Africa: Solving Nigeria’s Budget Paralysis: Urgently Required, A Quantitative Easing Program

The Mindset Above, Constantly Reminds Me Of A Joke One Of Our IMF Instructors Used To Say, While Making Jest Of The Fallacy Of Unbridled Austerity That Is Usually The Hallmark Of The Standard IMF Program: “The Operation Was Technically Successful But The Patient Died”.


Signing Of The Nigerian Budget By President Muhannadu Buhari


AFRICA: It is evidently clear that the current paralysis in the implementation of the 2016 budget is due to the inability to cash back the growth stimuli that were embedded in the budget. This is partly due to a false though unfortunate mindset, that somehow, you can save and starve your way out of a recession. The mindset above, constantly reminds me of a joke one of our IMF instructors used to say, while making jest of the fallacy of unbridled austerity that is usually the hallmark of the standard IMF program: “The operation was technically successful but the patient died”. Additionally, the inability to cash back the budget happened partly due to the real decline in government revenue, following the drastic fall in crude oil exports, as a result of the restiveness in the Niger Delta. Furthermore, by derisively talking down our own remarkable recent economic performance and actively working against it as many had sought to do lately, especially in the run up to the last general elections, we only ended up with self-inflicted economic wounds, which dampen morale and business sentiments. The end result of the above combination has been a steady decline in the pace of economic activities, which saw economic growth snarl to a lazy walk, instead of the sprint with which Nigeria’s economy had been associated for almost two decades. The rate of economic growth finally stalled and nosedived from 6.25 percent in 2014 to 2.82 percent in 2015, and further to a negative growth of -0.4 percent in the first quarter of 2016. The growth rate of 2.82 percent in 2015 was the slowest in sixteen years and appeared to have been largely due to an apparent non-perception of the gravity and urgency of the situation at hand. Slipping into negative territory of -0.4 percent GDP growth rate in the first quarter of 2016, could therefore be regarded as a first shot across the bow for Nigeria, by her own economy.


Below is the summary prognosis on the Nigerian economy given by the International Monetary Fund (IMF) team led by Gene Leon, following the 2016 Article IV consultation:

“Nigeria is facing the impact of a sharp decline in oil prices. Due to its dependence on oil revenues, the general government deficit doubled to about 3.3 percent of GDP in 2015, despite a sharp reduction in public investment. Exports dropped about 40 percent, pushing the current account deficit to an estimated 2.4 percent of GDP. With foreign portfolio flows slowing significantly, reserves fell to $28.3 billion at end-2015. Foreign exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect reserves have impacted significantly segments of the private sector that depend on an adequate supply of foreign currencies. Coupled with fuel shortages in the first half of the year and lower investor confidence, growth is estimated to have slowed to 2.8 percent in 2015 (from 6.3 percent in 2014), weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty. Inflation increased to 9.6 percent in December (up from 7.9 percent in December 2014), above the CBN’s medium term target range of 6 – 9 percent.”


“With oil prices expected to remain low for a long time, continuing risk aversion by international investors, and downside risks in the global economy, the outlook remains challenging. The authorities’ policy response has focused on seeking to support growth, while preserving international reserves. The draft 2016 budget envisaged, appropriately, a significant shift in the composition of fiscal spending toward capital investment while increasing the allocation for a social safety net. At the same time the CBN has eased monetary conditions”.


“In light of the significant macroeconomic adjustment that is needed to address the permanent terms-of-trade shock, it will be important to put in place an integrated package of policies centered around: (i) fiscal discipline; (ii) reducing external imbalances; (iii) further improving efficiency of the banking sector; and (iv) fostering strong implementation of structural reforms that will enhance competitiveness and foster inclusive growth”.

To quickly dwell on the last paragraph of Mr Leon’s commentary outlined above, he used the term “permanent terms-of-trade shock” to describe and dimension the depth of Nigeria’s external sector disequilibrium. The aim was to distinguish the current situation from the opposite term called “temporary” disequilibrium. Temporary disequilibrium in the balance of payments are usually one-off occurrences of import values outstripping export values. They are usually self-correcting. In most cases, nothing by way of fundamental expenditure decisions are required, as the balance of payments usually returns to normal state within a short time. Permanent disequilibrium on the other hand, is a chronic state, where the value of imports outstrips the value of exports for the foreseeable period.  This type of disequilibrium is what requires the array of tools, the most valuable of which, are exchange rate re-alignment, deft management of the government budget and export promotion. We shall return to this subject at a future date.


