nigeria borrowing inflationary

7/28/2019 Nigeria borrowing inflationary

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WHAT IS INFLATION?

The term "inflation" originally referred to increases in the amount of money in

circulation, and some economists still use the word in this way. However, most

economists today use the term "inflation" to refer to a rise in the price level. An

increase in the money supply may be called monetary inflation, to distinguish it

from rising prices, which may also for clarity be called 'price inflation'.

Economists generally agree that in the long run, inflation is caused by increases in

the money supply.

Price Inflation is a rise in the general level of prices of goods and services in an

economy over a period of time. When the general price level rises, each unit of

currency buys fewer goods and services. Consequently, inflation reflects a

reduction in the purchasing powerper unit of moneya loss of real value in the

medium of exchange and unit of account within the economy. A chief measure of

price inflation is the inflation rate, the annualized percentage change in a general

price index (normally the consumer price index) over time.

Inflation's effects on an economy are various and can be simultaneously positive

and negative. Negative effects of inflation include an increase in the opportunity

cost of holding money, uncertainty over future inflation which may discourage

investment and savings, and if inflation is rapid enough, shortages of goods as

consumers begin hoarding out of concern that prices will increase in the future.
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Positive effects include ensuring that central banks can adjust real interest rates (to

mitigate recessions), and encouraging investment in non-monetary capital projects.

Increases in the quantity of money or in the overall money supply have occurred in

many different societies throughout history, changing with different forms of

money used. For instance, when gold was used as currency, the government could

collect gold coins, melt them down, mix them with other metals such as silver,

copper or lead, and reissue them at the same nominal value. By diluting the gold

with other metals, the government could issue more coins without also needing to

increase the amount of gold used to make them. When the cost of each coin is

lowered in this way, the government profits from an increase in seignior age. This

practice would increase the money supply but at the same time the relative value of

each coin would be lowered. As the relative value of the coins becomes lower,

consumers would need to give more coins in exchange for the same goods and

services as before. These goods and services would experience a price increase as

the value of each coin is reduced.

An increase in the general level of prices implies a decrease in the purchasing

power of the currency. That is, when the general level of prices rise, each monetary

unit buys fewer goods and services. The effect of inflation is not distributed evenly

in the economy, and as a consequence there are hidden costs to some and benefits

to others from this decrease in the purchasing power of money. For example, with
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inflation, those segments in society which own physical assets, such as property,

stock etc., benefit from the price/value of their holdings going up, while those who

seek to acquire them will need to pay more for them. Their ability to do so will

depend on the degree to which their income is fixed. For example, increases in

payments to workers and pensioners often lag behind inflation, and for some

people income is fixed. Also, individuals or institutions with cash assets will

experience a decline in the purchasing power of the cash. Increases in the price

level (inflation) erode the real value of money (the functional currency) and other

items with an underlying monetary nature.

GOVERNMENT BORROWING

Academic literature is rife with theory and empirical evidence of the negative

consequences of government borrowing. Government borrowing limits the primary

central bank function of maintaining price stability. Since borrowing is essentially

akin to printing of new money, it erodes purchasing power of the local currency

in the form of high and persistent inflation and exchange rate depreciation. These

problems become more acute when the rise in domestic assets, led by government

borrowings, significantly outpaces growth in foreign assets.

Moreover, unscheduled government borrowing also complicates liquidity

management, undermining the credibility of monetary policy.


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Government debt (also known as public debt and national debt) is the debt owed

by a central government. By contrast, the annual "government deficit" refers to the

difference between government receipts and spending in a single year, that is, the

increase of debt over a particular year.

Government debt is one method of financing government operations, but it is not

the only method. Governments can also create money to monetize their debts,

thereby removing the need to pay interest. But this practice simply reduces

government interest costs rather than truly canceling government debt, and can

result in hyperinflation if used unsparingly.

Governments usually borrow by issuing securities, government bonds and bills.

Less creditworthy countries sometimes borrow directly from a supranational

organization (e.g. the World Bank) or international financial institutions.

As the government draws its income from much of the population, government

debt is an indirect debt of the taxpayers. Government debt can be categorized as

internal debt (owed to lenders within the country) and external debt (owed to

foreign lenders). Sovereign debt usually refers to government debt that has been

issued in a foreign currency. Another common division of government debt is by

duration until repayment is due. Short term debt is generally considered to be for

one year or less, long term is for more than ten years. Medium term debt falls

between these two boundaries. A broader definition of government debt may
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consider all government liabilities, including future pension payments and

payments for goods and services the government has contracted but not yet paid.

