Double digit GDP growth and rapid development
On the third part of our argument on how to achieve the double-digit GDP growth rate yesterday, we noted that while naira amounts in the system come in the final analysis from CBN, the manner in which any naira sums enter the system makes the difference between national prosperity and national economic perdition. In terms of Section 38 of the CBN Act, what FAAC distributes as “naira equivalent” of withheld FA dollar allocations is supposed to be temporary ways and means advances (WMA) or domestic debt which should be repaid in the very year such advances occur. The adverse effects of the WMA debts cannot be wished away through presidential forbearance even if they are not repaid and do not attract domestic debt service. In subsection 7.2.4 of the 2020-22 MTEF/FSP, the BOF/CBN couch the WMA under “deficit monetisation and the attendant macroeconomic dislocations.” That is both sweetly revealing and deserving of a little elucidation.
(i) All deficit spending implies incurred government debt. (ii) Total accumulated WMA domestic debt alone from inception in the 1970s now far exceeds 100 percent of the country’s current GDP. Consequently, Nigeria’s effective total (domestic and external) debt to GDP ratio far exceeds 125 percent contrary to official claims of 25 percent of GDP. In the circumstances, the FG should no longer exercise the option of borrowing both domestically and externally but embark on reforms.
(iii) Owing to the WMA debts (or deficit monetisation of FA dollar allocations down the years), the FG has consistently and annually overshot the FRA fiscal deficit ceiling of 3.0 percent of GDP. And as the above cited subsection attests, that explains the persistent excess liquidity, permanent macroeconomic instability, high inflation, restrictive monetary stance via high lending rates and rising poverty, among others. (iv) The September 2019 presidential panel on the economy comprises mostly those who at different times worked in or closely with the CBN, National Planning Commission and IMF and are therefore aware of the WMA debt via deficit monetisation and the attendant macroeconomic dislocations. But nothing positive has occurred five months into their appointment. At least two apt questions arise. Was the panel invited to give credence to FG’s continued use of HHFMP with members playing the leopard that has permanent spots? Will the members undergo transformation by helping to rescue the economy and when?
Fourth, ample export earnings ordinarily bolster up the value of the country’s currency. But Nigeria’s experience despite FA dollars allocations accounting for over 50 percent of the budgets of the tiers of government annually from 1974 till date on paper is systematic weakening of the naira. This is so in spite of additional significant forex inflows from merchandise trade, remittances and foreign loans. The crash in the value of the naira from N0.5464/US$1 in 1980 to the current Appropriation Act (AA) rate of N305/$1 or BOF/CBN’s N360/$1 arose from disobedience to the provisions of the CBN Act. Nigerians generally became steadily poorer as the naira got weaker.
The simple solution to the ever-worsening economic problem is the implementation of conventional and global best practice fiscal and monetary procedures in accordance with the provisions of the CBN Act, the Appropriation Act (AA) and the Fiscal Responsibility Act (FRA). Subject to the fiscal deficit ceiling of 3.0 percent of GDP, inflation range of 0-3 per cent defines price stability while stable naira exchange rate movement should fall within 0-3 per cent stability band that is anchored on the AA managed (or dirty) exchange rate. The low price stability (inflation) range and the confined band for exchange rate movement give rise to low and single digit lending rates that are both positive in real and internationally competitive. These are the three ingredients of enabling macroeconomic conditions for rapid GDP growth indicated earlier.
Parenthetically, owing to disobedience to the provisions of the CBN Act and the Appropriation Act and the FRA, the BOF/CBN have arbitrarily set a medium term inflation target of 6-9 per cent to depict unconventional macroeconomic stability at subsection 184.108.40.206 of the 2020-22 MTEF/FSP. True macroeconomic stability has eluded the economy since the 1970s. Inflation under the ERGP has consistently been double digit leading to restrictive monetary stance and uncompetitive lending rates. The recent adoption of loan-to-deposit ratio of 60 (now 65) per cent is diversionary and will not yield the desired result.
Under the SFM, sellers of forex (including beneficiaries of FA dollar allocations) and eligible end-user buyers of forex would pay specified commission on completed transactions. Individual transaction rates within the stability band would be weighted to arrive at the naira exchange rate in a given period. Forex supply to the SFM would be made up of the country’s total forex earnings including funds in domiciliary forex accounts and invisible export receipts. The Diaspora Commission informs there are 20 million Nigerians in the Diaspora. They currently remit an average of S1,300 each or $26 billion annually.
Forex demand should be moderated by BOF and/or National Planning Commission using discriminatory tariffs. The primary objective of collecting customs duties is to protect domestic production and also to accrete and conserve external reserves. For increased, broadened and assured revenue takings, government should impose discriminatory forex access tax. It has been shown elsewhere that under SFM based on the AA exchange rate of N305/$1, FG would realize FAT amounting to about N3 trillion in one year by absorbing the difference between the AA exchange rate and the various segment exchange rates as FAT.
However, owing to distortions associated with the existing multiple exchange rates, transition to the SFM may be open to one of two dirty (managed) exchange rate options. Apart from the 2020 AA exchange rate of N305/$1, subject to apex bank consultation with (and approval of) Mr. President and principal officers of NASS, the CBN may announce a revised AA exchange rate based on the widely used Investors’ and Exporters’ window rate of N360/$1. Transaction in the SFM would then proceed within the exchange rate stability band of N360/$1+/-3 per cent. The revised AA exchange rate would fetch the tiers of government some additional 18 per cent increase in naira revenue for FA dollar allocations. (The dollar allocations should be in abuse-proof form.) Since eligible forex end-users would utilize funds already in the system as against deficit monetization, the SFM transaction proceeds would not be inflationary. However, under SFM based on $360/$1, the existing tariffs may be retained while FG may adjust the applicable FAT levels depending on its revenue position.Therefore, the FG should stop stymieing national economic advancement with the ruinous HHFMP by immediately adopting the SFM to enable the country to face the real issues of inclusive growth, sustainable poverty reduction and rapid development.
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