Home Analysis Can ‘88 budget implementation avert inflation? 01/02/88 Being concluding part of this article begun on Thursday

Can ‘88 budget implementation avert inflation? 01/02/88 Being concluding part of this article begun on Thursday

by Business News Report

The third policy option government use to effect changes aggregate economic variable is debt management. This policy option is gaining popularity especially in the Less Development Countries (LDG) where public debt has assumed an alarming proportion.
National debts in this case involves the total government in respect of money borrowed.
National debt comes I two forms. Internal debt which the federal government engage in through issuing of development stocks or bounds and external debt in which Nigeria borrows from other governments and financial institutions of the world.
Internal debts by economic recounting not much; of a problem as they are owed to Nigerians and interest payments on them are mere transferred payments that do not have any adverse effects on Nigerian National Income except their inflationary impact.

External debt on the other hand, requires careful handling as they are owed to non Nigerians and interest payment on them are capital payment that constitute real burden on die national income. Because of the insolvency involved by the kind of debt it is usually not encouraged Nigeria’s ex tern al and internal debts in the past five years have risen to an alarming proportion.
This high level of debt has become a serious fiscal drag on the nation so much so that as at the end of 1983 Nigeria was hardly credit worthy As at September I960, Nigeria’s credit rating in international circles was 55%. This improved to 58% ir 1981 and to 48^ in September 1982.
In September 1983 the credit rating further fell to 30%. As a September 1987, th credit raring dropped to an all time low of 20.8%
The international credit rating thus put Nigeria as the 12 highest debtor the African Continent and the 77th position in the world.
Following this development, the international community lost confidence in the ability of the managers of the Nigerian economy honour their financial obligations and thus closed every line of credit to Nigeria.
As the end of the last year official figures put Nigeria’s external debt at ($19,689 billion) which at today’s exchange rate amounts to N81,217 billion. A profile of the loan shows that the federal government owned ($1,376 billion) N5.666 billion) multilateral institutions state governments owned ($598.81 million) N2.470 billion to the same organisation.
The federal government owed ($327 million) N1.348 billion) to other government while states owed other countries to the sum of ($65.11 million) N268.57875 million.
Federal government direct loans as at the period of was put at $5,85253 billion) N24.1416 billion. Federal government guaranteed loans to parastatals amounted to ($529.80 million) N2.185426 billion and those of states has an official record of ($2.42974 billion) N10,022 billion and the unguaranteed debt was recorded as ($126 million) N519.75 million.
The private sector share of debt has an official record of ($107.08 million) N441.705 million. The short term arrears outstanding during the period was ($8.2915 billion) N34.1927 billion.
One thing clear here is that over 97% of the external loans was owed by the public sector which makes the debt sovereign.
As a result of the high degree of external indebtedness, the nation was stalled in terms of growth and development.
In a bid to salvage the situation and get the country out of lie financial mess the federal government engaged in intensive debt re scheduling.
The importance of debt rescheduling and the need for new mon-;y inflow can only be appreciated when it is realised that rapid accumulation of external debt and payment arrears have constrained the scope for Nigeria economic management and’ has led to a slow down , indeed a virtual interruption of capital inflows with consequent constraints on economic growth.
Official reports have it that the reschedulling has drought the debt service ratio in 1986 from as high as 2 percent to 21.6 (percent anil in 1987 o 24.3 percent.
The major issue here s that success in debt reschedulling cheering news to the economy. It ‘s a mere postponement of the dooms days and mere shift of the debt responsibility of the present administration to the future administration.
Secondly, if about 24.3 per cent earnings is used to service debt what hope is there for the Nigerian economy whose growth rate has been officially put at 1.2 per cent and whose population is growing at 3 per cent per annum.
Nigeria incurred most of these external debt through loans obtained from external sources of finance budget shortfalls in attempts to implement development projects.
As a result of huge budget deficit accumulated over the last six years, the Nigerian government is caught up in a debt trap it is trying to riggle out of.
Interesting enough the 1988 budget has a deficit of about N6 million to hi: financed through loans. Of dm. an external project related borrowing, draw down of N1.506 billion is to lie procured while an internal loan of N4.579 billion is to be secured.
Budget deficit though not entirely inflationary, the Nigerian circum stances will trigger of inflationary pressure. It is rather unwise to further borrow from outside the country in whatever form and in whatever name. Borrowing has encouraged the Nigerian governments past and present to spend money
than Nigeria really has.
It is generally accepted that the primary cause of rising prices in Nigeria is the imbalance between the total demand for goods and services and the nations ability to supply the amount demanded.
What the 1988 deficit budget will bring into the Nigeria economy is a situation where consumers businessmen and the government of the federation wish to buy can supply. Business will in some few months be founded operating at capacity where their inventories are being exhausted and the back log or orders is growing.
This pressure on the supply side will drive prices up the economics of inflation.
Generally government decisions can either aggravate or ease a situation in which there is too much aggregate demand and rising prices. The federal government would have to take caution in borrowing to implement the 1988 deficit budget. A proper debt management policy is required to know when and how to borrow as not to add more to the inflationary pressures on the economy.
In this wise, the Central Bank of Nigeria needs a scientific approach to the Nigeria debt problem. The CBN has to establish a debt management to take care of externa borrowing and those already contracted. Proper records must be kept and loans carefully monitored to ensure they are used for productive venture that can yield revenue to the economy.
The situation in the past where fake documents were used to demand for payments should be discouraged.
The Nigerian economy has in the last few weeks experienced rising prices as a result of the expectation of rise in income and increased spending.
Understandably, part of this borrowing (N4.579 billion) will come out of what Nigeria would otherwise be spending and part out of saving.
On balance, aggregate demand in Nigeria during the course of 1988 will be reduced by less than amount borrowing. But since the money borrowed will be spent on the same economy, the inflationary potential of such money would remain the same.
It is an anxious that when there is idle supply, deficit spending adding to the national debt can be inflationary. Those who argue that there is a lot of idle capacity in Nigeria base their premise on the above assertion.
The Nigerian economic situation is much more complex than other economies. While in most other economies, the raw materials abound, their recession problem arise from constrained demand which can easily be proposed up through increased spending.

Related Posts