Tinubu’s spending plan seen stoking inflation

Bola Tinubu’s ambitious monetary plan to rejuvenate the Nigerian economy as encapsulated in his 80-page manifesto has been applauded as a comprehensive document, but is said to have the potential to cause further spike in inflation.

According to some economic experts, the spending plan shares some characteristics with the budgetary approach of the current President Muhammadu Buhari-led administration.

In his manifesto for the 2023 general election, Tinubu, the presidential candidate of the All Progressives Congress (APC), promised to break away from the current system that allows the annual budget and fiscal policies to basically depend on the dollar value of the government’s projected revenue.

“To achieve optimal growth in the long term, we must wean ourselves from this limitation. A more efficient fiscal methodology would be to base our budgeting on the projected level of government spending which optimises growth and jobs without causing unacceptable levels of inflation.

As part of this prudent growth-based budgeting, we will establish a clear and mandatory inflationary ceiling on spending. However, we must break the explicit link between naira expenditure and dollar inflows into the economy,” he said in his manifesto document, tagged ‘Renewed Hope 2023’.

“Much like the European Union has done, we too must be realistic and legislatively suspend the limits on government spending during this protracted moment of global economic turmoil exacerbated by domestic challenges in security, economy and demography,” he added.

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Economic experts who have reviewed the document are of the view that such an approach will further exacerbate Nigeria’s inflationary trend.

”The focus should be on restructuring the budgeting process to lean recurrent while more emphasis should be on capital expenditure,” Omobola Adu, senior economic analyst at Afrinvest, said.

”However, when we consider the plans to securitise ways and means (advances) and our existing debt obligations, this becomes highly unlikely in the short term. Anchoring the budget on spending consistent with growth means a significant increase in spending, which would most likely induce higher monetary induced inflation,” he added.

As of September 2022, Nigeria’s headline inflation hit 20.77 percent, the highest in 17 years while the food inflation increased to 23.34 percent. Both inflation figures are expected to surge after Nigeria has completed the rebasing of the basket of goods for computing inflation in the country. The Financial Derivatives Company had in August predicted that Nigeria’s headline inflation would reach 44 percent on rebasing.

“I would have expected the fiscal spending to be anchored on revenue generation that does not hurt productivity. However, the key issue in inflation is policy certainty and credibility. Once the government can keep to its policy statement, inflation expectations will fall and actual inflation will be stable. To do that, the inflation target for the short to medium term must be set at the level that eliminates uncertainty and keep spending within the projected and expected band,” Femi Saibu, professor of economics, University of Lagos, said.

He added that Nigeria’s inflation was driven more by foreign exchange speculation and inflation expectations than the cost and supply constraints. And consequently, the only way the manifesto could be translated into viable welfare benefits was to build trust, credibility and policy consistency from the outset, he said.

The thought of limitless spending causes scare among Nigerian economic experts in view of Nigeria’s debt, which has risen considerably in the last eight years, reaching over N42 trillion as of September 2022 due to deficit financing occasioned by inadequate revenue. This is in addition to over N20 trillion debt through the ways and means advances of the Central Bank of Nigeria (CBN).

Deficit financing in 2022 alone amounted to N5.3 trillion as of August 2022, which was N430.82 billion above the prorated level for that period, according to Zainab Ahmed, minister of finance, budget and national planning.

“It states correctly that the inflation in Nigeria is supply driven and not cost-push. It then says ‘usual anti-inflationary medicine’ will not work. This is correct. It then correctly recommends to fix this inflation is to increase supply,” Kalu Ajah, an economic analyst, said on his Twitter handle.

“The biggest story however in the document is on page 14, the budget methodology, which reads that the Tinubu administration will scrap the crude oil benchmark. This will allow the government to spend on deficit, without an ‘immunisation’ of revenues. Radical departure.”

Sanusi Lamido Sanusi, former CBN governor, while making a presentation at the recent Kaduna State Investment Summit 2022, attributed the rising inflation in Nigeria to deficit monetisation, which most experts fear is similar to the proposition in Tinubu’s manifesto.

“Deficit monetisation has also resulted in higher inflation – above and beyond the impact of higher commodity prices and a weaker FX rate. With both policy rates and market interest rates still in deeply negative territory, the CBN has created a powerful incentive for anyone with savings to move them off shore,” Sanusi said.