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By Polycarp Egwuonwu
The Nigeria current economic realities portrays the situation as frightening and only a responsible, rationale and courageous leader whose singular vision and mission is to innovate to steer the nation out of these predicaments can succeed. The nation is currently witnessing astronomical excruciating exchange rate, due to the current administration’s policy of exchange rate deregulation. Also the suffocating interest rate influenced by high rate of external debt stock and the attendant huge external debt service payment resulting in persistent increase in fiscal deficit. High rate of inflation accompanied by deflation, rapid declining trade deficit, increasing private investment crowding out, insignificant inflow of foreign direct investment, rapid sloping down of balance of payment (BOP), dismissal value of external reserve, poor and sluggish growth rate of the economy, monumental infrastructural deficit, low per capita income, high rate of unemployment and many others. The resultant effect is very low standard of living and depreciating state of social amenities and increasing high rate of poverty.
All these combined weighed down on the nation’s economic life, making the situation difficult for any unprepared leader to confront. If things must change, President Bola Ahmed Tinubu must start from himself and ensure that he purge himself of any ethnic thinking, ethnocentrism. His decisions must not be the product of a tree planted on tribal and religious fertile soil, but purely as a patriotic national leader demonstrate patriotism in his appointments and responses to issues that concern other ethnic nationalities. When this is done, every Nigerian will rally round him to support for the nation to move forward. It is a fact that when he succeeds, Nigeria makes progress and our next generation no matter the tribe or religion will excel. Today, the image of the country is at a low ebb no matter any standard of evaluation. The high rate of corruption in official and high places is a shame on the nation. What do we say when and where people in high places trusted with power to manage the nation’s economy turns around to rape and wreck the nation to devastation. Not only has that, those trusted to manage the affairs of the nation on any issue of international concern done that with impunity and recklessness to the shame of the nation. The way and manner the last general election was conducted and concluded is “an elephant in the room” (an obvious difficult situation that people don’t want to talk about).
The macroeconomic debate concerning the government fiscal policy on budget deficit financing (borrowing) and the consequential effect on the economy particularly developing country like Nigeria should not be overstretched. Several scholars, policy analysts and makers posits that budget deficit simply put financing deficit through borrowing has severe implications on the macroeconomic variables particularly on economic growth represented by the Gross Domestic Product (GDP) or the Real Gross Domestic Product (RGDP) i.e. GDP adjusted for inflation.
Conversely others argue that deficit financing is imperative particularly to a developing economies with high rate or high level of unemployment and low income. The proponent of deficit financing concurs that deficit financing if it runs for several years will become bad for financial stability of the country. Nigeria from 1970 till date has being running the economy on deficit financing except for four (4) years of fiscal surplus within this 53 years under review.
Let me recall that budget generally refers to the framework for revenue collection and expenditure outlays within a given or specified period of time usually one year or annually. It serves as an instrument for mapping out policies and programmes aimed at moving the society from the existing economic situation to a desired national economic destination. Financing deficit or Deficit financing implies an excess spending of government over income or revenue collected through taxes and other sources. Government spends on wide range of sectors like education, healthcare service, defense and security, subsidies, pensions, salaries and gratuities, energy, infrastructures, national emergencies, etc, the expenditure are bound to increase and where the income generated could not match the expenditure, deficit financing through borrowing sets in.
Borrowing scares Nigerians because of its impact on the economy which includes reduction in National savings, slow down on future income, increase in taxes and total debt stock, crowding out of private investment and rising interest rate and decline on living standard of the people. The economics of huge debt and deficit financing is either inflationary or deflationary or both. Inflationary means the prices of goods will be higher against the purchasing power of the economy whereas deflationary depresses the investment and slow down the process of economic growth.
Notwithstanding the above mentioned threat, government should borrow with economic growth in view marshaling out strategies to ensure that the borrowed funds are applied in the productive areas for a fruitful outcome. Government must develop a working strategic approach for financing through debt and deficits to achieve debt sustainability and economic growth. Government should target increase in investment (both private and public) through increasing the government incentives in the sectors that strengthens and impact on the economic growth and as well decreases taxes on business particularly on investment areas. This approach may expand the budget deficit in the short run but in the long run, the debt to GDP ratio in the long run will decrease hence sustainability will be achieved. To achieve growth in Nigerian economy while adopting deficit requires increasing business tax incentives. Huge corporate tax rates decreases the growth of the economy and competitiveness in the international arena. Reduced corporate tax will cause the country to shift from consumption centred economy towards investment oriented economy. This will lead to gain in productivity, innovation and competitiveness.
The advice by the World Bank and IMF to the Federal Government of Nigeria to increase corporate taxes should not be adhered to because individuals and corporate businesses have been overtaxed. Taxes and tariffs have been increased, added to high rate of foreign exchange, increased interest rate, high rate of inflation and effects of subsidy removal is so much telling on the people. Agree that the debt service payment (DSP) is high yet Government can apply prudential principle and maximum social benefit (MSB) can manage the loans applying them in a productive sector for economic gain. Countries that borrow to finance production like Brazil is no longer wallowing in poverty and under development, rather sustainable growth and economic progress is the outcome of their past decision. The same cannot be said of Nigeria because past political leaders sees borrowing as a safe avenue to increase spending without critically thinking of raising revenue through taxation.
The past leaders borrowed, mismanaged, misdirected and misapplied the funds to non-productive ventures that added no value to the economy thereby leading to poor outcome. As a result, Nigerians are averse or react negatively when borrowing are mentioned. Government must not borrow to fund political rallies and oil political machineries, buy luxurious jets, exorbitant cars for national assembly members, maintain good and expensive offices, fund pilgrimage to holy lands but direct borrowed funds to power sector for manufacturing, construction of refineries and conversion of wasting natural gas into use. These investment areas will increase employment opportunities, grow the economy and impact on our domestic currency. The current administration has mountainous challenges staring before it viz low oil production below the production capacity, insecurity challenges, decaying infrastructures, maintaining current account balance and above all the huge debt service payment and low external reserves. How will government face these challenges without seeking assistance from external sources? The idea of World Bank and IMF to raise taxes again is out of it. The citizens are bearing the pain and leaking wounds inflicted on them by subsidy removal and exchange rate deregulation and the multipliers effect on their living standard. The business entities and individual are overtaxed therefore thinking of raising taxes is a show of insensitivity to the state of our nation and the suffering of our people. When going to borrow, government must ensure that they borrow with economic growth in view i.e to ensure the application of these loans on productive investment and infrastructure that will turn out the return in investment in not a so long time.
In the research work conducted by this writer earlier on budget deficit and the performance of macroeconomic variables in Nigeria from 1970 – 2022 with particular emphasis on economic growth. The findings reveal that budget deficit has significant and positive impact on economic growth both on the short run and long run. He therefore advise policy makers to consolidate on the gain of budget deficit financing by adopting gradual incremental deficit financing in such a manner that it will continue to result in rise in economic growth.
Moreover, it is important to fashion budget deficit in a manner it will not affect interest rates because increase in borrowing increases the cost of borrowing which will invariably discourage borrowing and investment.
• Dr. Egwuonwu is a Development Economist
