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June 4, 2020

NIGERIA: A crisis going to waste

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( 3 mins)

Both houses of the National Assembly continue to discuss the amended 2020 budget this week and are likely to pass it eventually with few alterations. Yet more than ever, the budget will remain a mere statement of intent, with available pointers suggesting budget implementation will lag even the revised revenue and expenditure targets for 2020. Meanwhile, new central bank data suggests the Covid-19 stimulus package announced in March has been off to a slow start, which could deepen the economic contraction expected to kick in this quarter. Even more worryingly, lawmakers’ eventual approval of a USD 22.7bn medium-term external borrowing plan this week suggests Nigeria will dramatically increase its debt load way beyond the immediate fiscal crisis.

Uncertainty concerning the fiscal and economic impact of Covid-19 and how to respond to it appears to have resulted in several rounds of internal revision before the government eventually sent the amended budget bill to Parliament last week. In March, Minister of Finance Zainab Ahmed still proffered to reduce the budget by NGN 1.5trn (USD 3.9bn, about 15%), yet cuts currently proposed are negligible. The amended budget envisages spending amounting to NGN 10.51trn (USD 27.2bn at the NAFEX rate), which is only marginally below the NGN 10.59trn (USD 27.4bn) budget passed in December.

While this includes new, mostly healthcare-related items in response to Covid-19, reshuffling budget lines in favor of growth-inducing expenditure appears to have been limited. Besides, critical healthcare and educational spending that appears not directly Covid-19 related has been slashed. As such, an opportunity has been missed to sustainably recalibrate spending priorities, arguably not least due to the anticipated opposition from lawmakers insisting on funding for so-called constituency projects and other self-serving expenditure.

Budget vs reality

Meanwhile, new data on budget implementation in Q1-2020 suggest that revenue collection was 52% below target while expenditure continued almost as planned. It should be noted that the impact of the Coronavirus disease and the oil price slump only started to kick in towards the end of the quarter, i.e. Q2 will likely look even more dramatic in terms of missed revenue targets. This could be reinforced if the Central Bank of Nigeria (CBN) proves unable to speed up the disbursement of stimulus measures announced in mid-March. On aggregate, merely 10% of applications have been approved as of end-May.

NIGERIA: A crisis going to waste 1

In the lead-up to the plea for help from the IMF, the government also began to account for previously hidden debt owed to the CBN. Accordingly, debt servicing costs increased by 30% above budget plans and swallowed an eye-watering 99.2% of actual revenue in Q1. On the plus side, the data now made available give arguably the most credible account of the federal revenue situation to date.

More debt to the rescue

While the Senate unsurprisingly approved a request for USD 5.5bn in borrowing from bi- and multilateral creditors to plug the most glaring holes in the 2020 budget (which includes USD 3.4bn already granted by the IMF), the House of Representatives also approved a two-year borrowing request over USD $22.7bn (equal to 81% of this year’s budget) on concessional terms, which the Senate had greenlighted already in March. The plan, which had been rejected when first introduced by President Muhammadu Buhari’s government in 2016, would almost double Nigeria’s foreign currency debt stock over the next couple of years.

Biden’s nominees would bring diversity to the Fed—if they’re confirmed

( 6 mins) President Biden has announced his roster to fill key vacancies on the Federal Reserve’s 7-seat Board of Governors. If confirmed by the Senate, Biden’s nominees would advance his economic agenda at the central bank. They would diversify the ranks of economic policymakers and likely tighten supervision of Wall Street.

Sarah A. Binder

Senior Fellow – Governance Studies

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BinderSAB

M

Mark Spindel

Chief Investment Officer, Potomac River Capital LLC

These nominations follow in the wake of Biden’s decisions late last year to reappoint Jerome Powell to a second term as Fed chair and to elevate Lael Brainard as second in command. Powell and Brainard already serve as confirmed governors, but the Senate will also need to approve their four-year leadership posts. If the Senate confirms all five, Biden’s Fed appointees would reverse the heavy GOP-tilt of the Board engineered by the Trump administration.  
Here’s what you need to know.
Diversity counts
Biden has nominated two Black economists, Michigan State’s Lisa Cook and Davidson College’s Phillip Jefferson, to seats on the Board. He has also named former Fed governor and Treasury official, Sarah Bloom Raskin, as the Fed’s vice chair of supervision, a position Congress created in the wake of the global financial crisis as the Fed’s top banking cop.
These appointments help to diversify the Fed’s almost exclusively white ranks. Since Congress revamped the Federal Reserve Act in 1935, creating the 7-seat Board of Governors, 82 people have served on the Board. Just three of them were Black men, and ten of them were white women. And while Biden’s nominations augment the Fed’s racial diversity, confirming Cook, Brainard, and Raskin would expand the number of women governors by just one, since both Raskin and Brainard already have Board service under their belts. Notably though, this would be the first Board with a majority (four) of seven seats filled by women governors.
Rough waters ahead?
Observers expect a broad swath of Senate Republicans to vote to confirm Powell, a Republican, to a second term as chair. However, it remains to be seen how many, if any, Republicans will vote to confirm the other four nominees. Of course, Senate Democrats—if they stick together—can confirm all four without any GOP support, since Democrats banned nomination filibusters back in 2013.
Like most Congressional decisions, Fed confirmation votes are more contentious today than they were even 15 years ago, before the global financial crisis. The figure below shows shrinking Senate support on final confirmation votes for Fed nominations since the Reagan administration. Of those nominees considered on the Senate floor between 1982 and 2011, only one, Alice Rivlin, received less than 94% of the vote. The most dramatic contests came in 2020: The GOP-led Senate rejected Trump’s nominee, Judy Shelton, by a vote of 47-50, and just barely confirmed another Trump nominee, Christopher Waller. Four other Trump picks never even made it to a floor vote.

Nor can Biden count on filling the Board swiftly. Prior to the financial crisis, nominees waited about three months on average for confirmation. After the crisis, the wait time ballooned closer to eight months. The Senate took nearly ten months to confirm Waller, a record delay for the contemporary Senate’s handling of Fed nominees. Even with Democrats in control this year, Republicans have found ways to slow down the Senate.
Beware partisan crosshairs
Decades of rising partisanship are seeping into senators’ views of the Fed, often turning otherwise low profile Board nominations into politically charged votes. At the same time, public attention to the Fed has grown with its expanding imprint on the economy.   
The central bank has played an outsized role in stemming the economic damage caused by the global financial crisis in 2007-08 and the global Coronavirus pandemic in 2020-21. And with interest rates near zero, central bankers need to use more creative and often contentious tools to manage the US economy. Critics from both sides of the partisan aisle blame the Fed for either doing too much—or too little—to stem an array of old and new problems.
Add in rising expectations that the Fed will hike interest rates early this year to combat inflation and a hot economy, these nominees will face questions at the core of central banking—how fast and how soon to take away the punchbowl. Raising the price of money is never easy, but this Board could find tightening especially difficult given the addition of Biden’s governors committed to the Fed’s goal of a stronger and more racially inclusive labor market. 
The parties also disagree about whether the Fed can or should do more to combat climate change, especially in light of Congress’s own tentative steps. Democrats want the Fed to use its supervisory powers to force banks to address climate risk in their lending decisions; Republicans think such policies fall outside the Fed’s mandate. Partisans also contest whether the Fed should do more to redress racial economic inequities.
Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are “independent.” But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.

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