The chronic deficits of Nigeria

Oct 22, 2004 02:00 AM

An exactitude of modern life is that even governments must balance their books, declaring their deficits or surpluses. Many move in and out of deficit and occasionally have surpluses for the lean years. Others have chronic deficits and must constantly worry about bridging sources, as is the case in Nigeria.
This is the crux of the paralysing government-civil society confrontations over fuel prices which have characterised the five-year-old Olusegun Obasanjo presidency. They have intensified over the past year and could shave off about 2 % of the 2004 GDP growth.

The latest such confrontation erupted mid-October, with the police allegedly killing about 25 protesters and burying some in mass graves in northern Kaduna state. Every government since 1981 has posted deficits, causing economic dislocations as the central bank on the one hand finances the deficit and, on the other, seeks to mitigate inflationary effects by mopping up liquidity from the banking system.
Deficits ballooned under Gen Ibrahim Babangida's 1986-91 structural adjustment programme (SAP), from under 5 % of GDP to sometimes 10-12 %. They shrank under Gen Sani Abacha (1993-98) to just under 6 %, a level generally maintained under Obasanjo.

However, this level is unsustainable for three reasons.
One, it disqualifies Nigeria from the monetary union of the Economic Community of West African States (ECOWAS), expected to herald a common currency in July 2005.
Two, mostly western creditors are represented by the International Monetary Fund (IMF), to whom Nigeria owes $ 34 bn pending debt rescheduling talks.
Third, local banks, which traditionally funded the government are pressured by new capital requirements to exercise more circumspection. Underscoring this is that public investors have so far snubbed the government's bonds. These leave the government with few choices. Nigeria being a monocultural economy, the Obasanjo government has sought relief in the dominant oil sector.

Like Babangida, Obasanjo has chosen fuel price tweaking, variously called "liberalisation", "deregulation" and "subsidies removal". The government's oil holding company, NNPC, boasts that the latest price increases, effected late September, would net $ 350 mm.
This, added to the federal government's share of oil revenues in excess of the budget price, allocated in October, offset the N 131 bn deficit in the first half, preparing the government for November talks with the IMF and end-of-year ECOWAS monetary union evaluation. But at what price? With some of the lowest information and communication technology penetration and electricity supply rates in the world, Nigeria is a fuel-dependent economy.

Business costs rise by at least the percentage of fuel price increases -- 25 % in September. Even the government's widely faulted inflation rates reflect this -- 19 % in August. Food prices are almost doubling every six months. The impact on the poor, whom the government estimates at 80 % of the 135 mm population, is excruciating.
The automatic resort to fuel prices shows a fundamental weakness of the government: an unwillingness or incapacity to make those critical choices the economy genuinely needs. These are about its size, structure and bearing on the economy.

This is about the largest government in Nigeria's history: 30 ministries. South Africa, with about thrice the GDP, has 28-42 ministers and 34 presidential special assistants. Each of these personnel is housed, fed, clothed, transported, provided with office and domestic aides, and regularly sponsored abroad by the government, with numerous duplications of functions.
Similarly, despite long-promised privatisation, 82 major parastatals, including terrestrial telecoms and electricity monopolies Nitel and Nepa, remain in the public sector with little accountability for their expenditures.

These structural deficiencies are the real causes of deficits. They clearly require a strong political will to tackle. Railroading higher fuel prices, which penalise the poor and genuine businesses, while leaving the government to maintain its patronage system only demonstrates its weakness and suggests poor commitment to genuine economic reforms.
For as long as the government fails to effect the requisite restructuring of itself by rationalising and privatising seriously, for thus long should the perennial fuel "subsidies removal" and its attendant economic destabilisation be expected.

Source: Business in Africa
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