Forging a Monetary, Fiscal Policy Alliance

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A balance between monetary and fiscal policies is a necessary condition for any nation to achieve its macroeconomic goals, writes Obinna Chima

The foremost objective of macroeconomic policy is to achieve sustainable economic growth in a context of price stability and viable external accounts. For this, it is essential to achieve a close degree of coordination among decision makers in the areas of monetary and fiscal policy.

According to the International Monetary Fund (IMF), the effect of measures taken in either of these areas will inevitably depend on how the policies in each area affect those in the other.

Indeed, without efficient policy coordination between monetary and fiscal authorities, financial instability could ensue, leading to high interest rates, pressure on exchange rate, rapid inflation and an adverse impact on economic growth.

Clearly, all these symptoms manifested in the Nigerian economy since the Central Bank of Nigeria (CBN) eliminated the funding of 41 items from the official foreign exchange (FX) market. The CBN, had in the second half of 2015, issued a directive stopping some imported goods from the list of items valid for FX, which implied that importing the items can only be done by sourcing of FX from the parallel market. Some of these items included rice, cement, margarine, palm kernel/palm oil products/vegetable oil, among others.

The policy, no doubt, led to intense pressure on the naira, as well as the depreciation of the nation’s currency on the parallel market. This also affected the prices of goods and services as the level of inflation in the country rose significantly by 92 per cent in just one year.
And while this happened, it was expected that there would be response from the fiscal authorities on the 41 items, which was never seen.

That was why, when the federal government recently approved and gave directive for the application of new tax duties on luxury goods as well as goods which have local substitutes, it was viewed as a welcome development. This fiscal initiative is expected to support the earlier decision of the central bank to stop the sale of FX to the 41 items and also reduce pressure in the FX market in 2017.
The latest development was informed by an earlier decision by all 15 members of the Economic Community of West African States (ECOWAS).

New Tariff Regime
Specifically, the federal government raised duties on luxury goods such as yachts and Sport Utility Vehicles (SUVs) imported into the country. But also affected were some food items such as rice, salt and sugarcane that have local alternatives.

Under the new ECOWAS Common External Tariff (CET) regime which administers import and export tariffs within the West African sub-region in the movement of goods, importers of yachts and other luxury automobiles such as SUVs, boats, sports cars, and other vessels used for pleasure are now to pay 70 per cent of the value of the vehicles as taxes (duties) to the Nigeria Customs Service (NCS). The new rate was a jump from the 20 per cent which the owners currently enjoy.

This was contained in a circular by the Minister of Finance, Mrs. Kemi Adeosun to the NCS.
Other major items affected in the duty increase included sugar cane and salt from 10 per cent to 70 per cent; alcoholic spirit, beverages and tobacco from 20 per cent to 60 per cent; and rice from 10 per cent to 60 per cent. Also included on the list are packaged cement, from 10 per cent to 50 per cent; cotton/ fabrics materials, from 35 per cent to 45 per cent; and used cars popular known as Tokunbo, from 10 per cent to 35 per cent respectively.
Medicaments such as anti-malarial and antibiotics; crude palm oil; wheat flour; tomatoes paste; and cassava products were also affected in the upward review of duties. But essential industrial sector accessories, including bolt, industrial oil and other equipment are to enjoy a downward review to spur local industrialisation.
The finance minister, in the circular stressed that president Buhari has already approved the 2016 fiscal policy measures “made up of the Supplementary Protection Measures (SPM) for implementation together with the ECOWAS CET 2015 – 2019 with effect from 17th October, 2016.”

Effective Coordination
The Chief Executive Officer at Graeme Blaque Group, a financial advisory firm, Mr. Zeal Akaraiwe, pointed out that monetary policy acting alone cannot take the economy out oofial present state. He stressed that the central bank tried to use monetary policy issue to attack structural and fiscal issue with the ban on the 41 items without support from the fiscal authorities. This, according to him was why the desired objective wasn’t fully achieved.
“We have had negative trade balance and with a negative trade balance, your currency will lose value. As your currency loses value when you are importing most of your goods and services, prices would increase. If prices increase, we have inflation.

“That is not just a monetary policy issue, it also involves fiscal policy. So, the central bank has control only over monetary policy issue. For example, those 41 items that were banned from accessing foreign exchange, what the CBN ought to do was to allow fiscal policies such as duties and tariffs take over. If you want to import any of those items, let’s say rice, Customs would raise the duties.

