Two opposing forces acting on the Nigerian government’s public finance have led to the current unfortunate, but inevitable situation. Revenues have fallen and continue to fall; on the other side of the finance equation, the government’s needs have widened or increased and continue to do so.
This is a fundamental issue. The decline in revenue and the rising demand on government derive from the nature or fundamentals of our economy and polity at the moment. And because they are fundamental issues, they must be addressed by tackling the causes and never by treating the symptoms or consequences.
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The deficit created by this has led to the ugly situation where it has been said that the government had to “print money”. Sure, deficits must be funded, one way or the other, and “printing money is one of the possible ways to do so.
But all central banks print money, and our Naira has sometimes been printed, so why the uproar now about printing money?
The significance of the concern lies in the frame and the imagery it evokes. As a frame, “printing money” is a rather unsavory representation of a fiscal action (borrowing) by the state that the public all over the world considers escapist or rascally. When governments are reported to have resorted to printing money, the public usually has the impression that the authorities are unmindful of the potential consequences of such an action.
It also gives the impression of a preference by the government for “cheap” or costless money, but one that is actually laden with harmful possibilities.
It is a frame that gives the government’s borrowing a dubious or sinister coloration. It gives the impression of a government or its officials leading personnel of the central bank into a certain room filled with printing materials. In few hours the team emerges from another door beaming with smiles; the deed is done and, here are bundles of currency notes from which the government can begin to spend.
In this way, printing money gives the impression of policy rascality that could effectively undermine the fundamental principles of public finance.
How does the government finance its huge bills that cover motley of things? These range from office pins to healthcare, environmental issues, education, highways, and other public goods, including security. And in our current case, the government is prosecuting various wars across the country, all of which involve spending.
It is no longer a secret that the government’s finances are in deficit. It is also clear that the deficit has been exacerbated by the impact of COVID-19, which has succeeded in beaming attention to the vulnerable nature of the Nigerian economy.
In January 2021, the federal government recorded a deficit of N485.51 billion, due to a combination of factors. One, the price of oil fell, which means that revenue accruing from oil has fallen. Also, although the catch-all term of ‘non-oil revenue” now accounts for about 54.6per cent of total revenue in the January period, its ascendancy as a revenue source is yet to lift the nation out of its financial doldrums.
The key options available to a government for funding its deficits are to raise taxes, borrow from the markets (locally and externally), and of course borrow from the central bank, which is also known by its frame, printing money.
Raising taxes could mean either of two things. It involves raising the tax rates (as the government has done with the VAT rate), and embarking on a drive to widen the tax net.
The first option has its drawbacks and therefore cannot be pursued for long without dire consequences. The government cannot arbitrarily raise tax otherwise, the economy runs the risk of experiencing a fiscal drag.
This is a phenomenon described by public finance experts as “when the economy wants to move forward, something would be drawing it backward.” In theory and in reality, it depicts a situation where the government takes so much from business in the form of taxes that not enough is left for reinvestment or plough back to help lift the economy and set it on the path of growth.
Another option available to the government to finance a deficit is to borrow. Of course, we know that our government has been doing a lot of borrowing, both locally and from foreign markets. Both have their drawbacks, being debts. In the case of domestic borrowing, the concern usually is that government crowds out the private sector by competing with businesses for available funds. When governments offer higher interest rates than the private sector can pay, they “crowd out the private sector, which in reality should be the engine of growth’’.
The third option, often the last resort, is what is often referred to as “printing money.” In plain language, “printing money” simply means government borrowing from the central bank. The basis of this is the fact that the central bank is the banker to the government.
It touches on the issue of the independence of the central bank in a given country. How independent is the central bank? How much influence can the government have on the decisions of the bank? These concerns are not peculiar to Nigeria but apply universally. Again, they reflect the fact the relationship between the bank and the government of the day is of interest to every member of the country.
The key issue with printing money is its unsustainable nature. It is unsustainable because frequent resort to it by the government has detrimental effects on the economy. Its biggest drawback is the inflationary impact, which ultimately undermines the strength of the currency and welfare of citizens.
Government borrowing from the central bank back is usually through what is known as “Ways and means”. It is an overdraft, a short-term accommodation for an economic agent whose current income has fallen short of its expenditure.
So, it becomes an abnormality if a fellow who came in for a temporary accommodation now settles for a permanent abode. Frequent recourse to borrowing from the central bank is, therefore, bound to be counterproductive.
Already the stress on the financial system is becoming visible. In February 2021, Nigerian authorities told an international media organisation that the government had worked out terms for the conversion of a whopping N10 trillion ($25.6 billion) debt owed to the central bank to a 30-year bond. The amount represents deficit financing by the central bank to the government through ways and means.
