End­ing the Bias of Fis­cal Pol­icy Against Fu­ture Gen­er­a­tions

Financial Nigeria Magazine - - The Fixes From The Man­ag­ing Edi­tor - +234 802 343 9098 jide@fi­nan­cial­nige­ria.com Twit­ter: @JSAk­in­tunde

The dust raised by the 2017 bud­get has set­tled. Other is­sues of our national ex­is­tence soon over­shad­owed the late pass­ing and sign­ing of the bud­get. But it is on the im­ple­men­ta­tion of the bud­get it­self that the dust has piled. Fund re­leases for the cap­i­tal ex­pen­di­tures have missed time­li­ness, dis­rupt­ing work at project sites.

Cer­tainly, the furore over the fis­cal pol­icy of the Pres­i­dent Muham­madu Buhari ad­min­is­tra­tion will come up over and over again. Indeed, the Min­is­ter of Bud­get and National Plan­ning, Se­na­tor Udoma Udo Udoma, was quick to re-en­act some of the is­sues when on July 27th he an­nounced the 2018 – 2020 Medium Term Ex­pen­di­ture Framework (MTEF) and Fis­cal Strat­egy Pa­per (FSP). Ac­cord­ing to the plan he un­veiled, the 2018 bud­get will be ex­pan­sion­ary, ris­ing to N7.9 tril­lion from N7.44 tril­lion in 2017.

Like the pre­vi­ous and cur­rent bud­gets, the in­crease in the 2018 bud­get pro­posal is fu­elled by the deficit and high-stake bet on rev­enue from oil ex­port. The fis­cal deficit will rise to N2.77 tril­lion in 2018 from N2.35 tril­lion in 2017. Oil price of $45 per bar­rel and 2.3 mil­lion bar­rels pro­duc­tion per day have been tar­geted.

To be clear, the trend­ing com­bi­na­tion of mas­sive bor­row­ing for deficit fi­nanc­ing and re­liance on oil rev­enue is toxic. It is in­com­pat­i­ble with what might be con­sid­ered as ei­ther a sus­tain­able, or re­spon­si­ble fis­cal pol­icy for the coun­try. Even in the con­text of the ex­ist­ing eco­nomic chal­lenges, fis­cal pol­icy seems more blame­wor­thy than in­spir­ing. The 2016 bud­get failed to de­liver in­tended eco­nomic growth and job cre­ation. While this may be blamed on lack­lus­tre im­ple­men­ta­tion, the cur­rent and fu­ture bud­gets will meet ad­di­tional en­cum­brances.

The tran­si­tion in the global en­ergy mar­ket will not sup­port bud­get­ing on nearly the best­case sce­nario for oil price and do­mes­tic pro­duc­tion. Vir­tu­ally all the ma­jor oil con­sum­ing coun­tries have an­nounced dead­lines for phas­ing out fos­sil-fuel cars. In­dia and Ger­many plan com­plete tran­si­tion to elec­tric cars by 2030; UK and France by 2040; while 12% of cars in China will be elec­tric by as early as 2020. This is apart from the uptick in the pro­duc­tion of re­new­able en­ergy from so­lar and wind. In the United States, this tran­si­tion has gained mo­men­tum in the mar­ket­place, over­rid­ing the lack of po­lit­i­cal sup­port for re­new­able en­ergy.

In­no­va­tion is now the cat­a­lyst for the en­ergy mar­ket tran­si­tion. It is sim­ply fool­hardy to bet against in­no­va­tion in to­day's world where ma­jor in­dus­tries, rang­ing from man­u­fac­tur­ing, me­dia to fi­nance are fac­ing ma­jor dis­rup­tions by tech­nol­ogy. Thus, in the con­text of the MTEF, which is a three-year rolling plan and coun­ter­cycli­cal in ob­jec­tive, the 2018 bud­get plan glosses over the risk of fis­cal in­sta­bil­ity in the sub­se­quent years.

It may be ar­gued that the prob­lems with the fis­cal poli­cies of 2016, 2017, and 2018 in prospect, are mag­ni­fied by look­ing at the bud­gets on pa­per. For in­stance, while the govern­ment stated it would bor­row $5.5 bil­lion ex­ter­nally in 2016, it ac­tu­ally raised only about $2 bil­lion over a pe­riod that ex­tended to early 2017. The 2017 plan is floun­der­ing, even as for­eign lenders would avoid the im­pres­sion of 'spon­sor­ing' elec­tion­eer­ing in Nigeria in 2018. In which case, the risk of for­eign debt spi­ralling out of con­trol is quite be­nign.

