Fiscal Expansion is The Way Forward

Proshare

Thursday, September 08, 2016 9.56am/ FBNQuest Research

As commodity prices softened, trade and investment from China across the continent slowed, and a possible new round of US monetary tightening spooked markets, African finance ministers faced an obvious dilemma. The majority opted for fiscal austerity.

This group included Angola, Kenya, Ghana and Zambia, the last two within IMF programmes. Nigeria, in contrast, chose an expansionary stance. We support the decision on domestic and more general grounds but caution that its impact is finite.

The stance is warranted in view of Nigeria’s colossal infrastructural deficit. Estimates of the cost of making good the deficit abound. To give two official examples, we cite US$10bn per year for 10 years for the power sector, and US$16bn for transport over five years.

It will be said that the FGN is unable to bear the full costs itself. However, it has to make a contribution under co-financing programmes. It also knows that some projects have more appeal than others. Water treatment plants are less likely to attract investment than, say, power stations.

Spending by government employees is an important element of consumption. The FGN has delivered or promoted three separate programmes of relief for state governments in the hope of reducing salary and pension arrears (Good Morning Nigeria, 09 August 2016).The level of unemployment and under employment is such that one wage earner is supporting many dependents.

The expansionary stance is also justified because it was an election pledge by the victorious APC. It has a social dimension. In this context, the budget and national planning ministry said this week that the 2017 budget will include N500bn for social intervention, and so repeat this year’s allocation. 

Finally we support the stance because the FGN has spare borrowing capacity, at least on the external side. We have previously noted that market conditions now favour Eurobond issuance by emerging and frontier market borrowers.

We add three caveats. The first is that government spending is often wasteful and poorly managed. Taxpayers are not seeing much bang for their bucks.

The second is that an overly expansionary stance can have dire macro consequences, of which Venezuela and Zimbabwe are extreme examples. We do not think the FGN will fall into this trap. 

The third is the risk in a democracy that the electorate loses patience and votes its government out of office, as it did in 2015. This is where the intelligent use of public relations has a role to play.

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