Fiscal Spending And Burden Of Exchange Rate Stability

Managing the exchange, inflation and interest rates are within the purview of the Central Bank of Nigeria (CBN), and are usually determined by the fiscal behaviour of government. In this piece, STANLEY ORONSAYE examines how government’s handling of the economy has compounded the task for the CBN.

These are certainly not the best of times for the Central Bank of Nigeria (CBN). Charged with the primary responsibility of ensuring alignment of monetary policies with the fiscal behaviour of government, the regulator is at the moment stretched thin as it struggles to catch up with a government that choose to spend without consideration for the downside of such expenditure.

This tangential mode of operation has often resulted in policy summersault and inconsistencies, and the economy has been the worse for it. While the Central Bank of Nigeria (CBN), which is responsible for the monetary policy formulation and implementation, strives to rein in inflation, ensure stable exchange rate and interest rates, the government through its actions has allowed the fiscal side to go wild.

For instance, in the past one year, the CBN has had to tamper with the benchmark interest rate six times, doubling the figure from 6.25 per cent at the beginning of the year to 12 per cent at the end of the emergency Monetary Policy Committee (MPC) meeting held in Abuja on Monday, whereas Ghana and South Africa have had stable interest rates during the period. This is in addition to Nigeria spending huge foreign exchange reserves to achieve stable exchange rate.

According to CBN governor, Lamido Sanusi, the decision to increase the interest rate was in response to the anticipated huge liquidity that will confront the market as a result of some government policies that have been implemented in the last one year. “The global economic horizon remains highly uncertain, with the signs getting more ominous as policy makers find it increasingly difficult to take the necessary economic decisions that may avert a new wave of recession”, he stated at the end of the emergency MPC meeting. Back home, he said, “a combination of monetary, fiscal and structural factors continue to advise against complacency”.

This year alone, according to the CBN, oil importers have bought over $7 billion from official window, thereby, depleting the Nation’s external reserves which stood at $36.485 billion at the beginning of April to $30.862 billion on Monday.
No cutting down on spending

By implication, while the government has rejected all entreaties to cut down on its spending, and to instead channel resources to the productive sectors of the economy that would improve the country’s value chain, the monetary policy must bear a larger burden of economic adjustment. “The MPC has, therefore, to make difficult choices, each of which has clear costs and benefits,” Sanusi stated.

For one, the huge election expenditure, both official and unofficial created a mismatch in the economy that was capable of distorting the CBN’s plans to maintain stable exchange rate, curb inflation and attain reasonable interest rate. These rates are mutually complementary, with one determining the other to reasonable extent. Thus, unrealistic government expenditure invariably results in inflation and distortion in the economy. So the option is either to devalue the naira, allow inflation to soar or increase the interest rate.???????? ??? Each option comes at a cost.

All these mismatch and policy asymmetry has made the task of maintaining stability within the economy a daunting one for the CBN. Quite often, the CBN chooses the easier way out; raise the interest rate and then turn round to provide some buffer that would provide succor to the citizenry.
This explains the interventions in various sectors of the economy. From the N300 billion power and aviation sector intervention fund, the N200 billion agriculture intervention fund, to the N70 billion textile intervention fund as well as the manufacturing sector loan intervention fund.

But the intervention can only do much. With the inefficiency in the system and the squalid state of infrastructure, the funds have hardly availed much.
After raising the projected exchange rate of the naira from N145 to the dollar to N150, the Central Bank is probably at its wits end as the naira currently trades above N155 at the official market and N164 at the interbank. This clearly shows that the regulator is losing the battle to utilise monetary instruments to achieve its economic agenda. So far, only inflation rate appears to respond to monetary intervention as the figure has dropped from 13.4 per cent about a year ago to nine per cent in August. Yet, a lot still needs to be done in order to achieve the optimum target that the CBN has set for itself.

This is more so since the 2012 budget is expected to be more inflationary, hence the proactive move by the Central Bank of raising the benchmark interest rate. According to Sanusi, the predication of the budget estimates on oil price of $75 per barrel and an output of 2.4 million can only be so, “and further dampens any hope for an early fiscal retrenchment.? The high levels of recurrent expenditure, would suggest increasing pressure on prices in general.
Lack of cooperation and coordination

Experts say the task of the CBN is made more difficult because of the seeming lack of cooperation between that various managers of the economy. Thus, while government engages in senseless spending that add no real value to the economy, the CBN is left to clean the mess created thereafter.
“We expect to see more coordination between the ministry of finance which controls the fiscal aspect of the economy and the Central Bank which is in charge of the monetary side,” said Samuel Nzekwu, former president of the Association of National Accountants of Nigeria ANAN) According to him, the discordant tunes from both quarters is doing more harm to the economy. “We expect the monetary and side to be harmonized and to complement each other. Not when the government is mouthing succor to the real sector and the CBN is increasing interest rate.”

