HOW REDUCTION OF PUBLIC EXPENDITURE CAN HELP BOOST THE ECONOMY

A lot of people are oblivious of the relationship between public expenditure and the economy at large. Thus, the recent reduction of withdrawal  limit  from Automated Teller Machines (ATM) and POS/eCommerce spending from #150,000 to #60,000 and #2,000,000 to $300 (i.e about #60,000) respectively by the Central Bank of Nigeria have been welcomed by mixed reactions.

To most people it is a nightmare. Obviously, people were still struggling with the maximum daily withdrawal of #150,000 both from banks and ATMs. It is understandable because people need to make business transactions on daily basis which may involve higher sums, and now this.

However, to our economy, this may be a step in the right direction.

Among the reasons behind such policy was to put a check on bank fraud which has become quite an aspiration in the banking sector most recently. They say bankers are broke. They say bankers have little time for themselves. They say bankers are underpaid. But they also say bankers have other hustles in the bank. I would like to assume that these are mere speculations from the outside especially the last phrase, so I won’t take any side because am no banker.

A friend of mine was quick to condemn and compare the cluelessness (as she termed it) between the current head of administration and the CBN governor immediately the new limits on ATM withdrawal and online spending were announced. Of course she may not have had any laid down analysis to buttress her point, rather she would express her freedom of opinion depending on the way she feels at the moment. Hence I would like to dedicate the heart of this article to people like this.

There is quite an antagonizing relationship between the public and the private sector in every economy. The public sector represents the civil service, various political offices whether by election or by appointment, the military and paramilitary, the judiciary and other government departments. The private sector represents all kinds of legitimate businesses that have no affiliation with the government; could be private schools, could be stores, could be private firms, could be anything that does not have any relationship with the government apart from tax payment.

Technically, wealth is created in the private sector and is taxed by the government. These tax revenues are then used, in part, to pay salaries and benefits of the public sector workers, who barely create wealth but consume a reasonable fraction of wealth created.

When a society has a very large public sector (i.e many tax consumers) and a shrinking private sector (i.e wealth producers),the strength of the wealth generated depreciates and the inevitable result is a debt crisis; high cost coupled with insufficient revenue to pay those costs (Greece for instance).

Regrettably, the fashion obtainable in most African societies have the public sector occupying larger space in the economy and the only way tendency towards inflation is likely to be resolved is to put a check on the money in circulation.

It may interest you to know that every #1 of government spending may generate an estimate between #0.40 and #0.70 of economic growth, which is much less than the amount of economic growth generated by every #1 invested in a legitimate private business.

To a layman’s understanding, when the public expenditure is high (which can happen as a result of easy flow of money, maybe by unlimited bank and ATM withdrawals, unlimited online transfers and transactions, etc), this would lead to excess money in circulation and increase in demand which would bring about inflation. At this point, prices of goods and services would be on a steady increase while the income of those who purchase these goods and services remain the same, depreciating the value of the currency in use. This is when it is said that the economy has fallen.

Therefore, to avoid this, the public expenditure has to be checked. This can be done by regulating the flow of money. The effect of this can be seen in the current CBN’s reduction of ATM withdrawal and online transaction limits.

NB: This article was researched and written by Jerry Odii after crucial consultations. Therefore it is subjected to every constructive criticism. Read, comment and share. Thanks.