By TESLIM SHITTA-BEY
The dance between Nigeria’s monetary and fiscal policy was awkward from the start. Godwin Emefiele, Central Bank of Nigeria (CBN) Governor the dashing male lead and Kemi Adeosun (Finance Minister), the Queen’s English-speaking Chartered Accountant and economist blushing female belle were an odd pair. The ballet was not one of physical harmony but that of a policy relationship that was amazingly frustrating. While the CBN was on a roll with high interest rates and steep cut backs in money supply, the fiscal authorities were on a borrowing spree rushing to meet an exploding recurrent budget. The consequence was similar to a sledge hammer used to squat a fly, banks bluntly refused to lend money to the real sector of the economy at rates below 22 per cent per annum at a time they believed they could more profitably invest the same amount of money in risk-free government debt instruments (bonds) at annual coupon rates of between 16 and 18 per cent per annum. The consequence of the early policy discord was that the economy went into recession.
In six months of uneasy feet shuffling between the Finance Ministry (MOF) and the CBN, a new friendship has since emerged with both institutions forging a better relationship which has seen the economy shove its way back to growth after its first recession in 25 years. A number of analysts that spoke with Business Hallmark expressed the opinion that the effectiveness in the coordination of monetary and fiscal policy saw a major improvement in the second half of 2017 but in 2018 a lot will depend on the politics of the 2019 reelection bid of the administration rather than on the niceties of sound economic principles.
According to Dr Adi Bongo a faculty member of the Lagos Business School (LBS), ‘“If we look at macroeconomics in 2017, particularly inflation and exchange rate, one would say that the authorities have done a pretty decent job, because the year with high inflation and a high exchange rate, but both have since been reversed, with a whiff of stability, no matter how fragile.’ The economics lecturer believes that the two blades of policy have over the last six months, at least, worked in harmony compared to, ‘the conflict of direction that marred the first half of the year’. Going forward Bongo argues that fiscal policy could be expansionary as the CBN sits back to keep inflation in check and, ‘drives a vision of single digit inflation’. The problems with this position say other analysts are that a loose fiscal expenditure regime and a tight money supply situation would raise interest rates and cut gross domestic production (GDP). This in turn would lead to outcomes politicians may consider undesirable heading into an election that may prove to be close and bitterly fought.
‘Both fiscal and monetary policy are going to be critical issues in the new year as politicians try to figure out how they get reelected in an environment of runaway unemployment’ says Surajudeen Akinyemi, an economist and chief executive officer of manufacturing company Surak 713. According to Akinyemi, ‘in 2017 the government got away with a policy of tight money supply and heavy fiscal borrowing but in 2018 it is doubtful that this policy combination would do the job as a platoon of workers and a battalion of unemployed youths gear up to make their votes count in 2019, giving politicians a bitter taste of the electoral medicine administered in 2015’.
The MOF in 2017 attempted to grow fiscal expenditure to stimulate economic growth but the performance has been patchy. Most of the capital expenditure expectations fell through as revenues came severely short of expectations and political gerrymandering by the national assembly (NASS) put paid to major construction projects, especially in the southern part of the country, such as the East-West road and the Lagos-Ibadan Expressway both of which had their budgets slashed by the national assembly. The finance ministry also go tied up in late revenue inflows of the N2.3 trillion it expected to commit to projects in the year by the third quarter only N450 billion had been released and another N750 billion was not made good until November. In other words a total capital expenditure of N1.2 trillion was achieved in the course of the year representing a slim 50 per cent of the 2017 budget plan.
Expressing his opinion on the success of macroeconomic policy in the year, Professor Leo Ukpong, dean, School of Business, University of Uyo notes that “In terms of inflation and interest rate, I don’t think there was much improvement this year. They have managed to hold exchange rate at N360 per dollar in the past four to five months. I don’t think that is necessarily an achievement because what we need is to bring it down to about N200 per dollar. For monetary policy achievement this year, I will give the authorities a C-.”
But in terms of the fiscal authority Ukpong says, ‘the fiscal authority has been inefficient. In terms of injecting funds into infrastructural projects, indeed the authorities have made a hash of the assignment with over 50 per cent of the budgeted expenditure not being met and a whopping 33 per cent of the expected amount only released in the last quarter of the year. Granted they have restored some credibility to the budgeting process, but it is still far from adequate. We can concede that the budget monitoring process has improved admirably in 2017, however, like a tortoise on the march to the river the fiscal and monetary lords have been slow in injecting money into the economy, thereby placing unneeded brake pads on a crawling truck.’
To be fair to Adeosun and her beleaguered treasury team, global oil prices did not start picking up until sometime in June and the quantity of oil sold in international markets equally did not fare too well until about the same time. In other words fiscal receipts became a whole lot better by mid-year thereby easing pressure on the treasury which spent most part of the first two quarters of the year raising funds by CBN ways and means accommodation (allegedly to the tune of historic N5.3 trillion)and the massive sale of treasury bills and bonds at double-digit coupon (discount) rates. This hurt policy flexibility as it forced the CBN to maintain a historically high monetary policy rate (MPR) of 14 per cent per anum, and compelled the regulator to hold bank liquidity ratio at an equally high 30 per cent while cash ratio stood at 22.5 per cent.
With more money coming in and with improved fiscal balances the financial authorities in collaboration with the debt management office (DMO) have gradually clawed back public sector debt, hence reducing domestic borrowings and hammering down the average cost of government loans by switching to cheaper (foreign) sources of public sector financing. The new approach to managing the fiscal purse, according to analyst, should relieve the domestic money market of funding government treasury activities and drop more money on the table for domestic commercial banks to fund private sector actors.
The new treasury framework in partnership with a hawkish central bank should, in the coming year, sustain an even economic keel by keeping inflation in check, and allowing a gradual slide in domestic interest rates. This may see GDP grow at between 2.5 and 3.75 per cent in 2018 promoting a gradual but visible reduction in unemployment. With the economy already losing 7.9 million jobs over the last two years this should come as some relief.
With a better level of coordination of policy between the finance ministry and the monetary authorities economists believe that 2018 being a pre-election year should see macroeconomic quantitative easing involving more government spending and increased money supply and a gradual reduction in bank lending rates. This may see faster economic growth (currently estimated at 1.4 per cent) and lower levels of domestic unemployment (put at 14 per cent) which many have considered the bane of fiscal and monetary policy between 2015 and 2017. With the economy guided out of recession by the second quarter of 2017, both Emefiele and Adeosun have received cautious applause, but quite a number of observers are waiting to see if the waltz between the two heads of economic management will lead to a brilliant double twist and snap or whether they would both be laid sprawled on the dance floor by the end of 2018; If the economy does not pick up momentum.