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Published On: Mon, May 15th, 2017

Budget 2017: Analysts worry about implementation


Nigeria’s 2017 budget got a nod of approval by members of the national assembly last week five months after its original presentation and several weeks after back room horse trading with the executive. The budget was increased by a relatively modest N143 billion from the original presentation to the parliament by President Muhammadu Buhari in December last year, pulling the fiscal plan up 2 per cent from N7.3 trillion as presented by the president to N7.441 trillion as recently approved by the assembly.

As budgets go, the document is remarkably bland except for a few dodgy assumptions that could send the governments books spiraling into an ugly deficit of between 3 and 4 per cent of gross domestic output (GDP). The fiscal appropriations as reconfigured by the NASS is premised on an average international oil price of US$44.50 per barrel for the year 2017, which represents a 4.7per cent increase over the US$42.50 the executive had proposed early. Several analysts see this as brash and gravely dangerous.

In the face of rising global stockpiles, the international price of crude oil has slipped below US$50 over the last two weeks for, admittedly, technical reasons of forward traders unbundling their positions, but which could yield to more fundamental factors such as the unusually warm winter in Europe and America reducing potential demand for fuel and the rise in output by American shale oil producers. By raising the average budgetary benchmark of fuel prices in a indicatively soft global market, the legislature has, inadvertently, breached one of the classic tenets of proper accounting, conservatism. Analysts believe that it would be better for oil prices to skim slightly over budget calculations than to fall below budgetary estimates leading to wider and unanticipated fiscal deficit.

‘We have got to temper our gluttony’ says Dr Vincent Uwani, Director Research and Advocacy, Lagos Chamber of Commerce and Industry (LCCI), ‘even though the global economy may grow faster in 2017 than in 2016 (International Monetary Fund predicts 2017 growth of 3.5 per cent as compared to 3.1 per cent in 2016) the continued rise in crude stockpiles in international markets suggest that the NASS should have kept to the executives original benchmark of US$42.50’. According to Uwani, ‘unbridled optimism is just as dangerous as unhinged pessimism, the original budget price of crude oil at US$42.50 gave just about enough room to serve as a fallback cushion of 16 per cent now the cushion has collapsed to 12 per cent, a harder potential landing point’ he says.

But beyond shaky price assumptions the new budget estimate presumes average oil output at 2.2 million barrels per day (which analysts are not too worried about, though some would have preferred a lower figure to accommodate possible mild disruptions). The budget also rests on a US$/N exchange rate of N305/US$, this could prove a useful peg as a price above this rate would allow the government room to accrue more revenue in naira than the budget specifies. This would enable the government stimulate the economy and reduce unemployment from the staggering official rate of 18 per cent (up from 7 per cent in 2015).

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This perhaps explains the self-congratulation and effusive praise the senate president, Senator Bukola Saraki, gave both the legislature and the executive for the new budget. It also to some extent explains why the Senator was enthusiastic about the ability of the budget to lead the economy out of recession. The trouble with the NASS’s emotional joy ride, however, is that if prices continue to decline (currently at US$48 or 9.4 per cent lower than the US$53 per barrel at the turn of the year, see chart) then total dollar receipts could cave in and actual naira volumes available for spending by the authorities could implode. ‘We might be walking on eggshells this year’ notes Olusegun Atere, head of portfolio management at Imperial Finance & Investment, ‘if oil prices dip below the budget benchmark we could be looking at a horrible budget deficit with increasing bond market activity; indeed bond yields could rise phenomenally this year as prices crash and the fed becomes forced to raise already towering coupon rates to keep investors happy’ he notes.

Bond yields on 10 year instruments have climbed from just over 12 per cent in January 2016 to 14.5 per cent in October of the same year only to settle at a more recent support price of 16.2 per cent in April 2017 (see chart 4). The steepening yield curve suggest that investors are wary of growth in domestic inflation (currently put at 17.9 per cent) and are pessimistic about the years fiscal balance with analysts frowning at the 24 per cent debt service component of the new budget. Even though Nigeria’s total debt stock at US$64 billion is roughly a third of its gross domestic product (GDP), debts service obligations as a proportion of annual budgets is increasingly crippling economic expansion and weakening fiscal policy as a tool for macroeconomic management.

A major problem with Nigeria’s creeping debt trap is that there are no buffers to absorb the shock of declining foreign revenues from oil if the price of the commodity plummets. The capital component of the budget is less than a third of total expenditure and not all the projects related to this budget item are self financing or self –sustaining, indeed a large number of the projects are ‘social’, meaning that they do not have a refinancing framework. The consequence of this is that debt service obligation would become a major drag on the economy if oil prices plunge any further. To plug the hole the fiscal authorities would have to drastically raise domestic taxes (especially value added tax (VAT)) and cut back recurrent spending meaning a massive loss of either public sector jobs or a deep cut in workers’ pay. In other words the jolly economic outlook orchestrated by the executive and the legislature may end up being clever by half.

As a side bar to the budgets less obvious challenges is the issue of whether the current fiscal deficit is predominantly structural or cyclical. A structural deficit is a deficit that persists despite the economy being at full employment meaning that normal government policies of increasing money supply or cutting taxes do not matter. They simply cannot drag the economy up. A cyclical deficit on the other hand occurs as a result of a recessionary downturn and usually responds top governments fiscal and monetary stimulus.

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With a 2016 gross domestic product (GDP) of N148.5 trillion (US$486.8 billion), a tax rate of 30 per cent, full employment rate of unemployment estimated at 10 per cent and a 2017 budget deficit of N2.7 trillion, the 2017’s underlying cyclical deficit is -N3.5 trillion with no structural deficit at all. This is a bit difficult to accept and the problem with the calculation is that Nigeria’s unemployment rate it so high relative to the full employment rate of growth of GDP that splitting the deficit down to a structural component is difficult as most of it happens to be cyclical.

This, however, suggests that active government intervention through monetary and fiscal policy measures should be adequate in kicking the recession can down the road a few meters. Says Peter Folorunso, Managing Director of investment firm, Freewill Nigeria, ’we have a good opportunity to gain some fiscal balance with growth here if the government does not go overboard with its external borrowings and if capital expenditure is focused on building the nations stock of domestic infrastructure’.

Indeed, the budgets real as distinct from its ’nominal’ deficit should come in at around –N615 billion in 2017 meaning that the fiscal burden of government is not as large as it seems on first observation (the government appears to have ‘inflated’ its debt and reduced its real burden on fiscal finance). The assumption here is that total debt (foreign and local) will be about US$64 billion in 2017 and the budget deficit would be at about N2.7 trillion, with inflation hovering at about 17 per cent. This gives the finance ministry ample room to expand fiscal policy. Nevertheless the fed still need to reel in its internal and external borrowing appetite. The problem is not just that of immediate debt management, which could get dicey in the course of the year, as it is one of inter-generational responsibility. The people piling up the debt today will not be around to see to its repayment in the next five to twenty years.

Budget 2017 may indeed have some redeeming features such as its commitment to pushing economic growth and spending the country out of a gripping recession, but going into a spending spree without carefully considering the implications for a younger generation of Nigerian tax payers is the depiction of hubris gone into overdrive; it is both callous and mean.

Source: Passed 2017 National Assembly Budget Appropriations

Source: Passed 2017 National Assembly Budget Appropriations




US$ 48 per barrel

Source: Trading Economics





16.2% per annum

Source: Trading Economics, Central Bank of Nigeria



Source:  National Bureau of Statistics (NBS), Q1* and full year 2017**represent Business Hallmarks forecast

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