Nigeria’s economic growth slipped into negative territory of -0.4% in the first quarter of 2016 and the outlook for the second quarter is equally bad, except if by some magic of statistics, we are able to turn things around. This was the first time in about twelve years that the economy will post a negative quarterly growth. Hopes of reversing that negative growth trend in the second quarter which just ended will not be easy, with the crippling fuel scarcity that bedeviled the critical months of April and May. In any case, we are waiting the National Bureau of Statistics (NBS) second quarter data, while we are all at the same time, praying for the safety of the tenure in office of the NBS boss himself. His job is not an enviable job in times like these.


2016 Nigeria GDP Growth Rate | Nigeria Bureau Of Statistics


It is by far easier to continue to grow an already growing economy, than to nudge up an economy which is in the ditch to first claw itself out of the ditch, before resuming growth. The analogy with the real life scenario of someone falling into a hole is enough to illustrate this point vividly. The energy needed to claw out of a hole is by far greater than the energy needed to either maintain a steady rate of positive motion or manage a slight increase over a steady rate of motion. For an economy in recession you literally need a heavy duty jack to first jack it up like a fully deflated truck, before you pump the tires and then fuel the tank before the truck can start to move again. That is the exact scenario that Nigeria will find herself if we record another negative growth for a second consecutive quarter. At that point, we will officially be in a recession. In fact, some of us economists actually think that Nigeria’s economy hit that recession threshold, as far back as the last quarter of 2015.


Image Source: Bloomberg | 2015 Last Quater Growth Plunging


In the national income equation, aggregate demand or consumption is broken broadly into the domestic economy comprising – household consumption expenditure, business investment expenditure and government expenditure, and on the foreign trade sector, it is broken into the difference between the value of exports and imports. Viewed differently, savings, taxes and imports are withdrawals from the economy while consumption, investments, government spending and exports are injections.

Keynes eloquently demonstrated that despite the “moral” attractiveness of thriftiness during lean economic times for households and firms, in the macro economy however, it is actually very harmful medicine to give during a recession. Without doubt, it is very true that when households and businesses face economic downturns, the right and proper first thing to do is to reduce consumption expenditure for households and in the case of corporations, to reduce expenditures on things like raw materials and/or human resources in order to maintain or improve the bottom line. In the macro economy however, attempts to further reduce aggregate expenditure or consumption when household spending and investment are already down due to weak business sentiments, only go to prolong the suffering. Once Keynes was able to disaggregate the national economy into the various components namely household consumption, business consumption or investments, government expenditure and the net foreign trade position, it became clear that two residual components usually remained as active tools for targeting a turnaround in an economy that is in recession. These are government expenditure and targeting a positive net of exports over imports.


In the present Nigerian economy, households and businesses have been heavily hit by the economic downturn and this has badly affected aggregate demand leading to the negative growth in the first quarter of 2016. The situation was not helped by non-market policies such as the administratively frozen exchange controls that were imposed, which led further to dampening business sentiments of the corporate sector. Unfortunately, at that artificially low exchange rate, the Central Bank of Nigeria (CBN) could not supply the foreign exchange needs of the economy. By that freezing of the exchange rate at =N=197/US$1 for one and half years in the face of dwindling supply of the very scarce item – foreign exchange, we caused a series of consequences which will be presently highlighted. About five very negative things happened to the economy simultaneously.

First, businesses could not import raw materials and finished goods desperately needed by the by the US$560 billion economy, for sustenance and the maintenance of growth. Secondly, and very closely related to the first consequence, tax revenue receipts from import duties declined sharply due to the inability of the business sector to do business. The consequence of this second factor was the very significant loss of revenue from port related activities such as import duty and VAT that was needed to fund governments at all levels. Thirdly, Nigeria began to accumulate foreign trade payment arrears estimated at almost US$3.0 billion as a result of matured letters of credit, foreign airline and embassy remittances and other sundry business remittances especially invisible payments. It should be recalled that this exact same scenario, caused by administratively managed exchange controls, between 1982 and 1985 led to the crippling US$30 billion foreign debt crisis that Nigeria was thrown into in the 1980s which was only addressed in 2005/2006 after more than two excruciating decades under an avoidable trade debt burden. Any attempt to redefine the origin of the 1982-1985 foreign debt burden by any other means, is nothing but a complete lie. They were not project loans. Rather they were majorly trade arrears, which were converted by the export credit agencies of our trading partners into short term and later into long term debts. That was why it was called Paris Club debt. Fourthly, government could not fund the capital budget to enable Ministries and Ministerial Development Agencies MDA’s to pay contractors for jobs already done as far back as 2014 not to talk of the new capital projects embedded in the 2016 budget. Fifthly, State governments’ revenue receipts from the Federation Account declined sharply leading to their inability to pay salaries not to mention funding their capital budgets, thus further deepening the economic slide.

