Home Analysis CAN ‘88 budget implementation avert inflation (2)

CAN ‘88 budget implementation avert inflation (2)

by Business News Report

Monetary policies like fiscal policies seek to achieve the same stated objective. More often moderate governments resources the use of monetary policies options as its implementation has immediate impact and less obvious in its effect unlike the fiscal measures whose burden is traceable to government activities.
Monetary policies essentially deal with monetary and credit variables. The instrument used its achieves of stimulation of growth in national output raising the level of employment in the economy, the promotion of increased financial savings and efficient resource allocation, moderation of inflation and improvement in the balance of payment cannot effect these goals directly. Monetary policies can only realise them by influencing monetary variables which have definite relationship with the above goals.
Among these variables are money supply, credit (bank advances and liquidity requirements) and interest rates. The monetary and credit policy No 22 of 1988 has set the following targets for the variable in the fiscal year 198.
Money supply to grow from 1/8 per cent t 15 per cent.
Aggregate bank credit from 4.4 per cent to 8.1 per cent.

Expansion in credit from 1.5 per cent to 2.5 per cent.
Growth in credit to private sector from 7.4 per cent to 13.3 per cent and
Liquidity ratio from 30 per cent to 27.5 per cent for banks
From the above monetary policy provision the policies are expansionary s more money will circulate within the economy. For economic goals to be realised through the use of the above monetary instrument it is essential to know te relationship between the instruments and such a relationship would be predictable.
The question often asked is what relationship is there between money supply, interest rates and credit availability and the economic goal government seeks to achieve. The assumption is that government would have established a clear relationship between the policy instruments before employing them. For effective monetary policies the relationship thus established must necessity be of operational significance. For instance, there must be in the case of money supply an agreement on the appropriate definition of money.
The monetary authorities employed for this purpose the Mr (Notes and coins) leaving out demand deposit savings and call money out of the definition. As the monetary and policy credit guidelines for 1988 provides there will be increased supply of money to the economy during the course of the fiscal year. The money supply essentially will be autonomous in nature.
From economic perspective an autonomous increase inn money supply is going to create a discrepancy between money desired by people to hold and the actual money they hold. In this kind of situation which the 1988 budget will bring into being money actually held will be greater than money desired. This means that Nigerians are asked to hold money than they would have liked ordinarily. To do this successfully the Central Bank had to reduce interest rates.
With more money in the hands of Nigerians there will be a rush for the consumables to unload the money. More parties will be held. The increased spending resulting from this in turn will lead to increase in income through a stimulated economic activities.
Perhaps the increase is demand for goods and services will in the short run result in shortages of goods and services especially with the prevalent shortage of raw materials and the inadequacies of foreign exchange to fund imports.
Open market operation being the monetary authorities instrument of effective increase of decrease in money supply should be with caution and after a careful study of the economy. Since Central Bank redemption of treasury bills and certificates increase money while the selling of same decrease money supply buying back should be more in last two quarters of the year while selling should be more in the first two quarters. This will help control the volume of money in circulation and moderate inflation.
In applying this open market instrument the Central Bank should take into consideration the various increases in customer spending through aggregate expenditure injection into the economy so as to know the amount to withdraw from or put into the economy at any given time. It should also keep tabs n the supply of goods and services as to match the money supplied with the volume of goods in the economy.
The variation in the legal liquidity ratio requirements of banks the reserve requirements will be needed especially during the course of the 2nd half of the year to help moderate inflation.
The 27.5 per cent should increase gradually to about 30 per cent during the last quarters. This will log banks lending ability at this point as the economy liquidity would have been relatively high. The use of moral situation should also be employed to persuade banks on what course to take. The careful use of these selective credit control measures will be go a long way in moderating inflation.
Government intention not to float development stock this year should be strictly adhered t and midstream measure should not be introduced during the implementation of the budget.
As spending increase, investment will increase especially with the drop in interest rate. If the Nigerian economy responds to the forces of demand and supply, interest rates might fall further as the two have inverse relationship. This is the principle of liquidity preference theory which states that surplus money supply leads to low interest rates.
The special deflationary fund provided for in the 1988 budget will further increase the liquidity position of the economy making easy money available to economic agents in 1988.
The credit policy allows banks to increase their lending from 4.4 per cent to 8.1 per cent. With this liberal policy on banks lending businessmen will not go to banks for loans. With loans available for investment purpose business spending will rise and would compete for the few available raw materials. This might result in increased cost to the business community by way of higher costs due to increase demand.
What the credit policy should have done is to the majority of credit to projects which when completed will add to the capital stock of the economy. The credit policy as it stands now is inflationary and should be modified and ensure that most bank lending for 1988 are project tied.
Also provision that banks should own shares in small and medium scale enterprises is welcome. But a blanket licence to banks will make their lending to be more to those businesses they have interest in at the expense of others that it actual fact need the loans.
In making the instrument, government should ensure that firms are given adequate protection against banks. Banks should be made to own such shares for a given period in which the business would have been firmly established after which they sell off their holdings in the business. Through this way, a good number of business would have survived and the solid foundation on which future industrialisation would be build would have been laid.
Also necessary is for banks to invest in foundries industries that provide raw materials to feed th big firms, If foundries firms are properly funded they will provide spare parts for Nigeria industries which will go a long way to save foreign exchange spent on importing spare parts.

