Calabar – Nigeria’s huge fiscal deficit, rising domestic debt, depletion of the Excess Crude Account (ECA) and the distress in the banking sector are issues that urgently need the attention of the new cabinet as ministers settle into office.
This was the observation of former Minister of Finance and Director at the World Bank, Dr. Ngozi Okonjo-Iweala.
She also said the 2010 budget, based on an oil price of $67 per barrel and production of 2.35 million barrels per day, might be unrealistic leading to more borrowing and larger deficit.
In an address titled “Safe-guarding Nigeria’s Fiscal Health: Some Considerations for the Present and the Future” she delivered to mark the 24th and 25th combined convocation ceremony of the University of Calabar yesterday, Okonjo-Iweala stated that while ECA was rightly used to meet the shortfall in revenues caused by low oil prices, the worrying signs in terms of fiscal deficit and depletion cannot be ignored.
Policy actions should therefore be tailored in such a way to immediately tackle these issues, she suggested. The Ministry of Finance and the Central Bank of Nigeria (CBN) should get the ball rolling by focusing on results, she advised.
“Policy actions must focus on keeping the exchange rate flexible and market-based in order to help spur diversification; curbing the fiscal deficit and keeping an eye on debt increases, especially in domestic debt; and managing the bank recapitalization exercise with the utmost transparency and fairness,” she said.
Nigeria’s macroeconomic and structural reforms implemented from 2003 to 2006 helped it to weather the global economic crisis, she explained. However, action must be taken to remedy the current problems undermining major gains of the past.
The former finance minister disclosed that the ECA which was $20.1 billion at the end of 2008 has reduced to $7.8 billion as at December 2009. Also, Federal Government’s domestic debt amounted to N1.75 trillion naira or US$13.6 billion at the end of 2006. By the end of 2009, it had virtually doubled to N3.23 trillion or US$21.8
States have also borrowed heavily, with some floating bonds and “getting into trouble,” she said. The domestic borrowing of states should be monitored and information on how much states have borrowed should be made available, she advised.
Okonjo-Iweala argued that it is not entirely true that huge domestic debt does not matter because research indicates that some might be held by non-resident investors. She noted that for instance, a 2008 IMF report on private capital flows to Sub-Saharan Africa estimates that about 20 per cent of Nigerian government domestic debt is held by foreigners.
Furthermore, she argued her case by stating that domestic matters because “higher fiscal deficits financed by selling domestic bonds could crowd out private investment. Banks and other financial intermediaries would prefer to invest in ‘safe’ government bonds than make ‘risky’ loans to the corporate sector.”
She went on to explain that the ratio of domestic debt to GDP halved from 19.2 per cent in 2000 to about 9.2 percent in 2008; but then rose to 12.5 percent of GDP by the end of 2009. That means domestic debt increased to $4.3 billion during 2009 reaching $21.76 billion by the end of last year.
She also argued that real interest rates paid by the government on its domestic debt rose sharply in 2009 to 11 per cent given the sharp decline in the inflation. This will have an adverse effect on what she described as debt dynamics given slow growth, she explained.
On the 2010 budget, she said that if oil revenue assumptions of $67 are not met, the country would be forced to dip into an already depleted ECA, leading to more borrowings and larger deficits.
•On banks, she advised there should be better supervision which could be achieved through Nigeria modernizing infrastructure for accounting, financial reporting, collateral registration and credit rating.
•Also, “Nigeria must take steps to avoid situations where good fiscal policy resulting in growing ECA assets is undone by bad loans on the balance sheets of banks, as we have already seen to some extent. While the authorities are taking decisive steps to manage this crisis effectively and contain its fiscal costs, the lesson is clear: prevention is better and less costly than cure.
•“The whole Asset Management Company process needs to be handled transparently, effectively and quickly with three goals: restoring confidence to the banking sector; resolving the banks quickly so that lending to the private sector resumes; and minimizing the chances of a repeat crisis,” she said.
source – thisdayonline
photo – Trendy Africa
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