Spending the Economy Out of Current Crisis

Concerns vary as to how our government intends to minimize the impact of the global economic and financial crises on the Nigerian people. Opinions have equally differed extensively with respect to not only what needs to be done but about how it should be done. Two divides hold opposing views: the minority group believes in allowing macroeconomic correction via reduced public sector consumption particularly on those things which (a) do not boost the consumption patterns of the low-income groups as well as (b) result in massive dollar outflow and more so to reduce the volume of hot-money which inevitably creates instability. The majority group believes that government just needs to spend the economy out of the present situation.

One underlying fact among positions taken by the two groups is that non appears to seriously question the spending as such, but rather on the source of the spent money, as well as the quality and direction of the spending. Even the advocates of reduced the public sector spending know how expedient it is for people or institutions to spend money. Their concerns however have dwelt essentially on the implication of re-energizing the underlying cause of the crises in the first instance. Increased spending on all fours, rather than reduced but targeted spending, awakens the demons associated with deficit financing. And this is primarily the direction of government and the monetary authorities; of course not only in Nigeria but the world over. The difference however is that many of the countries we borrow policy strategies from have ample absorbers for the consequent shocks. We do not have such cushions save in our only income provider: Crude oil.

But what appears to be most appropriate for our own economy where virtually everybody depends on government's goodness for subsistence is the quality and direction of spending and less of its size. Focusing on size inevitably leads us astray into deficits. The scale become important and can decided upon as soon as appropriate direction and corresponding quality have been determined. For instance, the spending portfolio can be rebalanced and adjusted in favour of such identified quality and direction and less in favour of projects that do not meet the defined criteria. That way, we can achieve significant fiscal efficiency and output quality without compounding the risks of macroeconomic instability. A good way to start will therefore be to ask ourselves whether the composition or the planned fiscal spending portfolio for 2009 in consistent with the desiderata for strategically combating the crises at hand. The answer is very straight forward and that is: we may have a very short- time fiscal relief but at the cost of highly aggravated macroeconomic instability.

A short-time recovery can be achieved with expanded spending. However such recovery may not be sustained if (a) such increased spending proceeds from the central bank's hot money machines or loosened credit expansion (b) the quality and direction of such spending are not properly channeled to stimulate sufficient demand as well as promote real savings afterwards. Further to (a) above, the huge fiscal deficit in the 2009 budget promises equally huge expansions in money supply. It appears that this is a fait accompli. But "on what to spend the money" may still be deliberated. In situations like this, low income group's high consumption propensity should be targeted. To efficiently do this, efforts should be on those activities where many of the people belonging to this socioeconomic status can be meaningfully engaged. Such areas include infrastructure construction and agriculture. Again, government's effort in infrastructure concessioning is noble and should be pursued albeit with further modifications. Massive infrastructure reconstruction involving the use of many local firms that may not have the capacity to deploy heavy capital-intensive structure may be germane. The weak capital bases of such firms force them to use more of labour - intensive approach to construction. That way many artisans hitherto employed can be gainfully employed. This approach is not the same as government's use of direct labour in infrastructure reconstruction which have been flawed by massive corruption. The same spending direction solution can be applied to agriculture.

The advantages of this approach are that we can simultaneously pursue the development of our badly needed infrastructure even in the face of declining income, expand employment levels particularly at the level of those who can best spend it in real economic activities. Another advantage would be the minimal, if any, implication on foreign exchange and exchange rates. Although, the deficits must definitely work its way to worsening the naira value, the use of multiplicity of small local construction firms will minimize dollar-demand pressure by foreign construction firms that would want to repatriate profit, or purchase or lease new equipment from abroad etc.

The import of this submission is that if our proposed deficit spending are not appropriately and strategically targeted, we shall end up spending our economy into more trouble. Growth in money supply to accommodate these deficits, in the face of reduced real output growth can only cause further distortions and trigger more uncertainly in the macroeconomic environment. Thus such spending must be channeled where they can immediately impact on real output growth through enhanced demand. Now better-performing enterprises will in turn have the confidence to access further credit or other forms of financing to grow. Now better performing In any case, one other condition that will be very important is the associated taxes. All taxes needs to be eased. No further tax type should be created by the government. Corporate taxes and VAT can be further eased for say a period of 3 years until the economy improves. In order not to frustrate government business, public spending particularly the ones involving payments abroad should be reduced. It is in this regard that governments' decision to halt foreign trainings for its employees as well as purchase of new cars should be hailed.

Conclusively, the money transmission channel is very important for macroeconomic stability. All forms of deficits - worse still, a huge one - have adverse macroeconomic consequences. Thus how the resulting hot money transmits can determine how destructive it can be. When the deficit-hot-money follows the traditional route of CBN-Banks-Government -Politicians -Preferred sectors etc, the resulting step -wise inflation worsen as it progresses and eventually destroys more and more real businesses that are further withdrawn from its base source. Consequently such businesses as agriculture, and technical works where there are millions of small scale operation are quickly destroyed as (a) they cannot adjust their prices quickly to changing costs of inputs driven by these hot money which takes longer time to get to them; (b) those who quickly get the hot money alter their consumption and investment preferences relative to the volume of funds they receive to the disadvantage of those in the last stages in the chain. This suggested approach only ensures that those that are always at the last stages in the transmission chain are brought forward.

Martins Oluba N. Ph.D. DBA is the President /CEO of ValueFronteira Limited. martin@valuefronteira.com

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