The above clearly illustrate the stark fact, that austerity as an economic policy, is not the silver bullet, that conservatives would want us to believe it is. Back to our national income identity, we can see clearly that two major components of the Nigerian economy – the households and the business sector, have been completely taken out by the recession and only the residual component of government budget, remains available for active short term policy options to re-awaken the economy. Owing to structural impediments, exports, though a very potent instrument for long term non-inflationary growth, cannot be relied upon to stimulate Nigeria’s economy in its current state. In the medium term of course, exports are an inescapable option if we are to achieve the dream of structural change that Mr. President desperately desires.


To finance the government budget especially the capital budget and thereby give a shot-in-the-arm fillip to the very weak economy, there is a very strong need for the Central Bank of Nigeria to coordinate very closely with the Ministry of Finance to deliver an immediate quantitative easing equivalent to at least =N=1.0 trillion or roughly 45 percent of the =N=1.845 trillion 2016 capital budget, in order to restart growth. Technically, this means that the central bank will be lending this amount to government, to cover the short term budget gap specifically for the capital budget. This is perfectly legal and is in line with ways and means financing function of the central bank to government. There has been talk of injecting =N=350 billion into the economy since early May 2016. Unfortunately, all that talk has been essentially hot air. The purported release never took place and the Federal Ministries and MDAs have all been complaining loudly that they have not received anything from the Treasury or the Accountant General. We should be very careful, not to allow the ugly impression rapidly gaining ground, that we are playing hide and seek with the largest economy in Africa. Though this initiative is to be an immediate fiduciary injection into the economy via the federal capital budget, the CBN can gradually mop up the ensuing liquidity by issuing domestic currency bonds of equivalent amount over the next twelve to twenty four months.

The CBN as she currently stands, can confidently manage the immediate injection of =N=1.0 trillion into the economy via the capital budget to enable payment to contractors who have done their jobs and/or to start new capital projects to breathe life into the economy. Local contractors are being unnecessarily hamstrung by the unpaid debts with the attendant negative consequences for monies that businesses borrowed to finance these projects from the banks. Leaving the capital budget unfunded could easily amount to shooting oneself on the foot, as a deeper recession will be more difficult to come out of, along with the socio-political risks associated with it. It is half year already and there are no indications that there will be any positive move anytime soon. A smaller level of injection into the economy of any amount below the =N=1.0 trillion threshold, therefore, will completely be of no effect whatsoever.

It will be recalled that when the financial markets failed in 2008, the global economy spun out of control into the deepest recession since the great depression of the 1930s. Governments, all over the world, rallied to the rescue of their economies by one form of quantitative easing or the other. Most countries did so by direct fiscal action while others like the United States relied first on fiscal action by the two bailouts amounting to about US$1.487 trillion in government money to rescue the sinking banks and US manufacturers under the two bailout Acts passed by the US Congress in 2008 and 2009.

The US fiscal action was later heavily and actively supported by the US Central Bank the Federal Reserve, when congressional gridlock prevented further congressional authority to inject funds into the economy. But for this action by the US Federal Reserve when there was congressional budget gridlock, due to the false belief by the Republicans that austerity was good for the economy, the US economy would have stayed longer in recession and perhaps dragged the world economy into another great depression.  The US Federal Reserve largely made this possible by lowering the federal funds rate to 0.25% which, at practically zero, was at such a low rate that had never been attained in the entire prior history of the Federal Reserve. At that rate which was maintained for more than five years, the Federal Reserve stood ready to buy deposit money bank securities at that rate and as much as the banks demanded. By the end of the exercise, after lending US$2.587 trillion additional stimulus money to the economy through the banks, the Federal Reserve balance sheet size was five times the size before the 2008 financial crisis. What the easy money program did was to put money in the hands of the banks, who in turn lent to households and businesses to sustain the economic recovery.

