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Published On: Sun, Jul 15th, 2018

2018 budget in jeopardy

. Delay alone has reduced performance by 13% – Experts

By UCHE CHRIS

In all likelihood the 2018 budget will end like the three previous budgets of the President Buhari administration: a failure. Having been passed seven months after its presentation and half year gone; and with all the controversies surrounding its passage by the National Assembly, it requires little expertise in budgetting to know that its performance will be seriously undermined.

President Buhari: signing the mutilated budget

Normally, budgets are passed for full implementation to achieve any meaningful impact. Since the coming of this government all its budgets have suffered major implementation challenges because of huge deficits, high debt service and unnecessary delays in preparation, passage and the release of funds. This problem was further compounded by the revenue shortfall caused by the slump in oil prices and the economy consequently slipping into recession.

Generally, the old problems in budgeting by the government have been magnified in the 2018 budget, leading observers and experts to believe that this year’s budget will perform worse than any other by this government. Unlike other budgets, the government seems disinclined to its validity and implementation. President Buhari expressed his misgivings about the budget before signing it, insisting that he was doing so against his better judgment and preference, accusing the NASS of distorting its framework by adding their own projects and expenditure.

President Buhari in his speech accused the NASS of tampering with the 2018 budget sent to them by cutting essential projects and inserting non-essential ones. Up to 6, 403 projects initiated by the lawmakers were smuggled into the budget, Mr Buhari noted in his speech. Secondly, he accused them of sabotaging the executive’s effort of regularising the country’s budget on a January-December financial year.

“It is in this regard that I am concerned about some of the changes that the National Assembly has made to the budget proposals that I presented. The logic behind the constitutional direction that budgets should be proposed by the Executive is that, it is the Executive that knows and defines its policies and projects.

“Unfortunately, that has not been given much regard in what has been sent to me. The National Assembly made cuts amounting to N347 billion in the allocations to 4,700 projects submitted to them for consideration and introduced 6,403 projects of their own amounting to N578 billion,” Mr Buhari said.

An N8.6 trillion budget proposal submitted to the National Assembly on November 7, 2017 was increased to N9.1 trillion when it was finally passed in May.

Senator Udo Udoma, Minister of Budget and Planning, in his budget breakdown after the signing by President Buhari, acknowledged that the global economy is still characterized by uncertainty. However, the sluggish economic recovery in 2017 is expected to pick up pace while the global political terrain is expected to stabilize.

Global GDP growth is projected at 3.9% in 2018 up from 3.8% in 2017.

Emerging markets and developing economies are expected to lead with GDP growth of 4.9% Advanced economies are projected to grow at a slower rate of 2.5%, but Nigeria is expecting a 3.5 percent growth in 2018.

According to him inflation is slowing down as the pass-through effects of earlier currency depreciations are waning.  Some non-economic factors that could undermine medium-term prospects include geopolitical tensions, extreme weather events, and terrorism/security concerns.

However, domestic challenges impinging on the 2018 budget, he said, include:

incidence of crude oil production shut-ins; insurgency in parts of the North East and restiveness in some other parts of the country, and severe weather conditions, especially flooding of major cities.

“The 2018-2020 Medium Term Fiscal Framework (MTFF) and the Budget proposal reflect many of the reforms and initiatives in the ERGP, which is our roadmap to economic recovery and a more sustainable growth; projects are linked to government policies and strategic priorities”, he said.

According him, the 2018 Budget proposal seeks to continue the reflationary policies of the 2016 and 2017 budgets which helped put the economy back on the path of growth.

Thus, “we plan to continue to spend more on ongoing infrastructure projects that have potentials for job creation and inclusive growth. We will continue to leverage private capital and counterpart funding for the delivery of infrastructure projects. As with 2016 and 2017 budgets, the 2018 budget has been prepared on the Zero Based Budget (ZBB) Principles”, he said.

Actually the problem of the budget is not the insertion of projects to the tune of N500 billion as alleged by the president; the real issue is the prolonged delay in its passage which has seriously constrained its implementation. And both arms of government were responsible for the delay: Given the subsisting strained relationship between them the NASS insisted on performing its oversight functions diligently, while most of the MDAs shunned their budget defence alleging extortion by the members. Also members claimed that the MDAs stayed away because of their padded proposals.

Simply put, the budget was a victim of the face-off between the two arms of government. With this delay it is obvious that any hope in the budget will be dashed because a budget is expected to have 70 percent performance level to significantly affect the economy positively. No budget of this government has performed more than 30 percent. The 2017 budget recorded only 19 percent implementation.

This is even more significant in an election year when politics assumes higher stakes and relevance for the second term bid of the President. Generally once INEC blows the whistle for campaigns governance takes the back seat; so by that tradition, not much will be done with the budget until after the election and the expected economic amelioration will be postponed till then.

The second challenge facing the budget is the huge deficit level contained in it, especially for capital expenditure. This practice has been the undoing of the previous budgets which relied on borrowings to fund capital projects; as would be expected, such borrowings did not materialized, thus putting the projects in jeopardy. And with the haphazard implementation of capital projects, the budget becomes a mere consumption spending with little impact on the economy.

