For obvious reasons, recession is the most notorious economic parlance in the land today. No discussion comes up among Nigerians without the term creeping up as explanation for the current hardship facing many Nigerians. A friend driving around Abuja last week observed that there were fewer cars plying the roads these days, unlike a year ago. “It’s the recession now, many people have parked their cars; it has affected everything,” someone in the car quickly interjected.
Recession is associated with a general meltdown in the economy, when trade and industrial activities are in decline. The decline is followed by job loss and an upward swing in the labour market. In truth, all these are happening in the country right now. And it didn’t start under President Muhammadu Buhari; it started effectively since 2014.
But it has worsened since 2015 due to a combination of factors. It was the year of another generation which witnessed an unprecedented presidential profligacy. The unfolding Dasuki gate saga is ample evidence of that official squandermania.It was also the year Niger Delta militants returned to the creeks, blowing up oil installation and disrupting upstream production.
The result is that the Federal Government oil revenue projection has become a mirage since 2015. Oil revenue that used to constitute over 90 per cent of government revenue now account for less than 65 per cent. This has led to short falls in the budget since 2014, reaching, hopefully a climax in 2016.
Thus Buhari assumed office at a time when the country was already engaged in deficit financing-a situation that occurs when a government’s revenue is not enough to meet expenditure, and other means of getting needed funds have to be found.
To achieve higher economic growth during a recession like Nigeria has found itself, government needs, as a matter of urgency, to pump money into the system. The private sector can help salvage the situation by making investing massively in the economy. But the Nigerian private sector, like many others in developing economies, also rely on huge government spending, and is weary of committing to an economy in decline.
That is why the private sector has recorded the highest job loss since 2014. There are still speculations that some players in the banking sector are planning on further downsizing to avoid bankruptcy.
Thus, government is left to reclaim the economy almost alone, and at a time that oil, the major source of revenue for the country, is still selling below $50 per barrel. It is thus clear and obvious that government cannot generate enough money to reflate the economy from existing revenue sources. It has no choice but to look at other options, some of which may not be totally palatable.
For instance, it can decide to raise taxes across board, further reducing the saving capacity of its citizens and weakening their purchasing power. This is certainly not an attractive option for the Buhari administration which has acknowledged that Nigerians are suffering. And for a government that had promised to raise income, bring back jobs and local and foreign investments into the economy, it may be indefensible to raise taxes. This is perhaps why the Federal Inland Revenue Service, FIRS, has focused more on expanding its tax net than on tax increases.
This is why the borrowing plan of the Buhari administration, which has been vehemently defended by the Director General of the Debt Management Office, Abraham Nwankwo, is worth appraising for its far-sightedness and feasibility.
In November last year, President Buhari presented an external borrowing plan of $29.96 billion to the Senate. The plan will see the country borrowing this sum in tranches between 2016 and 2018. The loan would be targeted at projects which cut across all sectors with special emphasis on key infrastructure such as power, roads and rail, Agriculture, Health, Education and Water supply, among others.
According to him, “the total cost of the projects and programmes under the borrowing (rolling) plan is $29.960billion made up of proposed projects and programmes loan of $11.274billion, Special National Infrastructure projects $10.686billion, Euro bonds of $4.5 billion and Federal Government budget support of $3.5billion”.
These are huge sectors that have the potential to offer the largest chunk of jobs to the economy directly and indirectly.
Unfortunately the senate threw out the proposal without any serious consideration of its import. They were more concerned about suggestions that government could mis-use the loan, thus mortgaging the future of the country. Buhari’s argument in the proposal that the loan would be spent strictly on identified key projects that would be verifiable by the lawmakers could not persuade the lawmakers who offered no alternative plans.
Yet, there seem to be no alternative to what the federal government has proposed. Abraham Nwankwo, who was shocked that the proposal was rejected by the lawmakers, has tried repeatedly to make Nigerians appreciate the government’s borrowing plan as necessary and desirable. Nwankwo had argued that even before the recession set in fully, Nigeria had an infrastructure deficit that required approximately $25 billion per annum for 7-10 years to fix.
But if what transpired at the senate was any indication, the lawmakers seemed to have finally come on the same page with the executive on the issue of financing the budget deficit through borrowing. The senate approved the 2017-2019 Medium Term Expenditure Frameworks and the Fiscal Strategy Paper, MTEF/FSP, which allows the government to N2.321 trillion. It is made of N1.253 trillion domestic borrowing and N1.067 trillion external borrowing in 2017.
This was the same document the lawmakers had rejected as empty when it was presented by the president last year. But on a more meticulous scrutiny, the senate committees on appropriation, finance and national planning, gave the lawmakers better appreciation of the challenges facing the government and the country. The N2.321 trillion is about a third of the 2017 N7.29 budget.
Already the DMO has set in motion plans to finance the deficit of the 2016 budget through external borrowing. The Federal Executive Council, FEC, last year November, approved issuance of $1 billion Eurobond and appointment of six transaction parties for the bond. The bond is part of the country’s plans to borrow a total of N1.8 trillion ($5.8 billion) from abroad and locally to fund an estimated 2016 budget deficit of N2.2 trillion.
One need not emphasis the fact that following through on this borrowing plan would put government in the lead to ensure the economy is quickly stimulated back to life. It makes for further optimism that the Buhari administration’s deficit financing is holistic, covering three years.
There is an advantage to this, as noted by Abraham Nwankwo, in a recent interview. It means that the government has a medium to long term vision for the economy, which gives a forward guidance-having an idea of what’s going to happen in the next two-three years. That will make government and the private sector begin to take positions in anticipation, with a view to taking advantage for economic prosperity.
Now how can the private sector take advantage of this? Government should encourage private investors to participate actively not only in terms of direct equity but in public partnership with government through such vehicles as concessioning, Build, Operate and Transfer, BOTs and so on.
“Deficit financing, undertaken for the purpose of building up useful capital during a short period of time, is likely to improve productivity and ultimately increase the elasticity of supply curves.” And the increase in productivity can act as an antidote against price inflation. In other words, inflation arising out of inflation is temporary in nature. The most important thing about deficit financing is that it generates economic surplus during the process of development. That is to say, the multiplier effects of deficit financing will be larger if total output exceeds the volume of money supply. As a result, inflationary effect will be neutralized. Again, in LDCs, developmental expenditure is often pruned due to the shortage of financial resources.
It is the deficit financing that meets the liquidity requirements of these growing economies. Above all, a mild dose of inflation following deficit financing is conducive to the whole process of development. In other words, deficit financing is not anti- development provided the rate of price rise is slight.