CAN ‘88 budget implementation avert inflation (I) 28/01/88

Budget is the term used to describe the combination of fiscal activities in which a government engages during a specific period of time.
When a government’s outlays are exactly equal to is tax receipt, the government budget is said to be balanced, when outlays differs so that surpluses are deficit exist the budget is said to be surplus or deficit as the case may be.
The federal government of Nigeria 1988 budget is a deficit one.
Budgets are means and ways by which government seeks to resolve the conflicting macro-economic goals it set for itself.
At the macro level, the Nigerian government seeks to achieve full employment of productive resources hat have been idle since 1982 economic recession. Price instability that has been officially put at 15% inflation rate), real economic growth now it 1.2 per cent which lad recorded a negative growth of 3.2 per cent n 1986 and 1987 and balance of payment equilibrium which ;government is still batting seriously with through debt rescheduling and export drive, re also concerns of the budget.
The economic problem with achieving these goals are that some of them are conflicting, which means of having one could create ir reinforce another.
The usual economic practices is to establish models to determine he magnitude, reliability and the degree of confidence of the parameters of the variables involved in order to arrive at acceptable and meaningful trade-offs that would gear the economy toward the desired directions.
The fear is that the preparation of the 1988 budget did not take these into consideration most particularly in a military regime where budget proposals do not get any debate and scrutiny of an elected house that would act as a check on proposal that might not the worth while for the economy.
The budget process in Nigeria is high imperfect as unprecedented interest and unaccounted for cost and gains in the political system are in al likelihood, more prevail int than market failure in the private economy These imperfections in the budget process are caused by basic and deep seated inadequacies in Nigeria’s military dictatorship.
The budgeting process does not have the luxury of public debates on the floor of an elected house. It is but a reflection of the choices of the ruling military personnel and their aids. The budget document cannot be precisely referred to as a primary political document as in the United States of America where lots of checks and balances moderate the budget.
The time frame in, preparing the budget is unnecessarily short to take into considerations and give policy makers a clear perception of the endogenous and exogenous variables within and outside the Nigeria economy.
As a result of the short time span in preparing Nigeria’s budget, the 1988 budget ran into the error of giving greater weight to objective that does not merit it. This is more so when one viewed Nigeria as an economy without adequate data base.
To many economist, it was wonder how targets where set and arrived at for the 1988 budget.
The basic initial change in an economy is motivated by consumer spending. This tends to cause the economy’s level of income to change by some multiple of the initial change-multiplier effect.
Through budgetary provision, the Nigeria government intends to reflate the economy with about X24 billion naira with a special reflationery provision of N2.5 billion. With this money in the economy, the multiplier effect is going to be much in the short run, the nation cannot avoid inflationary pressure.
The key issue is that the budget did not state how inflation would be combated. Although it is a known fact that a change in one component that affects the level of income in an economy may not having a full multiplier effect on the economy’s equilibrium level of income because of the off setting changes it indices in the economy but the Nigerian situation is different and the full impact is likely.
One of the most commonly discussed economic conditions that may cause an economy to experience inflation is an increase in consumer purchasing.
It is important to note that the 1988 budget provisions contain potent element that are capable of causing general rise in prices apart form the popular and easily identifiable ones of government spending and money supply increases.
Taxes of course are low in 1988 so that individual Nigerians and corporate bodies may have large disposable incomes to spend for consumer goods. With more money in me hands of both individuals and corporate bodies, demand for goods and services will rise and thus prices. Already prices of essential food items have increased two folds and there is the possibility of more when the budget implementation would have been in full gear.
It is important that government time the period of releasing more money into the economy in a way that would tally with the absorptive capacity of the economy. Delayed payments involving certain amounts of money could be used as a device to check the side- effects of much money in the economy.
Another economic condition which the 1988 budget will bring in its trail is an increase in the cost of producing goods and services. Such higher costs that might he experienced in 1988 will be conditioned by increases in wage’s.
