Nigeria’s Keynesian moment?

On more than one occasion, the Ministers of Finance, Kemi Adeosun, and that of Information, Lai Mohammed, have responded to questions on Nigeria’s economic recession by suggesting that the “government will spend its way out of recession”.

This idea is not new. Indeed, it is a very old one. The idea of fiscal stimulus during an economic slump, as we currently face in Nigeria, was the brainchild of Maynard Keynes, who delivered what is still regarded as a masterpiece, “The General Theory of Employment, Interest, and Money”, in 1936. The main assumption of the theory, underscored by what is described as the fiscal multiplier, is that fiscal stimulus, as reflected in increases in government borrowings (expenditure), will boost overall economic activity. Narrow it to our situation in Nigeria today, the prescription is that fiscal stimulus will take us out of recession.

However, there are three main reasons why this is too simplistic, short termism, and has the potential to destabilise the economy in the future. The fiscal stimulus ideas being advanced by the ministers require serious investigation: What is the source of the money? What is the money used for? How does the fiscal stimulus affect growth, unemployment, and inflation, both in the short and long terms?

Let us examine these questions one after the other.
First, Nigeria’s 2016 national budget signed into law on May 6th has a N2.2 trillion expected deficit financing. At the start of the implementation of the budget, the government expected to receive part of this deficit from the African Development Bank (AfDB), the World Bank, and the issuing of bonds at the London debt market. The rest is to be financed by the issuing of bonds in the domestic market and the Central Bank of Nigeria. So far, it has realised deficit financing of over N1 trillion, all from the domestic debt market and through the CBN.

These borrowings are fraught with danger because they do not address directly the pressure point of government and the economy’s declining foreign exchange income. It is also fraught with danger because the level of domestic savings is very low, and thus the fiscal authorities are crowding out the private sector. Indeed, it is becoming increasingly clear that the majority of the lending and borrowing that have taken place in the economy have gone to the public sector.

As we approach the end of the third quarter, there is no sense yet on where we are with the borrowings from the AfDB and the World Bank, after being largely rebuffed by the London market earlier this year. Significant part of this are concessionary borrowings, and though the kind of borrowings we should seek during this economic slump, the fact that there is no significant movement on these debts is a reflection of deeper fiscal problems, which foreigners sometimes see better than we do.

The second question is as important: What is the money used for? So far this year, while the government has borrowed in excess of N1 trillion, it has released about N420 billion for capital expenditure purposes. It thus means that majority of the borrowings has been expended on salaries and overheads. That is not the argument made by Keynes, as such expenditure does not in any way help increase employment and private sector investment as the government may want us to believe. It is a tragedy that large components of Nigeria’s fiscal expenditure, because of serious underlying structural issues, do not exhibit inbuilt fiscal multipliers, the type predicted by Keynes in his theoretical writings of the 1930s.

The third and final underlying argument is a sense that the underlying problem of Nigeria’s deteriorating economic conditions is caused by a lack of demand. If it is, the diagnostic is that we should simply improve on aggregate demand through fiscal stimulus. However, I believe that our problems are not underlined by demand (we demand everything), our problems are underlined by supply. Our production is weak and shallow, faces significant constraints, especially foreign exchange constraints, has low productivities, and faces much higher costs compared to many other countries. As a result, we have three key and critical economic problems – poor growth, high unemployment, and rising inflation. The stimulus programme envisaged by the government does not address these three problems. What is required more than anything is the reform of the way we are governed, of the fiscal environment, fiscal space, etc. What we need are reforms that will attract investment and improve national income, and in the process create jobs. Spending is thus the least of our problem and the focus on spending will only address the short run and not the medium term recovery and sustainable growth.

There is no doubt in my mind that we will be out of recession (technically) very soon. But that should be the least of our problems. In light of the figures released by the National Bureau of Statistics (NBS) last month, 10.2 million Nigerians are unemployed. Many more are under-employed. A fiscal stimulus that simply implements the 2016 budget that is already flawed and skewed towards consumption and overheads will not increase employment, nor motivate increases in private sector investment. While the focus on expenditure is important, it is the reforms that will trigger private sector investment, both domestic and international, in oil and gas, infrastructure, aviation, rail, etc that are more important and needed.
Ogho Okiti