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Experts predict CBN’s N338bn bailout to States will reflate economy

By on September 12, 2015

There are strong indications that the injection of over N338 billion into the economy by the Central Bank of Nigeria (CBN) in the form of a workers’ assistance scheme for the states, popularly known as bailout, would help to boost the country’s Gross Domestic Product (GDP) as cash strapped workers across the country make up for lost time by increasing spending.

The bailout, which began last week, will according to analysts, result in the reflation of the economy by enhancing money supply, increase household spending and help to reverse the slowdown in economic activities nationwide.

Last week the CBN released N34.988 billion to Osun State, N10.020 billion to Zamfara and N4.320 billion to Kwara with firm instruction to the holding commercial banks to pay the monies directly into the accounts of workers.

Other states to benefit from the fund in the second batch include Kogi, Benue, Imo, Oyo, Ogun, Gombe, Ondo, Abia, Sokoto, Delta and Ekiti. Also on the list are Bauchi, Nasarawa, Cross Rivers, Borno, Plateau, Niger, Enugu, Ebonyi, Katsina, Edo, Adamawa, Bayelsa and Kebbi states.

Reflation is the intentional acceleration of economic activity by a government, usually by using public spending measures to reverse deflationary trends.

Analysts believe that apart from the central objective of reducing suffering and improving the welfare of workers and their families in the affected states, the bailout was one of the core strategies of the Buhari administration to achieve an uptick in economic activity after the slowness precipitated by the pre- and post-election periods.

Household spending alone, accounts for over 70 percent of GDP and the downturn in the pace of economic activities occasioned by the failure of state governments to pay salaries has had a negative impact on the country’s GDP.

Reduced government spending because of the sharp fall in oil revenues contributed immensely to the economic slowdown across the country.

As part of the federal government’s resolve to end the lingering crisis of unpaid workers’ salaries in the country, Buhari had in July 2015 approved a comprehensive relief package designed to fix the challenge and lessen the financial pressures on state governors.

The components of the three-pronged package included the sharing of $2.1 billion by the three tiers of government sourced from Liquefied Natural Gas (LNG) proceeds to the federation account, the restructuring of states’ debt-servicing payments by the Debt Management Office (DMO), as well as CBN’s Special Intervention Fund, a low interest loan  for the sole purpose of paying backlog of salaries.

It is further estimated that by the end of this month, all backlogs of salaries nationwide would have been cleared.

The Chief Operating Officer, Stockswatch Limited, Mr. Omorodion Ambrose, argued that the bailout of state governments at this point was an effective and alternative means of building policy environment for rejuvenation of lost momentum in the system.

He said: “The bailout move by the federal government is a welcome development for stability to return to the states and generally to the nation, because before the election economic activities have slowed down and after the election the whole thing deteriorated to the level that civil servants that should be the pride of the state governments are being owed salaries for three to eight months.

“These people’s livelihood are threatened and at the same time their disposable income is weakened, this results to low purchasing power that would further depress the economy and subsequently leads to businesses closing their doors. The effect will also affect government revenue, increase unemployment, which is the cause of security challenge the nation is having today.”

He said: “The bailout of state governments at this point, is also another way of building policy environment for rejuvenation of lost momentum in the system, but economic policies work more effectively and much faster if they are preventive rather than curative.”

However, the Managing Director, Financial Derivatives Company Limited, Mr. Bismark Rewane, has stressed on the need to look beyond decline in oil prices and revenue as origin of the liquidity crisis bedeviling the country problem.

He said: “We need to find out what led to the cash flow problems in those delinquent states; because finance failure is most often preceded by governance failure.”