Who will finance the budget?
After all the unnecessary political drama, the budget has finally been signed. According to reports, a spending plan of N7.44tn was approved, with proposed capital expenditure of about N2.18tn, non-debt recurrent expenditure of N2.99tn and debt servicing of N1.84tn. Plus, a few other line items. Let the spending begin. It is not clear what the expected revenue in the approved budget is, but the proposal had revenue expectations of N4.94tn. If it’s the same in the approved budget then the deficit is expected to be about N2.5tn. This would be a record deficit, beating last year’s deficit expectation of N2.2tn which was also a record.
If you crunch the numbers you can already see a problem. The federal government is continuing the trend of spending way more than it generates. A popular phrase during the last election was “We are borrowing to pay salaries.” That, unfortunately, is still the same with this year’s budget. To demonstrate, if you deduct the expected debt servicing costs and other statutory transfers from the expected revenue, you are left with a number that is significantly less that non-debt recurrent expenditure. In plain English, we are essentially still borrowing to pay salaries.
Unfortunate as all that is, it is not even half of the story. For a while now, and certainly, since about 2014, the revenue expectations in the budget have been very optimistic. The 2014 budget projected revenues of N6.2tn but actual revenue was N5.5tn. The 2015 budget projected revenues of N5.6tn but actual revenue was N3.99tn. The 2016 budget projected revenues of N4.6tn but actual revenue was N2.9tn. In short, not only have we been planning record deficits, but we have also been overestimating expected revenue, meaning the record deficits were even larger than the record deficits we projected. This is of course, assuming the budgets were fully implemented.
Our struggle to raise external financing in 2016 was well documented. After spending months jumping from one bilateral partner to the other, and from one multilateral agency to the other we finally raised some money from the AFDB, the World Bank, and the much-delayed Eurobond. The domestic borrowing plans were expectedly more successful but came at the cost of crowding out the private sector, and with higher interest rates. However, if we have been overestimating revenue, and therefore running larger deficits than expected in the budget, how have we been financing the revenue shortfalls?
Data from the central bank shines a light on what continues to be a very worrying trend. Between December 2013, and April 2017, claims on the federal government by the central bank have risen from about N678bn to N6.5tn. That is trillion with a ‘T’. These numbers have been driven by overdrafts granted to the federal government by the central bank which stood at N2.76tn as at April and converted bonds which stood at N1.7tn also as at April. The central bank has been effectively financing part of the federal government by fiat. Or to put it bluntly, we moved from borrowing money to pay salaries, to effectively printing money to pay salaries. There was a bit of noise made about this late last year, but since December 2016 and April 2017 credit to the federal government increased from N5tn to N6.5tn, a whopping 30 percent increase in four months! Obviously, the noise was not loud enough.
The Central bank financing of the federal government is rather worrying given the consequences. Credit to the federal government implies an expansion in money supply which theoretically leads to either higher inflation, or higher interest rates, or both. Given that inflation is still high at around at 16.25 percent, and interest rates for the most credit worthy borrowers are north of 17 percent, and up to 30 percent for others, you have to wonder how long the central bank can keep up its financing of the federal government before things start to get out of control.
Monetary policy spiralling out of control, as it did in Zimbabwe and is currently doing in Venezuela, always starts slowly but very quickly descends into chaos. Hyperinflation and currency collapse are not things that Nigeria is immune to. The question for policy makers is, how much longer can we pretend the underhand financing of the federal government by the central bank is not a problem? The root of the issue however is that we still have a federal government that is spending much more than it’s taking in. A federal government that seems unable to bring its spending under control, and a political system that urges it on. If the current trajectory continues then the future is very worrying.
Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa. The opinions expressed in this article are the author’s and do not reflect the views of his employers.