The Central Bank of Nigeria has released its 2016 February Monetary Policy Communique including personal statements of members of the committee. One prominent member of the MPC who analysts (including Nairametrics) like to read from is Economist Abdul Ganiyu Garba. The erudite economist is known for his often solitary but instructive opinion on decisions taken collectively by members. He also has a record of not regularly voting with the CBN governor on most policy decisions and expresses his views in the most brazen manner you can imagine.
His latest statement was without the usual fiery rhetoric taking on greedy speculators and the need to for the MPC to stick to a medium term policy for the economy that is not affected by short term greed and fear in the market. In fact he mentioned the work “greed” in the 2,300 word statement. What however caught our attention the most was his stark opposition to the planned N2.2 trillion debt by the Buhari government for the 2016 budget.
According to Ganiyu, the Buhari government cannot be planning to borrow N2.2 trillion on an ill perceived premise that our debt to GDP is 10% as such there is room for more borrowing. Particularly, his concerns were the obvious crowding out of private investors when government s borrowing that much.
He reminds us that was what caused the debt crisis of the 90’s that led to the Paris club deal. He also offered an advise to the Government to judiciously use the TSA savings rather than focus on borrowing more as it is counterproductive.
We picked out some of the major soundbites.
A Consistent Medium Term Monetary-Prudential-Fiscal Strategy Connecting monetary, prudential and fiscal policies within a comprehensive and consistent framework is critical. A sufficiently comprehensive framework would make it easier to understand why raising fiscal deficit when the current account deficit is growing will worsen a precarious twin deficit problem. The implications of a planned increase in public debt by over N2.2 trillion will become obvious: increase in debt from N10.5 Trillion to N12.7 Trillion, crowding-out of private borrowers including the small and medium scale firms that have higher growth and employment elasticities, a rise in interest rates, adverse effects on investment hence, employment and growth and the likelihood that debt service in the 2017 budget would significantly exceed the 22% of the proposed 2016 budget.
It will thus become clear that fiscal choices can constrain monetary choices also, that neither the goals of fiscal or monetary policy could be achieved without efficient and effective coordination. It is worth noting that after Nigeria exited the Paris Club in 2006, the total federal debt was N2.1 Trillion which is well below the borrowing plan for 2016. The borrowing plan will continue a trend that picked up in 2009 during which total federal debt almost quadrupled from N2.8 Trillion to N10.5 Trillion. Raising the debt by another N2.2 Trillion clearly needs much more detailed analysis of the implications for policy effectiveness.
An ongoing study has shown that had domestic debt risen along the 1981-2006 trend, government expenditure, total debt service and budget deficit would most likely have been significantly lower while private sector investments, credit to private sector and real GDP growth would have been significantly higher than they were. The results imply that excessive public borrowing was harming private investment, employment and real growth while creating and worsening a fiscal problem.
A more comprehensive framework would also make it easier to see that with lower domestic borrowing and a more effective management of petro-dollars, liquidity would not need to be mopped up frequently after each round of fiscal injections which often tend to raise interest rates, “kill money” and reduce opportunities for viable real private sector activities that have relatively high growth and employment elasticities. In addition, high interest rates tend to worsen the performance of loans and therefore, a threat to financial system stability.
Clearly, harmonizing monetary, prudential and fiscal strategies and policies are indispensable to the credibility of macroeconomic strategy and policy in Nigeria. The harmony has legal foundations in the CBN Act of 2007 which specifies the primary mandate of the CBN to be price stability and its secondary mandate to be, supporting the economic policies of the government. Without coordination, neither the primary nor secondary mandate can be efficiently and effectively actualized. Available information indicates that the Treasury Single Account has a balance of over N2.2 Trillion. If supplemented by recoveries either from voluntary returns or legal successes on the “war on corruption” and more effectiveness in the budget design and implementation following strictly provisions of the Fiscal Responsibility Act, 2007, there is a great likelihood that the problem of fiscal deficit should be significantly reduced in 2016.
If cash management were to significantly improve even to the levels of household budget management, it should be possible for the spending programmes for 2016 to support a more efficient and more effective monetary and prudential strategy and policy. The short to medium term gains will include: lower interest rates, lower crowding-out of private sector credit, enhanced intermediation and significantly lower crowding out of resources for social and economic infrastructures.
In the 2016 spending plan, the planned debt service of N1.36 Trillion is 76% of planned capital spendings, 62% of planned deficit, 22% of total expenditure and exceeds the sum of the recurrent allocation to the top five MDAs (Education, Defense, Police Formations, Health and Interior) by about N46 billion! The idea that we are below a threshold and should continue to borrow led Nigeria to a debt overhang problem that took more than half a century (1982-2006) to resolve at very high economic, social and political costs. To rely on the same idea to worsen the triple problems (fiscal deficit, current account deficit and a growing debt problem) is to fail to learn from history and to worsen the likelihood of efficient and effective policies.
I am still convinced that “the 2016-2020 planning and budgeting cycle offers opportunities that the monetary and the fiscal authorities should use to have continuing purposeful and thorough strategic sessions, working out and agreeing on a continually adjustable strategic macroeconomic management framework at least, for 2016-2020.” It is important that fundamental errors are avoided and key vulnerabilities are positively addressed otherwise, the policy environment will remain challenged by structural problems, psychological instabilities (greed-fear-worry) and by avoidable strategic and policy errors whose effects are systematic and long termed.