And with re­gard to oil, the govern­ment is al­ready talk­ing of a forth­com­ing “zero oil” Nige­rian econ­omy. More­over, govern­ment is also hedg­ing with Dan­gote's re­fin­ery. The re­fin­ery is ex­pected to cre­ate a huge do­mes­tic mar­ket for Nige­rian crude when it comes on stream in 2019, nul­li­fy­ing the im­pact of di­min­ished for­eign de­mand.

Both ar­gu­ments are faulty. While the ex­ter­nal bor­row­ing plans have been flap­ping, do­mes­tic bor­row­ing has ratch­eted up. Be­tween De­cem­ber 2015 and March 2017, do­mes­tic bor­row­ing fu­elled the to­tal pub­lic debt stock by 65 per­cent, from N12.6 tril­lion to N19.2 tril­lion, ac­cord­ing to data by the Debt Man­age­ment Of­fice. Granted the debt level is about 15 per­cent of GDP, debt-ser­vice-to-rev­enue ra­tio has crossed 40 per­cent. The Fi­nance Min­is­ter, Kemi Adeo­sun, re­cently ac­knowl­edged this as a real cause for con­cern.

And if Dan­gote's re­fin­ery sees the do­mes­tic mar­ket sim­ply re­place the in­ter­na­tional mar­kets for Nige­rian crude oil, it would mean the coun­try has cho­sen to swim against the tide, fun­da­men­tally delink­ing from the in­no­va­tion in the emer­gent global en­ergy mar­ket. In prac­ti­cal terms, there­fore, the coun­try would be­come a dump­ing ground for ob­so­lete tech­nolo­gies.

The fis­cal author­i­ties need to pause and re­ex­am­ine their plan. Lit­tle in the cur­rent pol­icy framework sup­ports its con­ti­nu­ity. The cur­rent re­ces­sion – which is used to jus­tify short-term plan­ning – has brought into starker terms the dilemma of pol­icy con­sid­er­a­tion for the cur­rent and fu­ture gen­er­a­tions. But based on the cur­rent bud­get pat­tern, the pol­i­cy­mak­ers may be rightly ac­cused of bias against the fu­ture gen­er­a­tions.

To dis­pel this no­tion, the govern­ment has to make a choice. It should ei­ther an­chor its bud­gets on rev­enue from hy­dro­car­bon and taxes, or taxes and bor­row­ing.

The first op­tion of max­imis­ing hy­dro­car­bon rev­enue and taxes would ap­pear rea­son­able, given the think­ing that oil ex­port rev­enue is needed to fa­cil­i­tate on­go­ing ef­forts at di­ver­si­fi­ca­tion of the econ­omy. The head room for bor­row­ing would then be pre­served strictly for the fu­ture “zero oil” econ­omy, which no less a per­son­al­ity than the Vice Pres­i­dent Yemi Os­in­bajo has al­luded to.

The sec­ond means the pro­ceeds of oil ex­port should be saved for fu­ture gen­er­a­tions. Over the next few decades, fis­cal pol­icy would fo­cus on tax rev­enue, lever­ag­ing off rapidly grow­ing for­eign cur­rency re­serves from sav­ing oil rev­enue. This could see the fis­cal deficit capped slightly above 3 per­cent of GDP, which is spec­i­fied in the Fis­cal Re­spon­si­bil­ity Act 2017.

Since the lead­ers over the years squan­dered the op­por­tu­nity to sus­tain­ably de­velop the econ­omy with oil rev­enue, the sec­ond op­tion would be more ideal for the cur­rent rul­ing class. But it would serve more than their come­up­pance. Bud­get­ing with­out re­liance on oil will un­leash the in­no­va­tion and the sur­vival in­stincts that we have been ab­stracted from since oil ex­plo­ration be­gan in Nigeria.

There is no easy path to sus­tain­able eco­nomic growth and fis­cal vi­a­bil­ity for the coun­try. Fis­cal pol­icy should start to pro­mote in­no­va­tion among the cur­rent gen­er­a­tion and demon­strate re­spon­si­bil­ity for the wellbeing of fu­ture gen­er­a­tions.

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