Pensioners and civil servants owed arrears may have cause to smile soon as the Federal Government has asked the National Assembly seeking to amend the Fiscal Responsiblity Act to proceeds of borrowing to be used for recurrent expenditure. A letter written by Vice President Yemi Osinbanjo to that effect was read on the floor of the Senate this week. Government intends to pay civil servants and pensioners arrears amounting to N2.7 trillion.
The Federal Government has struggled to meet its obligations due to a crash in crude oil prices and production volumes last year. Government is reliant on crude oil earnings for a significant amount of its revenue.
Could this be the opening of a Pandora’s box ?
While moves to settle salary and pension arrears are a step in the right direction, amendment of the act could open the way for possible abuse by future administrations. Government currently spends over 60% of its revenue on recurrent expenditure, and credit to the public sector is at an all time high. Rather than amend the law, the government would be better off reducing waste and diversifying its sources of revenue, steps which the government has taken. Borrowing to fund recurrent expenditure is highly unproductive and should not be encouraged. The move to amend the act signals the government has no intentions of cutting down on deficit financing anytime soon
Finance Minister Kemi Adeosun recently signalled the government’s intentions to switch to foreign denominated debt due to lower interest rates. An implication of the possible amendment is that the government could decide to pay the arrears by raising dollar bonds, leaving the country exposed to exchange rate volatility. A less prudent administration in the future could decide to fund recurrent expenditure solely using debt financing.
The Fiscal Responsbility Act (FRA) was passed in 2007 and amended in 2011. The law stipulates how the government as well as Ministries, Departments and Agencies (MDAs) manage their revenues.