The challenge of sustainable economic policies

The management of public funds is a common topic in terms of the highest responsibilities managed by the government. It comes as no surprise to most Nigerians that the government struggles with budgetary allocation, tax collection and other basic responsibilities it is expected to manage. Corruption and partisanship are not assumed but expected from our […]

The management of public funds is a common topic in terms of the highest responsibilities managed by the government. It comes as no surprise to most Nigerians that the government struggles with budgetary allocation, tax collection and other basic responsibilities it is expected to manage. Corruption and partisanship are not assumed but expected from our politicians.

Indeed, in a system racked with inefficiency, voter apathy and lack of transparency, there is not much in the way of social security. But why does the government struggle with implementing sustainable policies that can ensure economic growth and stability when it is such a normalised aspect of the government rule in other countries?

With every successive administration, it is hard to deny that we have seen a consistent downward trajectory in the quality of governance. The naira struggles to maintain relevance, reflecting deeper economic issues, such as inflation, poor monetary policies and declining investor confidence.

Each successive administration has faced difficulties in stabilising the currency and implementing reforms that could improve fiscal discipline and promote sustainable economic development.

• NIGERIA DAILY: How To Know If Your Hajj Has Been Accepted
• Minister presents gold bars to president Tinubu, says sector will boost naira value

This persistent decline underscores the urgent need for robust economic policies, strengthened institutions and a transparent, accountable governance system to reverse the trend and restore public trust in the government.

The Treasury Single Account (TSA) was an attempt to mitigate some of these issues, as prior to its implementation, it was common practice for ministers to use domiciled accounts as a means of draining public funds. The implementation of it was intended to consolidate government funds, promote transparency, prevent leakages and improve accountability in public resource management. The TSA aimed to address these issues by consolidating all government revenues into a single account maintained by the Central Bank of Nigeria (CBN), and all transactions could be monitored more easily and systematically.

Moreover, the TSA improved the efficiency of public financial management. With a centralised account, the government could better manage its cash flows and reduce borrowing costs as it had a clearer picture of its financial position at any given time. This also facilitated better budgetary control and planning as the government could allocate resources more effectively and ensure that funds were available when needed for various projects and initiatives.

It was not until December 2023 that President Tinubu cut government borrowing and reduced the federal budget from N33.93 trillion to N19.59 trillion. This shift was partly due to the government raising funds through the fixed-income market, including treasury bills and bonds, which are seen as more cost-effective alternatives to bank loans.

Despite this reduction, Nigeria’s overall debt remains high. The 2024 budget, amounting to N27.5 trillion, includes plans for deficit financing of over N7 trillion, indicating ongoing borrowing needs.

Analysts have pointed out that the assumptions underpinning the budget may not reflect current economic realities, such as the exchange rate and oil production levels, further complicating debt sustainability.

In order to ensure stable and consistent growth in the economy, the IMF has made several recommendations, such as investment in human capital by raising the budget for education; health care and social safety nets to enhance human capital development and reduce poverty and inequality; fiscal policy reforms through the implementation of measures to increase government revenue, such as broadening the tax base, improving tax administration, and reducing tax evasion; exchange rate policy; adopting a flexible exchange rate regime to allow for market-driven determination of the exchange rate, which can help absorb external shocks and improve external competitiveness. Widespread corruption at various levels of government leads to the diversion of public funds for private use.

This significantly reduces the amount of money available for public services and development projects. There is also an inefficient use of resources: funds are often mismanaged due to lack of transparency and accountability. Public financial management systems are weak, leading to inefficiencies in budget implementation and project execution.

Additionally, the IMF has stressed the importance of maintaining a tight monetary policy to combat inflation. This includes the need for exchange rate flexibility and building up foreign reserves. It also supports the Nigerian government’s efforts to unify the official foreign exchange windows and improve the functioning of the FX market.

Most importantly, Nigeria’s economy is still heavily dependent on oil exports despite being the largest exporter of crude oil in Africa. High corruption has impeded efforts to diversify the economy,  making it vulnerable to fluctuations in global oil prices. When oil prices drop, government revenues plummet, leading to budget shortfalls and increased borrowing. The focus on oil has led to the neglect of other sectors, such as agriculture, manufacturing and services. This lack of diversification makes the economy less resilient to oil price shocks and limits job creation and sustainable economic growth. As a result, critical areas such as food security and industrial development have suffered.

Agriculture, which historically was a major contributor to Nigeria’s gross domestic product and employment, has been underfunded and underdeveloped. This has led to increased food imports and a higher vulnerability to global food price fluctuations.

Furthermore,  the over-reliance on oil revenue has also led to under-investment in education and health care, which are essential for developing a skilled workforce and improving the overall quality of life. The service sector, which includes financial services, tourism and information technology, has not been fully leveraged. Potentially high-growth areas like technology and digital services are hampered by poor internet infrastructure, limited access to capital and regulatory bottlenecks.

Addressing these challenges requires comprehensive reforms, including improving revenue collection, enhancing transparency and accountability, rationalising expenditure, diversifying the economy and addressing security issues.

Implementing IMF’s recommendations and other expert advice can help Nigeria manage its funds more effectively and achieve sustainable economic growth.