Resource-rich countries, Nigeria inclusive whose economies are more vulnerable to commodity price shocks are likely to have a procyclical fiscal stance. Procyclicality implies that the fiscal stance exacerbates the business cycle thereby increasing the vulnerability of the economy to external shocks particularly from oil prices. In layman terms, we spend more when there is more money and expenditure crashes as revenue falls. To promote macroeconomic stability, the Nigerian fiscal authorities have made attempts towards promoting a countercyclical fiscal policy.
The Sovereign Wealth Fund (SWF) and the Excess Crude Account (ECA) were created as avenues to save oil revenues in booms to serve as stabilization funds in busts. This was duly executed between 2005 and 2009. Savings were deposited during the boom in oil prices between 2005 and 2007 and they served as buffers in 2009 to provide foreign exchange for international obligations and smoothen government expenditure during the downturn.
However, by 2014, the reserves had been depleted, leaving the economy without buffers during the 2016 slump in oil prices. This culminated in the recession experienced from the second quarter of 2016 to the first quarter of 2017 from which the country just came out with a 0.55 per cent growth. Clearly, we need to understand what drives procyclicality in Nigeria and how we can move towards Countercyclicality of fiscal policy to achieve macroeconomic stability.
The underdeveloped financial market is a major driver of the procyclicality of fiscal policy in Nigeria. The inability of the market to produce credit to fund government expenditure and provide fiscal stimulus during busts leaves the economy no other option but seeking external financing. This is difficult to obtain as countries lose creditworthiness during downturns. This results in spending cuts in a downturn, thereby intensifying the effects of the business cycle on the economy. Another driver is the weakness in the fiscal framework. With the establishment of the Special Fiscal Institutions (SFIs), there is the need to specifically state the grounds on which the savings can be drawn. The Nigerian SFIs are subject to discretionary withdrawals, leading to their rapid depletion. The weakness of the framework is further evident in the selection of the benchmark oil price for the budget. This is determined based on the agreement between the legislature and the fiscal authorities. This is contrary to the practice in Chile for instance, where independent experts select the budget price of copper for each fiscal year.
The weak fiscal framework reflects the underlying weak institutional framework. Compared to Botswana and Chile, who have made significant progress towards the establishment of a countercyclical fiscal policy, Nigeria’s institutional quality is below par. The weakness of institutions contributes to the level of fiscal indiscipline by the three tiers of government. In booms, the tendency to spend beyond set limits is increased by the availability of external financing. In the absence of checks to ensure accountability, public debt increases as the government seek external financing when government expenditure supersedes revenue.
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Political economy factors equally drive fiscal procyclicality. Policy inconsistency across political regimes leads to disruptions in fiscal policy with changes in political regimes. Newly elected leaders discontinue projects of previous administrations and flag of their initiatives, leading to a waste of resources and the opportunity for fiscal leakages in the planning and launching of new projects. Furthermore, electoral cycles influence fiscal policy via their effect on government expenditure. In 2010 for instance, as oil prices began to experience a rebound, the 2011 elections which were fast approaching led to increased expenditure as opposed to increased savings. Finally, seeing that Nigeria runs a democracy where the opinions of voters of policies in a regime can determine re-election into office, in the event of a conflict between political and economic interests, policymakers may not always make the best economic decisions. For instance, in a boom, to promote stability, fiscal authorities are expected to save for the rainy day. However, citizens expect the government to increase expenditure to provide infrastructure, employment and improve social welfare. This shows conflicting economic and political interests. In the event of such, it is not unpopular that the government pursues political interests to secure political support.
As Nigeria exits recession, actions must be taken towards ensuring macroeconomic stability by ensuring the fiscal policy response to the business cycle is countercyclical. This would however require an improvement in the institutional and fiscal framework. Specifically, policymakers should 1) strengthen the fiscal framework by ensuring fiscal responsibility and constitutionalizing expenditure from the special fiscal institutions: the ECA and the SWF.
2) promote the deepening of the financial market to achieve stability in the macroeconomic environment.
3) Promoting policy consistency across political regimes and;
4) Foster the efficient utilization of resources via proper planning and execution of projects to ensure policy consistency.
Ehikowoicho Agbenu Idoko
