Growing inflation, budget deficit sign of economic recession

For more than eight years, Nigeria has consistently maintained a budget deficit, which has progressively grown from four to six per cent of the GDP. The inflation figure left the single digit benchmark of nine per cent last attained in 2015. It was believed that the economic recession affected the inflation figures from 2016 to 2017 when the inflation figure rose from 15 to 16 per cent.

However, the federal government announced the successful transition from an economic recession in 2017 before the outbreak of the COVID-19 and launched its economic and recovery growth plan. The double digit inflation reduced from between 12 to 11 per cent in 2018 and 2019. Since then, all effort made by the federal government to sustain the economic growth experienced before the outbreak of the COVID-19 has failed woefully. This is despite the fact that the crude oil price has been stable, several development grants, loans and COVID support funds have also been received to cushion the effect of the pandemic.

The economy seems to be falling on an auto-pilot with inflation figures rising from 15 per cent to 17 per cent from 2019 to 2022 and budget deficit increasing.

To cushion the effect of the COVID-19, the CBN introduced some measures, which include a reduction of the interest rate from nine to five per cent. It also introduced a N50 billion Target Credit Facility to benefit households and Small and Medium Scale Enterprises. The funds were later increased in 2021 to 500 billion to benefit 53 manufacturing, 21 agricultural-related and 13 service projects. Nevertheless, evidence from the World Bank has shown that the intervention funds, rather fueled rising inflation.

The report of the World Bank against the CBN intervention fund can be justified when there is poor implementation and payback mechanisms attached to such funds. Also, the unfavourable business environment in Nigeria occasioned by dollar scarcity, poor power supply and insecurity can hinder the progress of such intervention funds.

With the growing budget deficits, where monies are borrowed to pay salaries coupled with rising inflation, it is safe to conclude that Nigeria has slid into its third phase of economic recession. The agencies of government responsible for fiscal policies must adopt a collaborative response to Nigeria’s economic challenges. For instance, the CBN, Ministry of Finance and the Budget Office of the Federation have all along developed fiscal policies independent of each other without recourse to the Fiscal Responsibility Act, which is the ground norm for the macroeconomic planning and projection of the country. This collaborative effort is needed in the preparation of the Medium Term Expenditure Framework. The MTEF sets outs the Macro-Economic Framework setting out the macroeconomic projections, for the next three financial years, the underlying assumptions for those projections and an evaluation and analysis of the macroeconomic projections for the preceding three financial years; it also contains a Fiscal Strategy Paper setting out the federal government’s mediumterm financial objectives, its policies for the medium term relating to taxation, recurrent (non-debt) expenditure, debt expenditure, capital expenditure, borrowings and other liabilities, lending and investment, the strategic economic, social and developmental priorities of the government for the next three financial years, an explanation of how the financial objectives, strategic, economic, social and developmental priorities and fiscal measures set out pursuant to the economic objectives set out in section 16 of the Constitution.

By virtue of S. (13), the Act mandates the Minister of Finance to coordinate the preparation of the MTEF. It also provides for consultation with key stakeholders to be part of the process. The consultation process affords relevant stakeholders to make input that would affect the economic projections as well as performances for the medium-term. Such all involving consultation, would diagnose the economic challenges and present recommendations that would be reflected in the medium-term plans. It would aid proper determination of a realistic inflationary benchmark as well as fiscal and revenue generation target. The involvement of the CBN in the MTEF process would aid the policies of its committee meetings. While this is being considered, revenue leakages must be curbed.

Nigeria may slide deeper into much more difficult recession that would lead to economic depression if leakages in government are not curbed. Borrowed funds must generate profits to repay the loans. The Fiscal Responsibility Commission must be empowered to discharge its function effectively. The commission must play an independent role in monitoring, naming and shaming violators of the Act. In particular, it should demand the performance of borrowed funds and evidence of realisation of costbenefit analysis attached to the loans. The important role of the commission in this period of economic recession cannot be underplayed. The amendment of the law to grant the commission power to prosecute violators of the act is also necessary at this point.

With the growing budget deficits, where monies are borrowed to pay salaries coupled with rising inflation, it is safe to conclude that Nigeria has slid into its third phase of economic recession. The agencies of government responsible for fiscal policies must adopt a collaborative response to Nigeria’s economic challenges.