oil proceeds in the budgets plus any further borrowings within or beyond the three per cent of GDP utilised in financing the budgets. Consequently the fiscal deficit levels were excessive. Subjected to excessive fiscal deficits, budgets fail to deliver inclusive growth and derail as reactive policy measures aimed at combating the ensuing adverse effects such as high inflation and macroeconomic instability only go to constrict and whittle down the contribution to growth and development by the productive sectors of the economy. In this connection, despite the projected reduced contribution of FA oil receipts to the 2016 federal budget, the CBN deficit financing that will be substituted for accrued oil receipts plus the anticipated borrowings within or above three per cent of GDP will account for over 50 per cent of the budget spending and so will continue to undermine economic revival.

Thirdly, the notion of the country’s over-reliance on oil revenue is a lazy and preemptive falsehood meant to becloud the actual economic problem that juts out before the unbiased economic analyst. An oil-reliant economy, by definition, works and is untouched by “polylemma” constraints associated with excessive fiscal deficits. Accordingly, the blame for the various economic ills and shortcomings contained in Section 6 of the 2016-18 MTEF&FSP should rest not on the purported over-reliance on oil revenue but correctly on CBN deficit financing substituted for FA oil receipts as already shown.

Fourthly, the unrelieved CBN deficit financing funds substituted for FA dollar receipts since the demise of the Bretton Woods system of fixed exchange rates in 1971 constitute an economic loan stream which, upon cumulation, would probably exceed 100 per cent of GDP. It is, therefore, fallacious for the 2016-18 MTEF&FSP document to contain in Section 7 that “the country’s debt to GDP ratio, which at 12 per cent is one of the lowest in the world, gives room for fiscal expansion”. Though non-repayable from its inception except for the latter-day begotten high interest-attracting and non-investable national domestic debt, which the CBN wangled from sterilised mopped-up excess liquidity, the long-running substituted CBN deficit financing has induced an all-too-evident hostile production environment and other economic distortions. And so the MTEF&FSP plan to “reflate the economy” ostensibly by further printing money in an economic situation that the National Planning Commission was wont to term overheated, is inane indeed.

In fine, the Presidency, Ministry of Budget and National Planning and National Assembly are the collective framers of the Medium Term Expenditure Framework and Fiscal Strategy Paper, the successor to a long lineage of economic programmes that reach back to the Five Year Development Plan (this ancestor programme succumbed in the fifth stanza). The Presidency precipitated each programme’s untimely death by causing FA oil receipts to be wrongfully substituted with toxic CBN deficit financing. Moral? Economic principles rule the economy. Going forward, once Buhari detoxifies budgetary spending attributable to crude oil receipt (however modest the quantum today) by allowing FA beneficiaries to collect dollar allocations by transparency-ensuring means in order to convert same as and when desired to non-inflationary naira revenue through deposit money banks, there will prevail macroeconomic stability and conducive economic conditions in which the country’s currently largely idle resources will be more than adequate to finance national economic revival and prosperity. (Source: Guardian)