Although the bench marks for the budget such as the oil price and oil production quota appear realistic and even conservative, indications are already emerging that the reverse may actually be the case, which will further increase the deficit. Oil price has maintained a healthy level of over $70 per barrel against the benchmark of $51.

With total revenue put at N7.165 trillion against total expenditure of N9.120 trillion, deficit stands at N1.955 trillion, which will be sourced from both domestic and external borrowings amounting to N793 billion and N849 billion respectively, leaving a shortfall of N300 billion.

In other words, the expected borrowings do not cover the deficit in the budget by N300 billion. This has already built in a failure rate of 17 percent in the capital expenditure of the budget even before implementation.

However, the focus of building up the reserves deprives the budget the expected revenue inflow. Also oil producers, including OPEC and consumer nations are determined to ensure lower oil price going forward. More importantly, the production output of 2.3 million barrels per day has already missed the target as current output has dropped to 1.8mbpd raising great prospect of higher deficit.

Again, the current capital flight in the capital market arising from increasing political risk in the country because of the coming elections as well as the continuing killings by herdsmen will put more pressure on dollar demands, which may hamper government ability to fund the budget.

Also the alleged diversion of funds from the critical areas and projects such as the Lagos-Ibadan road, Second Niger Bridge, Mambilla power plant, Enugu airport etc to the tune of N360 billion by the NASS to poverty alleviation projects to ensure even spread will further postpone the completion of these projects and their expected impact to improve the economy. Transportation in and out of Lagos, the poor power supply and movement across the country are imposing huge burden on the economy and Nigerians.

Finally the high percentage of debt service in the budget points to its soft underbelly. Experts believe that government focus on debt per GDP ratio is deceptive and counterproductive because it does not give a true picture of the state of the economy and its capacity to fund the budget. They argue that the more realistic and practical index would be debt to revenue ratio, which stand at 38 percent, while debt to GDP is about 16 percent. Debt service is N2.014 trillion; in addition to N4 trillion recurrent expenditure – both constituting more than 60 percent of total expenditure.

The reason is that the debt service is made from the current revenue base and not the total productive capacity of the economy. At the present debt recurrent expenditure levels, hopes of any positive development in the economy is remote as practically most of the current revenue is expended on them while capital expenditure which produces multiplier effects in the economy is dependent on deficit financing – borrowing.

National Assembly

This becomes clearer with recent hint from the Debt Management Office that Nigeria’s total debt stock has hit N21 trillion (about $30billion). In 2003 the nation’s foreign debt was $34 billion and it was an overhang as the economy struggled to meet its obligations. But the government then negotiated a debt relief with the Paris Club and received $18 billion write-off after paying $12 billion.

A breakdown of the country’s indebtedness to creditors including local rose to N17.36 trillion as at the end of December 2016, representing an increase of N1.8 trillion. The debt has increased by N9.1 trillion in two years from N12.06 trillion in 2015 to N21.16 trillion in 2018.

Nigerian government’s domestic debt stands at N12.97 trillion, as against N8.51 trillion recorded in 2015, representing borrowing of N3.46 trillion (40.71 per cent) rise. Also, external debt for the federal and state governments jumped from $9.46 billion to $13.81 billion in two years, representing an increase of $4.35 billion, put at 45.98 per cent.

Mr. Ayodele Akinwunmi, Head, research, FSDH Merchant Bank, said the actual figure of debt to revenue ratio used by the bank for first quarter of 2018, which was published some few months ago showed that it is about 79 percent. “What we looked at was the revenue from the federal allocation account commitment to the federal government, interest expenses of the government and revenue from FAAC.

“If you have a huge amount of your revenue going into debt servicing, it means it leaves you with less money to channel to critical component of the economy. It makes it difficult to finance the capital project component of the budget. The delay in the passage will effect implementation of critical projects.

“What I think would have happen is that as an election year, expectation is that government would want to say: ‘Let’s do what we need to do so that we can show our scorecard why people to re-elect us’. But whether they will be able fully implement the budget as passed is doubtful.”

Mr. Ambrose Oruche, an economist and director, corporate affairs, Manufacturers Association of Nigeria, MAN, believes government is the highest spender and everybody depends on it to plan; so the budget affects the economy. The budget details the debt payment, especially local debt; it will also give direction to where government is going in its fiscal policies.

“When it is delayed, it frustrates people from planning; people won’t be able to plan, not knowing the policy direction of government for the year. It creates tension for the business community. To further invest in the economy becomes a challenge. This budget took six months into the year before signing; it affected the whole business community; just signing the budget on time boosts investors’ confidence in the economy’, he said.

Table: Benchmarks                         2018                     2017           Actual

 

  1. Oil output =       3 mbpd              2.3mbpd     2mbpd
  2. Oil price =       $51                       $47             $55-60
  3. Exchange rate =       N305/$                 N305          N360
  4. Inflation rate =       42%                 15.7%         15-14%
  5. GDP =       5%
  6. Revenue =       165 trn           N5.08trn     N3.7trn
  7. Expenditure =       120 trn           N7.44trn     N6trn
  8. Deficit =       955 trn           N2.1trn      N1.9
  9. Borrowings =       643 trn           N1.9trn       N1.7
  • Domestic borrowing =       N793 bn               N900bn
  • External borrowing =       N849 bn               N800bn

 

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