Modern Monetary Theory (MMT) has been called garbage by BlackRock Chief Executive Officer Larry Fink; former New York Fed President Bill Dudley called it a “crackpot theory”, while it’s a “dangerous proposition”, according to the European Central Bank (ECB).
The theory’s headline argument is that governments with their own currencies have more room to spend than is generally supposed, and don’t have to finance it all with taxes. According to this view, there’s no risk of a government being forced into default because it can create/print the money it needs to meet any obligations.
It’s been denounced by economists from Larry Summers to Paul Krugman, but might have found a home in Nigeria as the (CBN) continues to directly finance operations of the Federal Government through Ways and Means or money printing.
Data in the Budget Office’s third quarter (Q3) 2018 implementation report published last week shows that the CBN probably funded the Federal Government to the tune of N1.6 trillion as at the end of September 2018.
According to the numbers, the Federal Government spent N5.3 trillion in the three quarters through September 2018, almost twice the N2.8 trillion earned in that period, thereby creating an initial fiscal deficit of N2.5 trillion.
Local and foreign borrowing of N605 billion and N303 billion, respectively, which comes to a total of N908.5 billion, is used to partially finance the deficit leaving a gap of N1.6 trillion.
The report, which is on the website of the Budget Office, does not give any information on where the extra N1.6 trillion the government spent in the period came from.
Isaac Okorafor, spokesperson of the CBN, was not immediately available to comment Friday, as his phone was switched off.
“The CBN is still lending to the Federal Government to make for its revenue shortfall and it’s not on the implementation report probably because they are trying to conceal it,” a former deputy central bank governor told BusinessDay.
“It’s called ways and means advances but it has stayed too long and it has dire implications on the economy,” the person said.
In the Budget Office’s implementation report, there was a line item that read “Interest on Ways & Means”.
In the first quarter of 2018, the government paid N6.74 billion. The amount doubled to N13 billion in the second quarter and settled at N16.6 billion in the third quarter, for a total of N36.39 billion.
The CBN has not published data on overdrafts to the Federal Government since 2017. The last time it did, in June 2017, the apex bank’s overdrafts to the FG was close to N3 trillion, sparking widespread concerns.
Notable among the critics of the CBN’s lending to the FG was the International Monetary Fund (IMF).
An IMF team in 2017, led by Senior Resident Representative and Mission Chief for Nigeria, Amine Mati, said the practice was unsustainable.
The team warned the CBN against financing government projects outside budgetary provisions.
“Acting on an appropriate and coherent set of policies to enhance an economic recovery remains urgent. This includes implementing immediately specific priorities that will help achieve the goals of the ERGP. In the near term, a stronger push for front-loaded fiscal consolidation through a sustainable increase in non-oil revenues would be needed to create space for infrastructure spending, social protection, and private sector credit.
“This should be simultaneously accompanied by a monetary policy that avoids direct financing of the government and is kept sufficiently tight, a unified and market-based exchange rate, and rapid implementation of structural reforms,” Mati and her team said.
Central banks sometimes finance government in period of temporary budget shortfalls through Ways and Means Advances. However, what should be a temporary and small effort has become increasingly permanent and growing fast in Nigeria.
Large expansions of central bank balance sheets have implications both for the real and financial sectors of the economy.
This is because any accumulation of assets implies an increase in corresponding liabilities. Also, expanding the CBN balance sheet in order to finance government spending often leads to inflationary outcomes.
The precarious state of the Federal Government’s revenue only lends itself to why the CBN has continued this unconventional practice, according to Johnson Chukwu, MD of financial advisory services company, Cowry Assets.
“It’s clear why the CBN is still financing the Federal Government, the question is when it will stop because it has to if we must guard against the ugly outcome from such a practice,” Chukwu said.
Ahead of full-year 2018 budget implementation report, the FG probably recorded a third straight year of lower-than-planned revenues.
The government could only manage N2.8 trillion in the first eight months of 2018, according to data obtained from the Q3 implementation report; about half of the N4.77 trillion it should have raised in that period to meet a full-year revenue target of N7.165 trillion.
Except government expenditure takes a haircut, lower-than-planned revenues could leave the country with a record budget deficit of N6.6 trillion, more than three times higher than the projected N1.9 trillion deficit and 74 percent higher than an actual deficit of N3.8 trillion in 2017.
Two straight years of lower-than-planned revenues in 2016 and 2017 pushed the government’s fiscal deficit to worrying levels and a third straight year of weak revenues would only leave the Federal Government’s finances in more precarious state.
In 2016, the government budgeted N3 trillion but earned only 56 percent, with revenues of N1.7 trillion.
In 2017, actual revenue of N2.7 trillion was only 54 percent of a N5 trillion target, according to data from the Budget Office.
The government turned to borrowing to cushion the revenue shortfall, which was largely driven by weak oil revenues in 2016 and underperforming non-oil receipts in 2017, and has signalled intentions to continue on the path of more borrowing despite warnings from the international and local community over the sustainability of the country’s rising debt stock.
In a three-year spending plan, called the Medium Term Expenditure Framework (MTEF), the Federal Government targets fresh borrowing of N8 trillion between 2018 and 2021. That would take the Federal Government’s total debt to N26 trillion by 2021, about a third of 2017 GDP. The debt stock could be higher if the government’s over-ambitious revenue projections through those years are not met as has been the case in the past.
LOLADE AKINMURELE