He said the fiscal and monetary aspect of the economy must be tailored towards alleviating the suffering of the masses before such actions can be appreciated by the people. “Now they want to remove fuel subsidy. This is a country where fuel is the basic commodity driving the economy as households and businesses need it to power their generators.” He said doing so without correcting some of the other ills in the economy will trigger run-away inflation.
According to CBN deputy governor, Kingsley Moghalu, combating inflation and maintaining price stability is an imperative for the CBN. “But the actions of the fiscal authorities over the next several months will influence how easily or quickly this objective can be achieved.”
Document blueprint

However, the presentation last week of the 2012 to 2015 Medium-Term Fiscal Framework (MTFF) and the Fiscal Strategy Paper (FSP) to the National Assembly, gives a semblance of effort by managers of the economy to work with better coordination.

The MTFF document, which indicates government’s income and expenditure profile for 2012 to 2015, shows that while oil receipts are expected to be on steady rise during the period, the Federal Government is ready to remove fuel subsidy. The impact of that decision is contentious.

In addition, the appointment of finance minister, Ngozi Okonjo-Iweala, as coordinator of the 24 member National Economic management team which has President Goodluck Jonathan as chairman speaks volume about the intention of government to depart from the past trend of wasteful spending and lax coordination of economic strategies. Now, all government economic agenda is brought under one roof for better coordination.

Members of the team include the Ministers of National Planning, Shamsudden Usman; Agriculture, Adesina Akinwunmi; Education, Ruqayyatu Rufa’I Trade and Investment, Olusegun Aganga; Works, Mike Onolememen; Petroleum Resources, Diezani Alison-Madueke; Power, Bart Nnaji; and Health, Onyebuchi Chukwu.
Other members? are Ministers of State for Finance, Yerima Lawal Ngama and health, Mohammed Ali Pate; CBN Governor, Sanusi Lamido Sanusi; Chief Economic Adviser, Nwanze Okidegbe; Special Adviser on Performance, Monitoring and Evaluation, Sylvester Monye; and the Directors-General of Budget Office, Bright Okogu; Debt Management Office, Abraham Nwankwo; Bureau of Public Procurement (BPP), Emeka Eze; Bureau of Public Enterprises (BPE), Bola Onagoruwa; and Infrastructure Concessioning Regulatory Commission (ICRC), Ahmed Mansur, as well as governors of Adamawa and Anambra states. Others are Honorary Adviser on Economy and President, Nigerian Economic Society, K. S. Adeyemi; and Chairman of IBTC Stanbic Bank, Atedo Peterside.
Revamping the economy

This robust roll-call is an indication that the government is serious about revamping the economy while also ensuring that the important segments of the economy are aligned and functioning properly.

The thrust of the MTFF and the FSP is to ensure restructuring the financial sector to enhance rapid economic growth and development, as well as job creation.

According to the MTFF document, the Federal Government is adopting an oil benchmark of $75 to calculate oil revenues for the 2012 budget. Also, while oil production was at an average 2.43 million barrels per day for 2011, the average for 2012 is 2.4 million barrels, while daily production average is expected to rise to 2.550, 2.575 and 2.6 million barrels for 2013, 2014 and 2015 respectively. The document also proposes a devaluation of the naira to N153 to the dollar.

“Prepared against? the backdrop of global uncertainty, l firmly believe that the MTFF will ensure that planned spending is set at prudent and sustainable levels and is consistent with governments overall medium term development objectives set out in the transformation agenda of the administration,” President Jonathan said at the presentation of the document to the National Assembly.

He also emphasised on the need for better synchronization between the federal and state governments in order to enhance results. “The states have their own economies but if there is no proper coordination in the management of the economy, between the Federal Government and the states, we cannot go anywhere as a nation,” he said.
Taking the front burner

Perhaps, at no time has the economy taken the front burner, than now when Nigerians are confronted by myriad of problems. From poorly managed huge crude oil earnings, minimum wage, banking sector reforms? and bailouts, and the latest move by government to remove fuel subsidy by January. All these factors are capable of changing the country’s economic and financial landscape, as well as alter many a family’s budget in no small measure.

While bringing all important players in the economy under one umbrella, what is needed, in addition, is to strengthen the Financial Services Regulation Coordinating Committee (FSRCC) to ensure a more robust policing of the financial markets and to eliminate efficiency asymmetry of the past.

The FSRCC, whose membership is drawn CBN, Federal Ministry of Finance, the Securities and Exchange Commission (SEC), the National Insurance Commission (NAICOM), National Pension Commission (PENCOM), the Abuja Securities and Commodity Exchange, the Nigerian Deposit Insurance Corporation, the Nigerian Stock Exchange (NSE) and Corporate Affairs Commission (CAC), will also help to enhance the regulation of the economy and ensure the strict adherence to the overall policy thrust of government.

It is expected that the various agencies of government that have direct bearing in the economy would begin to align and ensure that the ambitious target of 7 per cent GDP growth is achieved and, if possible, surpassed.

Thus, as the CBN grapple with the challenges thrown up by the fiscal indiscretion of government, it is clear that maintaining exchange rate stability, especially in times of global uncertainty, is crucial to the mandate of price stability. Tightening liquidity and tinkering with the interest rate may just be the only instrument open to the Central Bank, with less collateral damage. However, it is time to call the executive to order.