With the lifting of wage freeze labour unions will now go all out to demand for wage increases. If wages are increased arbitrarily across the board without a corresponding productivity, costs of producing goods will go higher and thus passed to consumers through price increases.
wage increases account should be taken of the average productivity within the Nigerian economy. If it is estimated that the average productivity is 5%, wage increases should not be allowed above five percent in order to check the effect wage increases might have on production cost
Labour leaders in the country have lots to do here. They should learn that the pay packet itself is not what matters but the real wage which is determined by the price level. Higher commodity prices reduce the purchasing power of the individual.
The initial effect, however, of cost increases that are not offset by lower costs of other things is that while the Nigerian firms may still physically be able to produce as many goods and services as before the increase, they will be willing to produce them if they can get higher prices to cover their new higher costs.
If the premise of the impeding inflation is that production not prices is more in meeting the wants of Nigerians, the situation could be contained through increase in consumer spending so that the economy can avoid unemployment and less than maximum
The issue here then is that of establishing the degree of inflation [hat is acceptable in order to curb unemployment.
As the 1988 budget stands out the increase in aggregate demand via increases in consumer spending (reflation) mean accepting changes in the distribution of the Nigerian produced gods and services in favour of an individual who will be able to raise their money wages and other incomes while correspondingly a smaller share will go to those such as the desired who can not raise their money incomes to off set the higher product price.
There was perhaps no consideration for these groups in preparing the 1988 budget.
The 1988 budget is loaded with potentials of wage price inflationary spiral with government continually increasing demand in order to maintain full employment and thus continually ratifying
the efforts of those groups who are able to increase their money wages to gain control of more of the economy goods and services. In order to reduce the inflationary impact after the 1988 budget, a gradual reduction in demand through a reduction in money supply is required during the course of
implementing the 1988 budget. This is necessary to discourage behaviour that could cause a cost push inflation. A lack of well defined income policy for 1988 would fuel inflation in the cause of the year.
The basis for such an income policy is that higher money wages do not necessarily cause cost push inflation in an economy if they are accompanied by a sufficient increase in the productivity of the economy’s labour force. Prices of goods and services in Nigeria will not rise if both wages and Productivity increase proportionately even if workers we paid more they also are producing more so that the cost of each product they will produce will tend to domain the same. The basic issue here is, will the productivity of the Nigerian work force increase?’ by how much if so?
The expectation is that government should have estimated the country’s average productivity and then
recommend wage increases that do not go beyond the average keep prices at the same level.
What those charged with implementing the 1988 budget should sec to is increase in productivity as it is capable of causing the demand for labour in the economy to rise even faster than the economy’s labour supply. Through this means the unemployment situation in the country could In reduced considerably a well as keeping down. inflation. It should be noted that inflation itself i not the bane of ai economy with regard to economic growth In fact, to encourage investment a certain proportion of inflation is required. This is usually referred to as natural rate of inflation. For Nigeria about 15% price appreciation yearly is needed keep the economy running and make investment profitable. What‚Äôs is not needed is a higher level of inflation.
The inflationary content of the 1988 budget might not give opportunity to investors. The budget will stimulate demand which will result in the rise of finished inventories of finished inventories. This in turn will stimulate demand for raw materials. If price are allowed to rise as they are already doing producers might find it difficult to acquire capital goods, as they will compete with materials at the foreign exchange market FEM.
With more pressure on the naira, the exchange rate will rise thus making imported capital goods most expensive. This is capable of discouraging investment most especially as the public sector will now go to FEM to purchase foreign exchange.
The federal government should in the cause of 1988 allocate more foreign exchange to FEM than budgeted for and the Enterprises Promotion Decree amendment should be brought to public notice in order to public notice in order to attract foreign investment.

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