Published On: Mon, Jun 25th, 2018

2018: Budget in need of a fix


Budget 2018 may have been signed by President Muhammadu Buhari but the odds against its full implementation seem stacked as analysts doubt the ability of the administration to achieve even half of its promise. The key challenge of the  new budget is that capital expenditure may be off to a disappointing start. 

Although  finance minister, Mrs. Kemi Adeosun, had by mid-2018 assured that the fiscal authorities had spent a whopping N1.5 trillion since December 2017 to rev the economy forward, not much of that spending has trickled  through the economy. ‘’we have seen a lot of newspaper spending commitments, but the trickle down effects have been extremely sober’’, notes Segun Atere, chief market analyst at Apel Assets and Trust, a local Investment supermarket. According to Atere, ‘’the stock market, for example, has looked sickly  since the beginning of the second quarter as gross domestic product (GDP) has looked more like a snail than a Cheetah. Slow economic growth has seen market yield stumble to less than one per cent year-to-date, this is a nasty taste of reality’’.

Indeed the stock markets dreary performance reflects the irony of a budget with historic capital expenditure proving to be too weak to lift corporations out of their doldrums.  Analyst Adeyemi Asiwaju of Ganduniya Capital  observes that, ‘’government’s talk and the economy’s walk seem out of sync. You have  big-sized government with  small-sized economic impact, it the worst of both worlds’’, he insists.

Asiwaju’s frustration is understandable. Nigeria’s GDP is growing at a lazy 1.95 per cent while population has bolted ahead at a sizzling 3 per cent, indicating a persistent fall in GDP per person and a looming crisis in the local jobs market as productivity decline knocks the economy sideways. Says Asiwaju, ”we have got a time bomb situation on our hands. The government has emphasized social transfers rather than economic value creation through growing  the job market”. 

Capital expenditure for the budget is estimated to be a generous N2.87trillion or 31.5 per cent of the budget total or 22 per cent higher than last years figure of N2.36trillion. This would normally be considered to be salutary but the problem according to analysts is that in an election year cycle a fistful of cash will end up as transfer payments to political hanger-ons, wheeler-dealers and thugs. The consequence is that a free flow of money would go into non-productive activity. Aggregate demand may rise, but with the Central Bank of Nigeria (CBN) on a deliberate path of cutting inflation (currently estimated at 11.98 per cent)  to single digit, the combination of high fiscal spending and tight money supply would push interest rates up and create problems for growth in GDP. How hard tight money supply will hurt growth will generally depend on how much money CBN governor, Godwin Emefiele, and his team suck from the system. The more cash and near cash withdrawn from the local money markets the slower the growth of the economy.

A caveat is that if money supply  cut backs prove mild higher government spending and tighter money may increase interest rates without slowing the economy too badly, indeed the economy could actually grow faster but at a slower rate than would be preferred (see chart on aggregate demand and supply expansion and contraction).  The addition of an odd ball of projects to the 2018 budget by the  legislature to the tune of thumping N587billiion is a curious expansionary bullet laced with political opportunism. Most of the projects are an amalgam of wish-washy condescension to local communal interests with  an eye on the next ballot.

Quite a few local economists have expressed ire at the disruption  of the funding of pressing national projects for more politically convenient  schemes that have limited impact other than providing  politicians in the two houses of the National Assembly bragging rights over rivals and flaky arsenal to justify their political representation. Says an economist who declined having her name mentioned in, ”you get a sense that the National Assembly had more interest in how the 2018 budget would give them political capital at the polls in 2019 rather than what clear economic impact it would have on growth and development nationwide. The budget is at best a nasty juggling act between  economic pragmatism and political shakedown”, she noted testily.

But beyond a surge in capital expenditure the budget also swings recurrent non-debt expenditure up by a whopping 17 per cent or about a fifth of last years estimate from N2.36trillion in 2017 to N2.87trillion in 2018. This means that the government expects to spend more in salaries, allowances and sundry repeated budget line items. This might be considered salutary in some quarters but fiscal analysts are doubtful that these added money burdens reflect wise economic counsel. According to Suraj Akinyemi, an economist and industrialist, ” the more the government creates private sector stimulus rather than public sector powder puff, the better for the economy. The budget leans heavily on public sector spending to grow the economy rather than private sector incentives, this limits the multiplier benefits that the economy could accrue”.

Another gritty problem of the newly-minted budget is the N2trillion debt service provision which constitutes 21 per cent of the budget. The huge debt overhang and its financing is likely to put the brakes on growth in the course of the year as the government battles to meet regular debt repayment obligations. Admittedly analysts believe that the swap of domestic borrowings for cheaper foreign loans appears sound, but this would depend  largely on the direction of both international oil prices and the exchange rate of the Naira to the United States Dollar in the course of the budget cycle. A fall in oil prices would punch a hole in fiscal revenues, reduce the exchange value of the Naira to the Dollar and worsen the country’s debt burden in  terms of the local currency. However, if  oil prices stay at an average  of  $65 per barrel, this could give the fiscal authorities a nicely held $14 per barrel spread to allow for the continued growth in the excess crude account (ECA), foreign reserve and the sovereign wealth fund (SWF). This would , according to analysts, fabulously calm investor nerves and allow the economy sustain a fairly stable exchange rate of N355.70 to a Dollar.

According to Akinyemi, ”a lot depends on the international oil market, if it stays  buoyant we should have a fairly decent fiscal year, but if it tanks we could be in for a bitter season of economic brinkmanship on the eve of a divisive election”. Akinyemi’s concern is shared by Apel Asset’s top market analyst Atere, who notes that,  ”the economy’s outlook will largely be shaped by oil . The global oil markets ups and downs will have telling effects on the fortunes of both government and corporations in the months ahead.  We are hanging on a wing and a prayer ”.

The economy will need more than prayers in 2018, it will require fiscal and monetary policy initiatives that a clever and coordinated. The fiscal authorities will need to shift aggregate demand curves up while the monetary authorities may need to support the expansion by tolerating inflation within the lower double digits. Indeed a number of analysts have recommended that the CBN cut Monetary Policy Rate (MPR) of 14 per cent by five per cent or 500 basis points to 13.5 per cent. A rate  cut would ,understandably, put  upward pressure on the exchange rate but this would be a bearable sacrifice in exchange for faster paced growth of the real sector with manufacturing and retail businesses getting an  elusive boost. The current growth of GDP at less than 2 per cent with population rising by a startling 3 per cent per annum has dragged down disposable income per person, this has left Nigerians clearly  poorer as budgets get passed year to year.

President Muhammadu Buhari’s budget reservation is like a wink in the dark, it could be real but nobody notices it. The budget is too much of a political call masquerading as an economic echo. High debt, low allocation to a critical sector such as education (which got 7 per cent in 2017 and 2018) and poor attention to health, makes the budget appear too much like its predecessors in fickleness if not size. To cut a better image the administration has lost a grand opportunity to establish ‘change’ as a credible mantra rather than a sleek political catchphrase signifying nothing. Indeed this budget, in the eyes of many commentators, needs fixing.

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