Joseph O Sanusi: A central bank look at fiscal policy management in Nigeria
Keynote address by Dr Joseph O Sanusi, Governor of the Central Bank of Nigeria, at the seminar of
the Nigerian Economic Society on "Fiscal Policy Management in Nigeria", Lagos, 22 May 2003.
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His Excellency, The Executive Governor of Lagos State, Asiwaju Bola Ahmed Tinubu,
The President, Nigerian Economic Society (NES),
Council Members of the NES,
Mr. Chairman,
Distinguished Speaker and Guests,
Ladies and Gentlemen:
I feel highly honoured to be invited as a guest of honour at this year's seminar of the Nigerian
Economic Society on "Fiscal Policy Management in Nigeria" and for an opportunity to present this
Keynote Address. The theme of the seminar could not have come at a more opportune time, as the
outcome is expected to assist the government in policy fine-tuning and implementation in the context
of its economic agenda under the next dispensation. This is in recognition of the fact that fiscal policy
is a major dimension of an adjustment programme to ensure a stable macroeconomic environment
and improved growth performance. Suffice to say that sound fiscal policy management, predicted on
consistency, sustainability, efficiency, accountability and transparency, is essential for accelerating the
pace of economic recovery.
Since the 1970s, the government has been overly dependent on the oil sector as the most important
source of revenue accounting for four-fifths of the total. Consequently, fiscal operations have been
influenced by the uncertainties of the international oil market. To minimize the destabilising influence
of the volatility in the price of crude oil on government budgetary operations, efforts have been
intensified since the 1980s to broaden government revenue base and enhance the contribution from
non-oil sources. Federal government expenditure has closely followed developments in the revenue
flow, which has given rise to a boom/bust pattern. The rapid acceleration in government spending
between 1973 and 1976 was so strong that the increased revenue earnings from oil over the period
was more than absorbed, resulting in substantial deficits. It has been difficult to scale down
expenditure whenever there was a significant deterioration in the oil market. The result was that
government resorted to borrowing from the banking system, especially from the Central Bank, to
finance the deficits, with adverse implications for domestic prices and the exchange rate. Like most of
the other oil exporting countries, Nigeria experienced a sharp bust of inflation in mid-1970s as public
expenditure rose.
It is noteworthy that fiscal dominance has been one of the sore points of monetary management in
Nigeria, as it has tended to undermine the effectiveness of monetary policy. For most of the 1990s, for
instance, the major source of general macroeconomic instability was the rising fiscal deficits of the
Federal Government, financed mainly by the Central Bank. In recent times, the banking system has
been characterized by the problem of excess liquidity arising from the expansionary fiscal operations
of the three tiers of government, and the rapid monetisation of crude oil receipts. The large injections
of liquidity into the system induced rapid monetary expansion that was substantially out of line with
prescribed targets.
A major problem of fiscal adjustment in recent times is the difficulty of lowering the largest components
of recurrent expenditure such as wages and salaries, while attempting to raise the level of capital
formation. A keen observer will notice that over the past decade, recurrent expenditure has been
dominant in total federal government expenditure. It was 67.4 per cent in 2002, compared with
56.9 per cent and 65.9 per cent in 2001 and 2000, respectively. To generate growth, a sizeable
proportion of government expenditure should be allocated to capital and socio-economic sectors.
Beyond the issue of allocation, the quality of the expenditure remains critical in ensuring efficiency and
optimal utilization of resources. In this regard, the Federal Government has instituted the Due Process
compliance principle, which is being implemented.
I wish to add that, to be able to measure the effects of policy, the availability of timely and reliable
statistics on government revenue and expenditure cannot be over-emphasized. This is also consistent
with the principles of transparency and accountability. There is a need for increased
information-sharing on a regular basis, as information assymetry undermines policy design and
analysis. It is noteworthy that this dispensation has witnessed the return of the Public Accounts
Committee of the National Assembly and the oversight function of the Auditor-General of the
Federation. These are welcome developments that should be sustained.
Before I conclude, permit me to highlight some of the practical ways of addressing the problem of
fiscal dominance in order to enhance the effectiveness of monetary policy. First is ensuring how the
overall budget deficit will be reduced and how it will be financed in a non-inflationary way. In this
regard, current effort by the Federal Government to access the capital market and restructure the
outstanding debt stock is a welcome development. Secondly, the Debt Management Office (DMO)
should be encouraged to assume full responsibility for government debt management, thereby
relieving the CBN of such role. Thirdly, there is a need to meet the West African Monetary Zone
(WAMZ) convergence criterion, limiting central bank financing of government to 10 per cent of
estimated current revenue. Fourthly, the enactment of the Fiscal Responsibility Act should be
rigorously pursued.
Your Excellency, distinguished ladies and gentlemen, there is no doubt in my mind that the issue of
fiscal policy management is very critical to the successful implementation of our economic
programmes. In this connection, I hope the seminar will find time to ponder on the following issues:
(i) the need to establish a stabilization fund which will address the problem of
revenue/expenditure volatility;
(ii) formulate viable fiscal rules which are consistent with our fiscal federalism, and
(iii) propose the way forward in addressing the problems of inter-generational equity argument
arising from debt overhang.
I am convinced that the array of eminent professionals gathered here today will come up with concrete
proposals that will enhance our fiscal policy in the medium to long-term.
I thank you for your attention.