To allay the fear of sceptics, that price inflation will run riot, the central bank has in its arsenal, an array of tools that effectively prevent the economy from overheating and they have done exceptionally well with them, since the central bank was granted autonomy in 1988. These include the use of cash reserve requirements, liquidity ratio, statutory bank deposits, the quarantine of government funds in the central bank and other tools of monetary policy.

Growth in itself is inflationary in nature. That is exactly why the opposite of the term “growth” is “recession”. Quantitative Easing will only lead to runaway price inflation if the economy is at or near full employment. When appropriately targeted as in this case at the capital budget, the bulk of the fiduciary issue will go to service existing debt which is currently hobbling the private sector and finance new government capital investment. This economy we all know, is currently having human capital unemployment estimated at 12%. Unemployment in other factors of production such as land and capital are also pretty dismal, given the quantum of factories and businesses which have shut down. Thus, there is ample idle capacity of factors of production in the Nigerian economy, to allay any fears of runaway price inflation.


Furthermore, the current talk of external borrowing to close the budget gap should be given very serious attention. However, if the intention is to approach the International Bond market or the Bretton Woods institutions such as the World Bank or any multilateral lending institution for that matter, it will NOT materialize, simply because the rating agencies have since thrown Nigeria out. We all know that the grace period that Nigeria was given when we refused to allow the market determine the exchange rate and remove impediments to capital account restrictions, expired in February 2016. Since then, we have technically become financial untouchables. It will take perhaps another two to three years of steadily allowing the market to operate in Nigeria, before our credit rating and standing will gradually be restored. Thus the international bond market as a borrowing option, will very likely not fly for Nigeria as we speak, because we do not have key international personalities and actors on our side the way we did, a few years ago.

With regard to the foreign borrowing option therefore, we have only one viable option here which is China. That last trip by Mr. President to China ought to have been used to negotiate this medium term direct budget support loan rather than wasting time and energy in that unworkable Naira-Renminbi (Yuan) special exchange rate window. We should urgently approach the Chinese for a medium term budget support loan of between US$10-12 billion by offering as collateral, the placement of say US$5-6 billion of our foreign reserves with the China Reserve Bank or any other bank of their choosing, and closing the debt service gap by a stipulated dedicated offtake of a specified volume of Nigeria’s crude oil over the medium term, by China’s state oil company Sinopec, at the ruling world market price or at some discount thereof. This way, we still save face significantly, in that we are still able to count the US$5-6 billion in escrow collateral account, as a part and parcel of Nigeria’s foreign reserve, while at the same time we have access to fresh liquidity to cushion this year’s budget and part of next year’s budget.



All that the government needs to do is to send a supplementary appropriation budget to the national assembly for the approval of this medium term budget support loan, as soon as Nigeria receives the term sheet from China. That to my mind, is why the current court and judicial fight between the executive arm of government and the principal officers of the legislative arm of government is totally unproductive. Both arms of government should find face saving ways out of the unnecessary fight and get on with the business of state building. The economy should be our number one overriding concern and objective for now, including Mr. President.


Finally, while this author appreciates the need to boost tax revenue as a proportion to GDP from the present 12 percent back to 20 percent tax revenue/GDP ratio before GDP rebasing in 2014, rushing it by unjustifiable and irrational tax rate hikes by the tax authorities will not only stifle economic growth, but will in the long run prove counterproductive. Nigeria should not just swallow hook line and sinker, that desperate urging to raise tax rates by the IMF Managing Director Christine Lagarde when she came calling earlier in 2016. Unsustainably high tax rates are among the very strong dis-incentives that hobble the economic growth in the EU of which she herself, was a major setter of those excessive and unsustainable tax goals as a French Finance Minister. It is precisely because of the high corporate and sales tax rates in the EU that the Republicans in the US derisively describe the EU as a socialist system, which of course by design and definition the EU is not. There are several EU countries where the businesses are very unwilling to give you official receipts for purchases, because of their unsustainably high sales tax rate of over 22%. We should avoid unnecessarily criminalizing otherwise decent hard working people by too high tax rates. Let us build a Nigerian economy where tax rates are moderate and do not discourage investments and hard work. Without realizing that the various multifaceted fees paid to government agencies are actually taxes, we tend to always understate the actual tax/GDP ratio. Broadening the tax base, rather than jerking up the tax rate, is a better and more sustainable way of bringing economic agents into the tax bracket.