Lending to a national government in a currency other than its own does not give

the same confidence in the ability to repay, but this may be offset by reducing the

exchange rate risk to foreign lenders. On the other hand, national debt in foreign

currency cannot be disposed of by starting a hyperinflation; and this increases the

credibility of the debtor. Usually small states with volatile economies have most of

their national debt in foreign currency. For countries in the Eurozone, the euro is

the local currency, although no single state can trigger inflation by creating more

currency.

Lending to a local government can be just as risky as a loan to a private company,

unless the local government has sufficient power to tax. In this case, the local

government could to a certain extent pay its debts by increasing the taxes, or

reduce spending, just as a national one could. Further, local government loans are

sometimes guaranteed by the national government, and this reduces the risk. In

some jurisdictions, interest earned on local or municipal bonds is tax-exempt

income, which can be an important consideration for the wealthy.

Global debt is of great concern since interest payments can often place great

demands on governments and individuals. This has led to calls for universal debt

relieffor poorer countries.
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A less extreme and more innovative measure would be to permit civil society

groups in every nation to buy the debt in exchange for minority equitypositions in

community organizations. Even in dictatorships, the combination of banks and

civil society power could force land reform and overthrow unaccountable

governments, since the people and banks would be aligned against the oppressive

government.

NIGERIA ECONOMY AND GOVERNMENT

Nigerias economic structure is largely oil-based. The economy has stumbled for

years due to political unrest, corruption and poor fiscal policies. However, since

the restoration of democracy and introduction of economic reforms, the country is

growing at a fast pace. According to the International Monetary Fund (IMF)

projections, Nigeria is the second fastest growing economy in the world and will

outperform other African economies in the near future.

The most conspicuous fact about Nigeria's economy is that the corruption and

mismanagement of its post-colonial governments has prevented the channeling of

the country's abundant natural and human resources especially its wealth in crude

oil into lasting improvements in infrastructure and the construction of a sound base

for self-sustaining economic development. Thus, despite its abundant resources,

Nigeria is poorer today than it was at independence in1960. Still one of the less
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developed and poorer countries of the world, it has the potential to become a major

economic power if the leaders resolve to learn from past mistakes and to harness

the country's rich natural and human resources for a productive and sustained effort

to promote economic development.

The oil boom which Nigeria experienced in the 1970s helped the nation to recover

rapidly from its civil war and at the same time gave great impetus to the

government's program of rapid industrialization. Many manufacturing industries

sprang up and the economy experienced a rapid growth of about 8 percent per year

that made Nigeria, by 1980, the largest economy in Africa. The growth, however,

was not sustained. The new oil wealth did little to reverse widespread poverty and

the collapse of even basic infrastructure and social services. The iron and steel

industry, started with the help of the Soviet Union, still has not achieved a

satisfactory level of production. The oil boom also provoked a shortage of labor in

the agricultural sector as members of the rural workforce migrated to jobs in the

urban construction boom and a growing informal sector. When the price of crude

oil fell and corruption and mismanagement still prevailed at all levels, the economy

became severely depressed. The urban unemployment rate rose to 28 percent in

2005, and crime also increased as 31.4 percent of the population lived below

the poverty line.


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IS NIGERIA GOVERNMENT BORROWING INFLATIONARY?

Nigeria government for decades has been over borrowing from the international

community.

Nigeria's debts mounted as administrators engaged in external borrowing and

subsidized food and rice imports and gasoline prices. In the 1980s, economic

realities forced Ibrahim Babangida's military regime to negotiate a loan with the

World Bank and to reschedule Nigeria's external debts . His regime undertook an

economic structural adjustment program (ESAP) to reduce Nigeria's dependence

on oil and to create a basis for sustainable non-inflationary growth. However,

external borrowing to shore up the economy created more problems than it

alleviated. Much of the borrowed money never reached Nigeria. The portion that

reached the country often went towards abandoned or nonperforming public sector

projects. External loans escalated Nigeria's debts to US$30 billion during the

Babangida regime and consumed external earnings indebt servicing . Similarly, the

ESAP prescribed by the International Monetary Fund (IMF) failed to advance the

economy, and aggravated the problems of inflation and unemployment. It caused

reduction of state spending on education and health care. Continuing political

instability due to Babangida's annulment of the presidential election results in June

1993 and the subsequent authoritarian rule of Sani Abacha (1993 to 1998) made

the general economic situation worse. The gross corruption by the Abacha regime


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and its violations of people's fundamental rights turned Nigeria into an

international pariah for 6 years, and thus discouraged foreign investment in the

economy. Many industries and manufacturing companies could not obtain raw

materials and closed down. Others operated under severe handicaps, including

rampant power outages and refined petroleum scarcity. Not enough had been done

in the years of plenty to diversify the economy or to sustain the development.

Military coups and political instability worsened the situation.

