Dear Sir
In your article titled “En partant du déficit budgétaire ” dated 5th October, you claim that “ une expansion budgétaire induit un déficit commercial et une appréciation du taux de change. On feint de l’ignorer car il est plus facile de blâmer la politique monétaire que de critique le ministère des finances ».
First, the latest figures from MOFED show that budget deficit is on a downward trend:
As a % of GDP
|
Jul-Dec 2009
|
2010
|
2011(estimate)
|
Budget deficit
|
3.9
|
3.2
|
3.0
|
Moreover, the structural primary balance (excluding grants) which is the most appropriate measure of the fiscal stance was negligible up to the end of 2010 and was more or less in line withthe output gap as at end of 2010 estimated to be near zero. ( while both the nominal and the real effective exchange rates for 2010 registered an appreciation of around 3.3 %-courtesy IMF).
Second, Short term interest rates are also showing a downward trend declining from 10.15-11.50 % in June 08 to 7.50-9.00% in June 2011; the flattening of the yield curve is reflected in a similar movement of LR rates from 8% to 5% during the same period.
Third , broad money supply has been increasing by 8.1% and 7.6 % in 2009 and 2010 respectively .
Changes in the monetary base are shown below:
% change
|
Jun-09
|
Jun-10
|
Jun-11
|
Monetary base
|
9.2
|
19.8
|
18.4
|
These figures are not surprising given the record the record FDI inflows and large government external borrowings that produced excess liquidity in the system.
Fourth, 59% of the budget deficit in 2010 was financed by borrowing from aboard and 58% of the domestic borrowing was from the banking sector. Indeed the effect of a fiscal expansion depends on how the expansion is financed . In such circumstances, the logic of a debt-financed fiscal expansion raising interest rates , crowding out private investment and appreciating the exchange rate does not hold. Given that we had excess liquidity in the system and there was monetisation in a situation where the output gap was negative (excess capacity) , the simple correlation of fiscal predominance to the crowding out of private investment and an appreciating exchange rate is erroneous.
Our Appreciating Exchange Rate has more to do with record FDI levels (IRS and ERS) and increased foreign borrowings (without the counterpart increase in imports ). (Theoretically an increase in short term interest rates have a greater effect on portfolio inflows )
