Outlook 2021: Inside a Perfect Storm: Monetary and Fiscal Sword Fencing - Nigeria's Fiscal Policy

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Saturday, February 13, 2021   /04:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics


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The ravaging effect of the COVID-19 pandemic pressured governments around the globe into coming up with various heterodox monetary and fiscal policies to negate the effects of the virus on the growth of the economy. Advanced economies with a robust fiscal balance were able to pass huge fiscal stimulus bills and packages. While frontier economies already struggling could not provide a huge stimulus package for its citizens. The pandemic further necessitated the need for developing and less developed nations to build a huge fiscal structure that could trigger the growth of the economy as a cushion for future black swans. To help poor countries to cope with the negative effects of the coronavirus on their economy, the G-20 and China agreed on the restructuring of loans and granting of moratoriums to the world's poorest countries.

 

The monetary policy took an unusual dimension in 2020. Different economies have adapted monetary policies best suited for their economy. Economies, with already low interest or negative interest rate such as Japan, the US, Australia, etc, had to utilize a "fiscmon" policy mix as there was less headroom for a further cut in interest rate to effectively trigger growth in credit to the real sector to boost productivity. On the other hand, economies with high-interest rates could make head rooms for a reduction in interest rates. It should be noted that the adoption of these policies is peculiar to each economy e.g., Nigeria has a high-interest rate of 11.5% but due to its low level of productivity, its inflation rate as of November 2020 stood at 14.89%. Therefore, despite the incentive to reduce the interest rate to trigger credit growth, monetary policymakers would be cautious because of Nigeria's high inflation rate.


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Nigeria's Fiscal Policy

Nigeria's attempt to bolster growth in 2020 was hindered by the COVID-19 pandemic. Its major source of foreign export revenue which is oil was severely affected by the pandemic. The fall in the oil demand was attributed to lockdowns implemented in various countries to prevent further transmission and pressure on health facilities.

 

Therefore, attempts to trigger economic rebound through fiscal policy were limited as Nigeria was already battling low-income revenue, high debt servicing, and low investment, etc. Despite the paucity of income, the Federal Government came up with different schemes to help Micro, Small and Medium Enterprises, as well as its citizens, cope with the pandemic. For example, the Federal Government came up with a N75bn MSME Survival Fund which was aimed at supporting vulnerable micro and small enterprises in meeting their payroll obligations, and safeguard jobs in the MSMEs sector. Also, the federal government established a N500bn COVID-19 crisis intervention fund which was supposed to be channeled to the upgrade of healthcare facilities at the national and state-level, VAT exemption for an expanded list of basic food items plus medical and pharmaceutical products, suspension of the proposed increase of electricity tariffs by the electricity distribution companies, three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans and the extension of the moratorium on loans issued by the Bank of Industry, Bank of Agriculture and the Nigerian Export-Import Bank, etc. Despite these schemes and stimulus programs, many economic experts expressed pessimism on the effectiveness of these policies in triggering a rebound in economic activity and growth.

 

Illustration 36: Nigeria's Fiscal Responses to COVID-19 Pandemic

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COVID-19 relief spending was evident in the increase in government expenditure in Q2 2020. Government spending for Q2 2020 increased by +152.25% to N2.34trn from N928.26bn in Q2 2019 (see Chart 21).


Chart 21: General Government Final Consumption Expenditure Growth Rate (%)

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Source: NBS, Proshare Research

 

Furthermore, to cope with the present realities caused by the pandemic virus, the government decided to adjust its budgets (see Table 15).

 

Table 15: Overview of the 2021-2023 MTRF

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Examining Nigeria's 2021 Budget

Critical to the growth and recovery of economic activities is the Nigerian budget. Last year the Nigerian government reverted to the January-December budget cycle. While the budget for the 2021 fiscal year has been passed by the Nigerian National Assembly, it is vital to review some of the assumptions and propositions of the budget to examine how effective the budget size is in triggering an expected recovery from recession in 2021.

 

Nigeria's planned expenditure for the 2021 fiscal year increased by +25.62% to N13.58trn from N10.81trn in 2020. Also, there was an increase in the planned capital expenditure by +65.32% and recurrent expenditure by +18.14% for 2021 when compared to the previous year.  2021 planned capital expenditure and recurrent expenditures are N4.1trn and N5.6trn, respectively.  Although, the planned increase signifies the government's commitment to triggering a recovery in economic activities the huge debt servicing size of N3.3trn and the budget deficit of N5.20trn stands out as a major source of concern to most economic analyst. Furthermore, the budget size is predicated on oil revenue which has shown a high level of uncertainty over the years and hence further emphasized the need for diversification of Nigeria's revenue (see Illustration 37).

 

Illustration 37: Budget 2021; Light Touch on Spending, Heavy Head on Debt

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Budget Deficit Bogey - Figuring out Fiscal Policy 

Given that Nigeria's budget is predicated on certain assumptions it is pertinent to examine how realistic some of these assumptions are. Nigeria's benchmark oil price for the planned 2021 budget is $40 per barrel. The high level of uncertainty caused by the COVID-19 pandemic has made it difficult to predict the future price and demand for oil. The commencement of the vaccination of citizens in advanced economies has signaled positive news for oil price recovery in 2021. However, the recent discovery of a new strain of coronavirus has posed a risk for oil price recovery.

 

Furthermore, a GDP growth rate of +3% in 2021 is ambitious given that high level of insecurity, poor infrastructural facilities, corruption, and high cost of governance persist. Also, Nigeria's inflation rate stood at 14.89% as of November 2020. An uptick in headline inflation may further be exacerbated in 2021 given inherent structural bottlenecks and the high cost of doing business.

 

On the other hand, the exchange rate assumption of N379/$1 would depend on CBN's policy decision in stabilizing the exchange rate. On the back of the inherent supply and demand liquidity challenge, there may be another round of adjustment to drive rates alignment and a more realistic fair value (see Illustration 38).

 

Illustration 38: Budget Deficit Bogey - Figuring out Fiscal Policy

 

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There are valid fears by some analyst that Nigeria's planned budget for 2021 would likely underperform given its constrained fiscal space e.g., a planned fiscal deficit of N5.2trn, non-oil revenues potential limited in the short term, limited funding, and uncertainty as regards oil revenue (see Illustration 39).

 

Illustration 39: Of Budgets and Underperformance

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Downloadable Version of Goodbye 2020, Hello 2021, Understanding the Mega Trends of a Crucial Year for an Economy Report (PDF)

1.     Complete Report: Outlook 2021: Understanding the Mega Trends of a Crucial Year for an Economy- Jan 28, 2021

2.     Executive Summary: Outlook 2021: Understanding the Mega Trends of a Crucial Year for an Economy- Jan 28, 2021


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