The Nigerian government is financially broke and barely able to pay its bills. The

portrait of the Nigerian governments dismal financial situation is in sharp contrast

to recent propaganda by Nigerias Finance Minister, Ngozi Okonjo -Iweala, and

Central Bank governor, Sanusi Lamido Sanusi. Both officials have sought to depict

the Nigerian economy as vibrant and robust.

The Federal Government has also borrowed massively from local and foreign

banks to pay its recurrent expenditures. The President Goodluck Jonathans

administration is now eyeing the N3.4 trillion pension funds to enable it to finance

its deficits.

The Nigerias net oil export has been cut by half as elements have engaged in

massive oil theft.


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Since her second tour as a prominent minister in Nigeria, Ms. Okonjo-Iweala has

constantly told the public that the Nigerian economy was buoyant. But in private

she has told close associates, officials of international finance bodies as European

and North American nations that Nigerias economic outlook was getting worse

especially with decreased oil sales. With her blessing, Nigeria has also resorted to

massive borrowing from China and several other non-traditional loan sources to

plug financial deficits. By the end of Mr. Jonathans tenure, Ms. Iweala would

have borrowed Nigeria back to the Stone Age referring to the period Nigeria

racked up loans from the IMF as well as Paris and London Clubs essentially to

finance the grasping needs of Nigerias corrupt elite.

Nigeria has been downgraded in recent weeks by international financial rating

organizations, but the government wants to maintain that everything is rosy.

The situation is rich in irony. Okonjo-Iweala, in her first coming as Finance

Minister, led efforts that culminated in our escape in 2005/6 from three decades of

crushing debt through a debt buy-back deal under which Nigeria paid $12 billion to

secure an $18 billion debt write-off from the Paris Club group of creditors. While

at the World Bank thereafter as its managing director, she frequently railed against

reckless borrowing, profligate public expenditure and untidiness in the countrys

public finances. But, it is deeply troubling that 18 months into her second coming

as minister and head of Jonathans economic team, our public finances are as


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messy as ever while she enthusiastically seeks dubious foreign loans. Is the

Finance Minister paying attention to the depth of public corruption in the country?

Unfazed by strident opposition to controversial foreign loans, the minister again

got herself into an awful tangle at the House of Representatives, as she sought to

defend the Presidents request to raise the 2012-2014 borrowing plan to $9.3

billion. In her presentation to the House Committee on Loans/Aid/Debts, she said

the projects to be funded included erosion and flood control; FADAMA agriculture

projects in the North; educational projects in Edo State; power projects in Zungeru,

and the $500 million China Exim Bank loan for the ongoing Abuja Light Rail

Project. The minister and the Debt Management Office stridently assert that our

Debt-to-Gross Domestic Product ratio at 17 per cent, is one of the lowest in the

world, but fail to factor in the observations by senators that projects for which

loans were obtained in the past were either abandoned or failed; that most of the

items for which new loans were being sought had been captured in the 2013

budget, and that seeking foreign loans is a celebration of inefficiency and lack of

moral credibility at a time of highergovernment revenues.

There is much to worry about. Jonathan and Okonjo-Iweala have failed to ensure

accountability and prudence in public finance. The International Monetary Fund

has observed that up to 80 kobo of every N1 spent by Nigerias government is lost

through waste and theft. Such leakages and gross misplacement of priorities


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account for the bulk of public funds being spent on recurrent needs with little left

for capital projects. The government sustains its culture of waste and corruption by

allotting money to projects that are better left to the private sector. The plans to

borrow $7.9 billion for pipeline projects and spend $1.6 billion on turnaround

maintenance of the four loss-making state-owned refineries are totally misplaced.

CONCLUSION

The greatest threat and the major contributory factor in the undermining of a given

economy and its currency is inflation. The monetary well being of a nation can go

under and deteriorated drastically when inflation rears its ugly head and a once

buoyant economy can become sicken with depressing currency, GDP and lower

productivity. But in most cases Inflation could become a tool to erode the debt of a

nation; a country with large domestic and foreign debts can utilize the inflationary

trends to reduce the burden of its debts.

In the 2006 negotiation for the payment and the final settlement of the Paris Club

debt, Nigeria was granted the famous 18% write-off that reduced the debt. But the

reduction that inflation could have offer was not wholly taken advantage by

Nigerian negotiators. Inflation with regards to debt can be use to grind down a

given debt. Nigeria do not have to be necessarily overjoyed and satiated with the

18% write off because net debt would have gone down to 45-50% by the


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application of inflationdebt ratio. The bad era of the double digit inflation would

have be effectively utilized and applied to erode the countrys debt.