“So, by doing that, you are using fiscal policy to discourage the importation of those items, instead of saying go to the black market to buy forex to import them. This is because when you send them to the black market, you are starving the official market of forex. So, we have structural issues that we have not yet addressed and we are fighting the symptoms,” he had said in a recent interview.

Fiscal Reforms to the Rescue
Nonetheless, some bank chief executives officers (CEOs) have stressed that the performance of the Nigerian economy in 2017 will largely be driven by the quality of reforms initiated by the fiscal authorities as monetary policies appear to have reached their limit.
The CEOs spoke to THISDAY in separate phone interviews.
Speaking on his expectations in 2017, the Managing Director/Chief Executive, First Bank of Nigeria Limited & Subsidiaries, Dr. Adesola Adeduntan said invariably the outlook for the banking sector would reflect the fortunes of the Nigerian economy.

According to him, “The main transmission mechanisms are via consumer spending, which shows up in retail deposits, card usage, and retail loans; business investment, especially through its effects on term deposits, loans, and foreign trade; and government spend, including through borrowing by the issuance of government securities.
“Of these three lines, only the latter has held up well as rising domestic prices drive up yields on government securities. However, it is unlikely that the industry’s bottom-line can subsist entirely on fee incomes. So, much will depend on how the economy fares next year.

“The economy’s contraction this year was the worst it has been in the last few decades. Interestingly, I believe monetary policy may be reaching the limits of its possibilities because of structural rigidities in the economy, including through the effect of this on inflation and the naira’s exchange rate.
“Both of these indices have fared poorly on the back of dwindling government revenue, which was the result of the precipitous drop in global oil prices.”

The FirstBank boss stressed that the burden of economic adjustment this year would thus fall on the fiscal sector, and to an increasingly larger degree on the extent to which government can drive reforms in the economy, promote an investor friendly environment, and send a clear harmonised message of the government’s economic intent.
“It is important, therefore, that the budget for this year is both larger than it was last year and that it includes major policy interventions in the area of pro-poor initiatives. I would have loved to see a much more significant drop in the recurrent expenditure share of the budget.

“Essentially, much-needed reforms will include completing the transition of government from provider of goods and services to that of a regulator of a private sector-led economy, and changes to the way the economy is organised, with further strengthening of entrepreneurial initiatives across board.

“Combined, both the structural reforms and increased and better targeted government spend should see a recovery in consumer spending and business investments that should drive a pick-up in domestic economic activity in 2017.
“Helpfully, OPEC’s oil production agreement late last year should see global oil prices rise higher than last year’s average, supporting higher public revenues. Banks, on the other hand, have far higher levels of capital this time around than they had just before the 2008-09 global financial and economic crises, and thus are far more resilient today than they have been at any other time in the history of the economy,” he added.

To the CEO of Access Bank Plc, Mr. Herbert Wigwe, there is no quick fix to the current economic situation.
Wigwe said what was required to lift the economy out of recession was “very coordinated efforts by government, that is monetary and fiscal authorities, as well as the total cooperation of all other economic agents.”
“While that is being done, the sequences of events that it takes to come out of this situation is also just as important,” he added.

According to Wigwe, “If we get it right, we should start to see some recoveries in the second half of the year.”
This he however stressed requires coordinated efforts.
“If we don’t do that and allow the situation to degenerate, then it (recession) can last a lot longer,” he added.
On his outlook for the banking industry, Wigwe, who is also the Chairman of the Body of Bank CEOs said: “First of all, there is no way that the industry is not going to feel the pain, first of all, coming from the fact that manufacturers are not getting enough foreign exchange to support importation of their raw materials for production.
“So, you are going to see banks struggle as far as their non-performing loan (NPLs) ratios are concerned. Just because these guys do not have enough raw materials to produce and break even, not to add repaying their loans. That in itself is a really big issue.

“But I think that one of the things you are going to see is that people are going to resort to other mechanisms to look for income. For instance, the pursuit of retail, and other alternative means of income.”
Furthermore, Wigwe pointed out that the effect of the downturn on economic activities, as well as the rise in NPLs would clearly reflect in banks’ 2016 financial statements, adding that in 2017, banks might not record strong performance.

“But 2018 would be a year for full recovery for banks,” he said.
In his contribution, the CEO of Diamond Bank Plc, Mr. Uzoma Dozie acknowledged that 2016 was tough and 2017 will be no different. However, he added that the Nigerian market was big and the current challenges present opportunities for people and systems to develop new markets and improve existing ones.
Clearly, effective coordination of monetary and fiscal policies make it easier for policy makers to achieve their stated policy objectives in efficient manners.