Even while Nigeria’s Federal Government continues to live in denial over its bloating public debt level, Professors Festus Adenikinju and Mike Obadan, two members of the Central Bank of Nigeria’s Monetary Policy Committee, have once more, drawn attention to the looming debt trap and the need to avoid same.
Adenikinju, a professor of energy economics at the University of Ibadan, in his personal comment at the January MPC, warned that the twin evils of “rising debt and high fiscal deficit pose a significant challenge to effective economic management.”
He lamented a situation where “between January and September 2019, actual revenue stood at 52% below budgeted revenue, whereas actual expenditure exceeded planned expenditure over the same period.”
That notwithstanding, he continued, capital expenditure “expected to drive economic growth, as expected underperformed.”
Obadan, Professor of Economics, University of Benin and former Director-General of the Nigerian Centre for Economic Management and Administration, Ibadan, Nigeria, said: “The Federal Government’s persistent fiscal deficits and the corresponding debt accumulation have continued to be worrisome in view of the implications for monetary policy effectiveness and debt sustainability.”
From January to September 2019, he said, the Federal Government’s fiscal operations left a budget deficit of N3.466tr, while borrowing from the domestic markets by issuing FGN bonds amounting to N670bn for financing the gap.
“This left a net overall deficit of N2.796tr which may have been largely financed from non-budgetary sources in which event it contributes not only to excess liquidity and monetary inflation in the economy but also to public debt accumulation and crowding out of private investments in the financial markets.”
Obadan also challenged the Federal Government to “aggressively pursue domestic revenue mobilisation through tax reforms and enforcement of compliance; progressively build fiscal buffers, and drastically reduce the cost of governance by ensuring expenditure efficiency and effectiveness which is low at present.”
These, he noted, are crucial, given the widening fiscal deficits “driven by revenue underperformance and bludgeoning public expenditure whose quality is on the low side.
Agreeing with them, Dr. Joseph Nnanna, who was attending his final meeting as deputy governor of the CBN and MPC member, said “the risk to macroeconomic stability remains the twin deficits which the economy is belabouring under and the persistent inflationary pressures arising from expansionary fiscal and accommodating monetary policies.
“The combination of Ways and Means financing and weak fiscal buffers have resulted in a fiscal deficit of about N3.68tr (representing 3.5% of GDP) and a current account deficit of $2.79bn (about 2.24% of GDP), in Q3 2019, respectively,” he added.
For him, “socio-political stability is heavily anchored on massive job creation – nation-wide. Unemployment remains the ticking time-bomb.”
In the face of such realities, Adenikinju expressed concerns over the persistence of inflation, at a time foreign reserves fell by $3.47bn or 9.11% from $41.54bn in December 2018 to $38.07bn in December last year. Even so, he continued, the economy remains awash with liquidity as demonstrated by the fall in interest rates across financial market instruments, while current account balance is negative.
As if to confirm the situation, he noted the 266.94% rise in net banking system liquidity position from N160.03bn on December 31, 2018, to N587.21bn on December 31, 2019.
The picture looks even gloomier, he continued, with “the poor state of the fiscal sector, fall in prices of financial assets, and the bearish outlook for the oil sector.”
At a time when the CBN’s primary responsibility is price stability, he had urged fellow MPC members not to ignore the inflation threat in the country. He applauded and urged the CBN to sustain its policy aimed at increasing lending to the real sector that would boost the supply side of the economy and relax constraints to the domestic food and agricultural supply. In the seven months between May, when the Loan-to-Deposit Ratio was first raised by the CBN and December 2019, he said bank lending rose by over N2tr, describing it as a positive outcome of the policies.
“The new lending went to critical sectors like manufacturing, agriculture, and trade. This is in addition to the major lending activities by the other financial institutions like the microfinance and development banks. The new lending will drive up supply and exert downward pressure on domestic prices. It should also drive down lending rates at the retail end of the financial sector if it is sustained.
In his own personal comments at the meeting, Edward Adamu, a deputy governor of the CBN and MPC member warned that such “persistent excess liquidity would no doubt exacerbate pressure on the country’s external sector, which outlook is currently not very strong in view of the protracted low prices of oil (the country’s most important export) and unstable capital inflows.
“Given the strong connection between Nigeria’s external sector and the real sector, pressure in the former rapidly transmits to the latter through the exchange rate. Typically, both domestic output and consumer prices are pressured by vulnerabilities in the external sector, and could easily degenerate into a self-propelling process of economic instability,” he warned.
Notwithstanding the headwinds, he expressed optimism over the economy, especially given the timely conclusion of the 2020 budget process and the ongoing payment of contractors’ arrears, which he says “should reinvigorate business confidence and spur economic activity.
“This is already showing in the capital market with the All Share Index (ASI) rising by about 10% between end-December 2019 and January 22, 2020.
“Equally encouraging is the significant improvement in the banking industry’s resilience (with the non-performing loans ratio falling to about 6.0% at end-2019 from 11% in April) and the considerable growth in new credit to key sectors like agriculture and manufacturing.”