RECOMMENDATION

Pipelines, depots, refineries and all other oil downstream activities should be left

entirely in the hands of the private sector with the government as regulator. The

government should speedily privatise all its commercial ventures as this will free it

to fund roads, health, education, water supply, housing, erosion and ecological

schemes for which it is now frantically borrowing. There is a growing convergence

of opinion that high foreign aid intensity is actually associated with erosion in the

quality of governance.

Legislators should not be taken in by the ministers reasoning that the loans sought

are concessionary, with long-term, low or zero-interest facilities. That is exactly

where we started over 30 years ago when development partners convinced us to

take loans and pay later. Loans attract penalties when payment timelines are

missed and our poor debt management and fiscal indiscipline are legendary. The

signs are ominous. Whereas all that we borrowed and for which we had repaid over

$40 billion while still owing $35 billion by 2004, was less than $18 billion; now

we owe $6.2 billion that will, according to DMO, rise to $9.02 billion by year end


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and $16.76 billion by 2015. Domestic debts are expected to climb to $8.44 billion

by 2015.

In other countries, the impact of foreign loans is visible in infrastructure and jobs.

But in Nigeria, structures built by loans such as the steel plants, fertiliser,

petrochemical and paper plants have all collapsed. A Stanford University 2009

study hit the nail on the head: In some of the worlds lowest-ranking countries in

many areas of governance, particularly with regard to corruption, foreign aid

appears simply to increase the volume of funds at the disposal of already corrupt

government officials and kleptocratic elite. While other crude oil exporting

countries have been piling up robust foreign reserves and investing massively in

infrastructure on persistently high oil prices, our infrastructure continues to

crumble.

Okonjo-Iweala should clean up our deplorable public finances, lead efforts to

restart the privatization plan and target growth with jobs like other World Bank

returnees did in Ghana, Peru, Argentina and Brazil, enabling their countries to

climb out of debt and recession. Foreign loans crowd out sorely-needed Foreign

Direct Investment when ploughed into ventures and sectors that are better

liberalized or privatized. As long as our government was borrowing to fund the

corrupt and inefficient Nigerian Telecommunications Plc, the massive FDI, job


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creation and phone and internet penetration that followed the sectors liberalisation

in 2001 could not take place. Legislators should not stop at merely criticizing the

borrowing plan; they should protect present and coming generations by forbidding

new loans under any guise and insisting on prudent management of our resources

through diligent oversight.

The World Bank on Monday highlighted the inherent risk in Nigeria borrowing to

finance its budget in the event of a deficit in the next two years, just as the Federal

Government says it would continue to maintain a 40 per cent threshold of debt to

Gross Domestic Product, GDP, ratio despite the increase to 56 per cent by

multilateral donor agencies. If the economy grows so well and we generate more

revenue from taxes more than the government is getting now, then there will be

less need for government to borrow the amount government has to borrow.

If Nigeria can generate more revenue from taxation, government will be able to

meet its obligation with less borrowing. As a federal system, we need to bring

effective debt management to bear at the sub-national level.

Leading economist, Dr. David Cowan, said that to create a strong cushion for

Nigerias economy in the face of the increasing economic convulsions in the Euro

zone, the United States and other crisis-prone economies, Nigeria should move its

current level of crude oil exports from 2.3 million barrels per day to about four


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REFERENCE

http://en.wikipedia.org/wiki/Inflation

Blanchard, Olivier (2000). Macroeconomics (2nd ed.). Englewood Cliffs, N.J:Prentice Hall. ISBN 0-13-013306-X

Mankiw, N. Gregory (2002). Macroeconomics (5th ed.). Worth InternationalMonetary

Fund and The World Bank (2001), Developing a Primary Market forGovernmentSecurities , in Developing Government Bond Markets: A Handbook,Chapter 5,

pp. 153178. International Monetary Fund and the World Bank,Washington D.C.

http://www.osundefender.org/?p=61383

http://dailyindependentnig.com/2012/07/nigerias-5-91bn-debt-and-challenges-of-inflation/

Emeka Chiakwelu is the Principal Policy Strategist at [email protected].
http://en.wikipedia.org/wiki/Olivier_Blanchardhttp://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/Special:BookSources/0-13-013306-Xhttp://en.wikipedia.org/wiki/N._Gregory_Mankiwhttp://www.osundefender.org/?p=61383http://www.osundefender.org/?p=61383http://www.osundefender.org/?p=61383http://en.wikipedia.org/wiki/N._Gregory_Mankiwhttp://en.wikipedia.org/wiki/Special:BookSources/0-13-013306-Xhttp://en.wikipedia.org/wiki/International_Standard_Book_Numberhttp://en.wikipedia.org/wiki/Olivier_Blanchard

nigeria borrowing inflationary

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