Africa Business Communities

Stallone-Obaraemi Samuel: Managing African Economy – The role of Governments and Central Banks

It is justifiable to say that governments need to apply different policies and measures in order to be able to minimise or alleviate economic difficulties they may face. Let us consider a few of them.

Monetary Policy 

Take for instance the UK and US. According to Pettinger ( 2007) Monetary policy is the most important tool for maintaining low inflation.  In the UK, monetary policy is set by the Monetary Policy Committee (MPC) of the Bank of England. They work with an inflation target in mind of 2%+/-1, set by the government and in order to achieve this, they use interest rates. They are able to do this by critically studying the various factors in the economy and trying to decide the actual status of the economy and the best cause of action to take. If the economy is overheated, interest rates are increased in order to reduce the rise of aggregate demand in the economy, as this discourages borrowing, and consumers are incentivised to save more money while the rate of disposable income is reduced and imports increase while exports decrease.

Supply Side Policies

Every country has some potential for productivity. Supply side policy envelops any policy that is aimed at improving the ability of a nation to produce. To improve performance in this area, government can take various steps including instituting and encouraging and incentivising tax system, promotion of healthy and intense competition and flexibility in the free labour market, human capital development, excellent performance culture in the public service sector, privatisation and deregulation..

Fiscal Policy 

As a demand side policy, fiscal policy is simply borders around; the relationship between what governments receives and what it spends vis-vis it behaviours and speed of attitudinal change in order to influence aggregate demand.

No matter how much claim countries put to the freeness of their economies, governments still have some control over how things happen economically. In fact the absence of government regulations will result in wanton anarchy. Governments regulate economic activities through outright policies, the activities of the central bank, taxation and the likes. The government has a duty to encourage socio-economic development, and maintaining the required balance amongst all macro-economic factors for purposes of ensuring relative consistent and sustainable growth.  Unfortunately there has continued to exist a huge gap between theoretical postulations of how fiscal policies brew economic growth and what is realistically obtained in different countries.

According to Ocran (2009) Although one school of thoughts posits that there is need for government to  provide support for knowledge accumulation, research & development, productive investment, the maintenance and  law and order together with the provision of other public goods and services. As they do, this can stimulate growth in both the short-run and the long run. However, another school of thoughts asserts that government is lazy, with unnecessary bottlenecks surrounded by mountains of inefficiencies. Consequently government tends to hinder rather than facilitate growth when allowed to get involved in the productive sectors of the economy. Furthermore, stifles economic growth by distorting the effect of tax and inefficient government spending.

Research has revealed that first, government consumption expenditure has a significant positive effect on economic growth. Gross fixed capital formation from government also has a positive impact on output growth but the size of the impact is less than that attained by consumption expenditure. Tax receipts also have a positive effect on output growth. However, the size of the deficit seems to have no significant impact on growth outcomes. 

Let us dwell a little on fiscal policy as we take a short look at the economic behaviour and policies of South Africa and Nigeria.

Fiscal Policy in South Africa

Bhorat et al (2013) insist that the in order to counteract the effects of weakening economic growth, the fiscal policy in South Africa is anchored on the principles of being countercyclical and ensuring long-term sustainability and seeks to support programs that enhance the social wage, cap spending, limit the growth of the wage bill of government, improve efficiency, and shift borrowing to capital and investment expenditure. The aim is to manage the economy such that budget deficit is reduced over the medium term. Consequently, South Africa’s debt profile has remained sustainable, although strict care needs to be taken to continue to control this.

Control: The South African fiscal recognises that while the single most important source of government revenue is tax revenue, the largest component of current expenditure remains the wage bill and the government has decided to cap this, and focus is to be placed on investment in infrastructure, rural development and enhancement of competitiveness. It is common sense. If you receive less relative to your expenditure, the wise thing is to cut down on your expenditure.

As Bhorat et al (2013) opined, because the rate of poverty and economic inequality are heightened due to the defect in the educational system and management, unbalance in skills acquisition low productivity relatively speaking, the South African economic policies are also couched to address these issues. For instance the South African economic policies appear to strongly correlate the levels of education to unemployment.

Fiscal Policy in Nigeria

On the other hand, the fiscal policy of Nigeria has been pro-cyclical according to Ebimobowei (2010). In line with one of the schools of thought, the Nigerian fiscal policy over the years has failed help the country to achieve economic growth. Relative to government spending, the rate growth has been sluggish, due to policy inconsistency, wasteful spending and high level corruption.

Olawunmi and Tajudeen (2007) did some review on the performance of the fiscal policy in Nigeria covering 1981 to 2004 and the findings are instructive and could be used to draw logical inferences today. According to them, referring to Olaniyan (1997), the implication of government investment should be equal to the gross rate of interest at which the private investment is undertaken. That means government should actually run like a private business, in a profitable manner. In the light of this Nigeria has not performed well as a business or economic entity. There have been unproductive and budgetary deficits from 1980 until date. In fact the case appears to be worse in 2014/2015.  Furthermore, the abysmal performance of ever increasing government expenditure the ever increasing government borrowing and expenditure is also worrisome coupled with the high degree of double digit inflation for almost 2 decades.Ebimobowei (2010) went further to state consequent upon the aforestated, it is pertinent that

1. While servicing existing loans properly, unnecessary spending should be avoided by the government;

2. Policy consistency should be deeply enshrined;

3. Government should work to reduce tax leakages and stabilize the tax system for improved revenue;

4. The wanton disrespect for the sacrosanctity of the nation’s budget should be eradicated. Budget should be passed and approved early enough to engender smooth implementation;

5. Government cut down on expenditure leakages

6. For the economic stability of Nigeria to be attained, corruption must be stamped out completely

 Exchange Rate Policy

According to the central bank of Nigeria the main objectives of exchange rate policy in Nigeria are to preserve the value of the domestic currency, maintain a favourable external reserves position and ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability. I believe this is largely the purpose of exchange rate policy.

For example according to Pettinger (2007) in the late 1980s the UK joined the exchange rate mechanism (ERM), as a means to control inflation. They kept the value of the pound high and succeeded in reducing inflationary pressures.  Although some of the measures used back then as inflationary policies are no longer in use, they did work at the time.

Wage Control

As posited by Pettinger ( 2007) wage growth is a key factor in determining inflation. The pace at which wages increase could affect the rate of inflation. In England in the 1970s, there was a brief attempt at wage controls which tried to limit wage growth. However, it was effectively dropped because it was difficult to widely enforce. In Nigeria the trend has been to review the minimum wage every decade. However, what perhaps needs to be considered is whether the time span between each review and the leap between the former and new rates actually reflect reality. This is important for balance to be reached.

Stallone-Obaraemi Samuel is Senior Human Resources Manager with TNS Global. Follow him @twitter.com/Stupendousstal

 

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