The Federal Government has prepared and published an addendum to the revision of the Medium Term Expenditure Framework 2020-2022. The key macroeconomic assumptions include oil price of $25 per barrel and crude oil production of 1.9 million barrels per day; exchange rate of N360/1USD; retained revenue of N5.089tn and a deficit of N4.58tn in an overall expenditure of N10.509tn. Other key indicators are GDP growth rate of -4.42%, inflation rate of 14.13% and nominal GDP of N139.52tn. This discourse briefly reviews some of these key indicators with a view to offering insights into the direction of fiscal policy implementation.
The projection of 1.9mbpd at $25pb is realistic in the present circumstances of the worldwide disruption of economic activities and supply chains occasioned by the COVID-19 pandemic and the decline in crude oil prices. The projection is for negative economic growth of -4.42% and indeed that Nigeria will soon enter a recession. This is a realistic forecast in the circumstances too. However, Nigeria needs to sustain economic growth at not less than eight per cent per annum over a period of about 10 years, if it must lift about 100 million persons out of poverty as projected by the President, Major General Muhammadu Buhari (retd.). The growth must be inclusive and people-centred, attacking vulnerabilities, increasing local capacity, innovation-driven and spurring growth in our areas of comparative advantage. Nigeria is at a zero point where there is no room for a further loss of the momentum of growth, but the only available option is to grow. Thus, the economic and fiscal crisis offers an opportunity for a fresh growth-inspired economic policy encompassing fiscal, industrial, monetary, labour, and trade policies.
The revised fiscal deficit is N4.58tn from N1.85tn originally estimated in the 2020 federal budget. This is 3.29% of the GDP and exceeds the threshold set by the Fiscal Responsibility Act for normal times. The aggregate fiscal deficit will be N4.95tn (including project-tied loans and expenditures of government-owned enterprises) representing 3.55% of the GDP. This has been justified by the MTEF in the statement that COVID-19 poses a threat to national security within the contemplation of the FRA. With Nigeria projected to lose about 40% of her revenue and oil revenue being a major part of the loss, and the fact that oil price and revenue are not rebounding to former levels any time soon, the federal budget should not contain this size of deficit. A N4.58tn in an expenditure estimate of N10.509tn is 43.61% of the estimate.
Losing 40% of a country’s revenue and cutting expenditure by less than one per cent is not prudent and may not be in consonance with the principles of fiscal responsibility. Even though experts agree on the need to inject more resources to stimulate the economy and aggregate demand, the central issue of concern is on the components of the expenditure. Stimulating the economy should not promote waste, conspicuous consumption tied to demand for foreign goods and services which can be produced locally, inappropriate expenditures and lifestyles, etc. The deficit should be reduced and if it must remain at this level, the expenditure items need to be reprogrammed.
With diminished foreign reserves, the upward adjustment of the exchange rate from N305/US$1 to N360/US$1 and the importers and exporters foreign exchange window from N362/US$1 in January to the current N385/US$1 is a welcome development. However, there is the need for the Central Bank of Nigeria to move towards full convergence of the various foreign exchange windows for a well-functioning market. As of April 2020, there were several windows in the segmented foreign exchange market including the official rate, investors and export window, retail secondary market intervention window, BDCs’ invisibles and travel window. Unnecessary foreign exchange windows and subsidies create opportunities for arbitrage, distort economic planning and dampen investor and economic players’ confidence. Converging the exchange rates into one which is market determined will also free up more naira for the Federation Account to be shared by the three tiers of government.
The present practice where money transfer companies pay recipients of foreign exchange transfers made by their relatives abroad in naira at the official CBN rate, while holding back the foreign currency is not in the overall interest of the Nigerian economy. The CBN should design a process for remittances to come into Nigeria in the currency of the remitter. This will facilitate greater access to foreign currency available for use for the procurement of necessary imports. The current practice denies Nigeria of resources remitted to her by citizens as well as shortchanges the recipients of the true value of the money sent to them. If the recommendation is accepted, it would involve the injection of not less than $20bn annually into the Nigerian economy from the Diaspora remittances. In 2017, 2018 and 2019, migrant remittance flows to Nigeria stood at US$22bn, US$25.081bn and US$17.57bn respectively. The 2018 remittance was equivalent of 83% of the 2018 federal budget, 11 times the foreign direct investment flow for the year and 7.4 times larger than the net official development assistance received in 2017. If these Diaspora remittances are injected into the economy through the CBN capturing the foreign exchange component, the aphorism that the oil sector contributes over 90% of Nigeria’s foreign exchange earnings cannot hold true.