Parsing through the fiscal policy plans included in the manifesto of the president-elect, Asiwaju Bola Ahmed Tinubu, reveals several policy reforms aimed at driving the Nigerian economy forward. Nigeria is currently facing a severe fiscal crisis made worse by lower oil revenues, increasing debt burden, and a ballooning recurrent expenditure.
To address these issues, the president-elect proposed policy actions (most lacking details) that provide a solution to this crisis. One that catches our attention is a proposal that aims at moving Nigeria away from relying on foreign exchange as a basis for determining the country’s budget.
“Budgetary custom bases our annual budget and fiscal policies largely on the dollar value of projected oil revenue. Not only does this practice artificially restrict the Federal Government’s fiscal latitude, it also unduly attracts the nation’s attention towards a single source of fiscal revenue to the detriment of others.”
To achieve this goal, the excerpt proposes establishing a clear and mandatory inflationary ceiling on spending, which would help ensure that expenditures are kept within reasonable limits. He also suggests that Nigeria must break the explicit link between naira expenditure and dollar inflows into the economy, which may indicate that the current budgeting methodology is heavily influenced by external factors such as foreign exchange rates.
“To achieve optimal growth in the long term, we must wean ourselves from this limitation. A more efficient fiscal methodology would be to base our budgeting on the projected level of government spending which optimises growth and jobs without causing unacceptable levels of inflation. As part of this prudent growth-based budgeting, we will establish a clear and mandatory inflationary ceiling on spending. However, we must break the explicit link between naira expenditure and dollar inflows into the economy.”
What does this mean
Breaking the explicit link between naira expenditure and dollar inflows refers to reducing or eliminating the dependence of Nigeria’s budget and fiscal policies on the country’s foreign exchange rate. The federal government has for decades, relied on indicators such as the oil price, oil production output, and the exchange rate as a basis for determining Nigeria’s budgeted revenue.
Based on this, an expenditure framework is developed that captures the budgeted requirement for capital, recurrent, and non-debt recurrent expenditures. In recent years, the budget has often led to widening deficits as the budgeted revenues are not enough to cover the expenditure.
He also spoke to “prudent growth-based budgeting” which refers to a budgeting approach that emphasizes responsible spending to support growth and development, while also ensuring that expenditures are sustainable and within the limits of available resources.
Reducing reliance on FX
By breaking the explicit link between naira expenditure and dollar inflows, his government aims to reduce its reliance on the foreign exchange rate and to create a more stable and predictable fiscal environment. It also wants to rely less on oil as a benchmark for determining Nigeria’s budget.
This could involve a range of policy measures, such as reducing imports and increasing exports, promoting local production and consumption, and implementing monetary and fiscal policies that are less sensitive to changes in the exchange rate.
However, breaking the link between naira expenditure and dollar inflows is a complex and potentially challenging policy objective, as it requires significant reforms to Nigeria’s monetary and exchange rate policies, as well as to the broader economic and trade environment.
What needs to be done?
Firstly, Nigeria’s economy is heavily dependent on oil exports, which account for a significant portion of the country’s foreign exchange earnings. This dependence on oil exports makes the country vulnerable to fluctuations in global oil prices, which can have a significant impact on the value of the naira relative to other currencies. To break the link between naira expenditure and dollar inflows, Nigeria may need to diversify its economy and reduce its reliance on oil exports, which could require significant policy and structural reforms.
Some of these reforms will include eliminating burdensome government bureaucracy, implementing civil service reform recommendations, and removing fuel subsidies. The overall size of the government will also need to be cut down including budgets for the presidency, national assembly, and security agencies.
Secondly, the Nigerian government would need to undertake significant reforms to its monetary and exchange rate policies to reduce the link between naira expenditure and dollar inflows. This could involve adopting a more flexible exchange rate system that allows the naira to float freely against other currencies, rather than being pegged to the dollar, as it has been in the past. This would require changes to existing laws and regulations, as well as the development of new systems and infrastructure to support a more flexible exchange rate regime.
Thirdly, breaking the link between naira expenditure and dollar inflows would require broader economic and trade reforms, such as promoting local production and consumption and reducing the country’s reliance on imports. This would involve significant investment in local infrastructure, education, and technology, as well as changes to trade policies and regulations.
What are the challenges?
Even if the president-elect decides to address the three issues mentioned above he will still face major challenges implementing the same. For example, Nigeria’s economy is heavily dependent on oil exports, which account for a significant portion of the country’s foreign exchange earnings.
This dependence could make it difficult for the government to reduce the link between naira expenditure and dollar inflows without first diversifying and increasing government income sources and reducing its reliance on oil exports.
In addition, implementing significant reforms to Nigeria’s monetary and exchange rate policies, as well as to the broader economic and trade environment, would likely face resistance from various stakeholders, including businesses, interest groups, and political factions.
This resistance could make it challenging for the government to enact the necessary policy changes. The current government has had to face several strike actions in recent years such as when it increased electricity prices.
Implementing the policy of breaking the link between naira expenditure and dollar inflows would require significant technical capacity in areas such as economics, finance, and trade policy. This could pose a challenge for the Nigerian government, which may not have sufficient expertise or resources to implement such complex policy changes.
Nigeria has a history of political instability, including coup attempts, ethnic and religious conflicts, and corruption. These factors could make it difficult for a president to implement significant policy changes, as they could face opposition or even threats to their leadership.
Finally, external factors such as global economic trends, geopolitical tensions, and changes in commodity prices could also pose challenges for a Nigerian president attempting to break the link between naira expenditure and dollar inflows. These factors are outside of the government’s control and could have a significant impact on the success of the policy.
Waoh,this is highly explained, it is a very complex matter,I don’t know how we are going to be great again,many stumbling blocks to our growth, how do we break the barriers?