When the Fiscal Responsibility Act was enacted in 2007, the noise and hype was all about prudent management of public expenditure and resources. Now we have a law that would mitigate corruption and inefficiency, ensure funds are judiciously utilized and reduce unnecessary resort to debt financing.

At least those were the intentions. Reality however was quite different. Except for some recent IMF Mission, which claimed, without offering any evidence, to be "very happy that the Fiscal Responsibility Act in Nigeria is working in line with international standards", most objective observers are more sceptical.

So how are we really doing now that the Fiscal Responsibility Act (FRA) is in place? Let us take external debts because that should be easier to control. If we remind ourselves that as part of the attempt to sort out the financial mess, the Obasanjo's government had paid out $12.4bn (£8.2bn) to the Paris Club in 2006 in exchange for the remainder of its $30bn odious official debts being written off. If we would also recall that Nigeria had borrowed less than $10 billion, but due to interest charges and penalty for not paying on schedule, including "penalty on the penalty," it paid out $35 billion over 20 years and still was said to be owing another $30 billion as at 2004, and later $36 billion before receiving the debt "forgiveness" of $18 billion. It follows, therefore, that we should be wary of getting back to such a debt trap, and since the FRA clearly addresses this issue, avoiding further, non sustainable debt build up would be a measure of success. So how is the country doing in this regards? By the end of the controversial cancellation deals, our external debts fell from its all-time record of $36 billion to less than $3.65 billion by December 2007. It has now risen again, according to the Debt Management Office, to $4.27 billion (June 2010) and is due to hit almost $10 billion by December, if the government plans to borrow some $5.24 billion in the next couple of weeks gets the nod of the National Assembly. So, as a means of curtailing external borrowing, the FRA is not working.

What about sanitising government financing? Here too, it does not seem to be working. How else do we explain the habit of dipping into the Excess Crude Account to satisfy the unquenchable thirst for fund by the politicians? Every time they meet, billions more are added to the pool for sharing, even though the Act is clear about when and how this could be allowed. So the Account, meant to come in handy in future, has been drained from $20 billion in January 2009 to just about $460 million now.

Three years ago, fiscal deficit limit was set at a maximum of 3 per cent of GDP. Going by current trends it is now set to be well over 5.4 percent of GDP, given the N445 billion in extra spending approved by Parliament which is an addition to the N4.4 trillion already in the 2010 budget.

CBN and finance ministry officials have warned that oil-based revenue would not be enough to fund the budget, so our government is using up its windfall oil savings AND borrowing more. Even domestic debt is climbing higher and stands at some N2.5 trillion, as at last March.

This fiscal irresponsibility and financial incompetence end up compromising the budget process and all governmental financial dealings. Please, don't mention "due process" which in any case is more observed in the breach. This year's capital allocation was not released as late as mid-August (perhaps it has been sent out now, but spare yourself the hustles of trying to grab a piece of the action: the same lawmakers that approved the budget have earmarked each and every major project for themselves, and the civil servants say it openly). In any case, I cannot see how a bunch of self-serving politicos, facing an election in a couple of months would do anything else but grab and grab, fiscal responsibility Act or not.

So far, not many governments (federal, states or local) have shown much respect for this law in their own activities, though some are trying. Will any government take steps to reduce unproductive expenditures on its own? Not likely, because a policy for fiscal prudence stems from a vigilant citizenry: it is not a gift given on a platter of gold.

In any case, this whole fiscal responsibility issue is being taken out of proportion with regards to the significance of fiscal deficits. Prudence, transparency and all that are very straight forward. But the issues are more nuanced than those.

The ideological Right argues that fiscal deficits are the crucial parameters adversely affecting all other macroeconomic variables. They argue that lower fiscal deficits lead to higher and more sustainable growth while higher fiscal deficits lead to inflation. They also argue that large fiscal deficits may lead to huge accumulation of public debt and could "crowd-out" private sector borrowing.

Things are not so simple, however. For instance, if the fiscal deficit is dominantly in the form of capital expenditure, it contributes to future growth through demand and supply linkages, and can create so much demand in the economy that private investment may "crowd-in" and supplement autonomous investment. As for inflation, it results from an excess of aggregate demand over aggregate supply and there can be higher inflation with low, zero or even positive fiscal accounts. This may happen because of excessive spending by the private sector over and above its earnings.

All this can all be gleaned from basic textbooks. Deficit financing per se is not inherently bad, provided we invest in projects and programmes whose social rate of return is higher than the rate of interest on the borrowed money, and whose external leakages are minimal.

This applies not just to Nigeria but to most developing economies. With regards to India, for example, it has been said that, "(our) economy is a demand-constrained economy. Due to existence of underemployment of resources and production at much less than its optimal level, the economy can actually sustain a high level of fiscal deficit up to around 7-8 per cent of GDP. Even in case of revenue deficit, if it is properly managed, it will help in pumping purchasing power to the economy and boost demand, keeping in mind the persistently low level of inflation during recent years".

The problem of growing deficits deserves concern but the most important consideration is the composition of these deficits and the way these are being financed, and the rate of corruption in the economy.