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Published On: Mon, Jan 11th, 2016

IMF may reject 2016 budget

UCHE CHRIS; OKEY ONYENWEAKU & JULIUS ALAGBE| 

Following last week’s visit of the Managing Director of the International Monetary Fund, IMF, Ms Christine Lagarde, to Nigeria, indications have emerged that the 2016 budget may suffer radical review to address evident inconsistencies and shortcomings in its outlay. The budget, which largely informed the visit, because of the Federal Government’s plan to borrow about N900 billion from the external bond market, received a thumbs-down from the Fund on account of conflicting assumptions and lack of fiscal responsibility.

Lagarde in several remarks pointed out the fact that Nigeria does not need to borrow to fund the budget as there are sufficient internal sources to support the budget. She also said that the budget is overly ambitious, understandably because of political considerations, as well as unrealistic given the turbulence in the price of crude oil.

Ms Lagarde also said that IMF team of economists will be in the country this week to do a comprehensive review of the budget before making their broad recommendations. Her visit took most Nigerians by surprise in view of the negative perception of the Fund in the country after previous experiences in the 1980s.

However, experts believe the IMF boss was being diplomatic with the government because her body language was clear and there were enough suggestions in her speeches to point to a definite direction for the budget.

”It is clear the budget cannot stand as presented, because it is reckless and insensitive” commented the economist, Mr. Henry Boyo in a television intervention.

Addressing the Senate leadership on Wednesday, Lagarde said: I see an immediate priority—a fundamental change in the way government operates. The new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but what needs to be done so that Nigeria can deliver to its people the public services they deserve—be it in education, health or infrastructure.

She said Nigeria should be careful on borrowing. ”Nigeria’s debt is relatively low at about 12 percent of GDP, but it weighs heavily on the public purse. Already, about 35 kobo of every naira collected by the federal government is used to service outstanding public debt.

More importantly, she advised on the quality and efficiency of every naira spent. This she said was because, as more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery. Lagarde also wants government to focus on three particular areas to restart the economy, which include transportation, a sound banking industry and fighting corruption.

The IMF is in Nigeria to endorse her legibility for external borrowing. The 2016 budget anticipates a foreign debt projection of N900 billion, which will require IMF endorsement of the economy before investors can participate. It is part of its Surveillance Protocol on member countries.

Chief Emma Nwosu, former Managing Director, ACB International said that though Lagarde was not talking about IMF or Bretton woods borrowing, it does not mean that there isn’t a debt component in the budget. The question is how much and from where?

‘I had done a series of articles on the issue that if we continued the way we were going, in terms of borrowing, we were going to over borrow or over shoot the threshold. No sooner had I done that than we found ourselves in that condition. I do not think that we are broke. It is just that we are over spending.

We can achieve higher revenue through efficient taxation. I don’t mean over taxing the poor but we can tax the rich and luxury goods. We should also be seriously plugging the holes in such areas as the customs and bunkering among others. We should also try to diversify the economy by developing solid minerals and agriculture. I believe we can re-invent the country”, he said.

Dr. Boniface Chizea, MD/CEO at BIC Consultancy Service said that the challenge with the budget is implementation. ”What was said is that Nigeria does not need to borrow from the IMF. And this should be obvious to all. IMF is there to extend credit to countries in distress, that have imminent balance of payments difficulties and that are challenged to find other sources.

Most certainly Nigeria is not in that situation. Nigeria is a beautiful bride as far as sourcing credit from other market related sources is concerned. This budget is realistic even if we must admit that its implementation will not be a walk in the park. It will not be very easy to borrow the quantum of loans included in the budget, particularly the earmarked level of borrowing from overseas and from the preferred sources preferably from concessionary sources.

One of the difficulties with borrowing from the IMF is that it comes with conditionalities which implies that you lose some of your ability to take independent decisions relating to devaluation, privatization, liberalization and removal of non tariff barriers to continue to underwrite free flow of world trade.

I remain optimistic that budget 2016 will take us far along the desired road if we record good success with its implementation,” he said.

Analysts also believe that the budget, prepared at a time global oil prices continue to exhibit unstable patterns, is based on fundamental fiscal assumptions, which are unrealizable thereby putting it in jeopardy even before its passage and implementation.

For instance, the budget is premised on an oil price benchmark of $38 per barrel, when the current price is as low as $34. Also, revenue projection is based on 2.2 million barrel oil production when we are only doing 1.8 million, representing a short fall of 400,000 barrels per day.

Analysts are of the view that in spite of the fact that total earnings from oil exports account for less than 20 per cent of the budget, it is preferable to underestimate the nation’s revenue as it has probably been overstated. Also they wonder how the budget could propose a welfare expenditure of N500 billion, when it plans to borrow N1.2 trillion.

According to analysts, global oil prices are not showing any sign of sustainable stability. The recent stability, and perhaps upsurge in the price of oil is not expected to last except if the rift in the Middle East economies continues unabated. That is however almost unlikely and Nigeria cannot afford to gamble with its fiscal plan on uncertain projections.

The 2016 budget document has shown that the nation’s aggregate spending is capped at N6.08 trillion. Meanwhile, projected revenue of N3.86 trillion is estimated, which implies a deficit of N2.22 trillion.

While the expenditure side of the budget remains a welcome development for the already beaten economy, there have been issues on the income side. Compared with 2015, fiscal spending plan is 34 per cent above the previous budget.

The FG plans to rake in N820 billion from earnings from oil while its projected non-oil revenues of N1.45 trillion are to be sourced from company Income Tax – CIT, Value Added Tax – VAT, Customs Duties and Federation Account levies. Also, independent revenues were estimated at N1.51 trillion which include revenues from Ministries, Departments and Agencies, MDAs.

“Very well, government may achieve 200 days for oil production in a year but the exchange rate fixed at N198 to a dollar is not realistic. The nation’s external reserve is not gaining strength in spite of the fact that the nation has partially paralysed importing activities but there are concerns on exchange rate position”, SCP Professionals noted in a chat.

As part of the revenue generation drive, Federal Inland Revenue Service may find it quite difficult to meet the revenue target for 2016. The breakdown of FIRS shows that N1.03 trillion is expected to be generated from company income tax at the time when companies’ activities are contracting because of the Central Bank of Nigeria’s managed FX policy stance. Also, FIRS estimate N1.789 trillion for collection for petroleum profit tax.

“Lack of economic policies coordination between fiscal and monetary policies may produce some level of unintended results.

CBN restriction of FX policy in no doubt is affecting productive activities in the already wobbling real sector even as some service oriented businesses grumble”, SCP Professionals stated.

According to budget estimate, the government is expecting to generate N1 trillion from Customs and excise duty in 2016 as against about N935 billion in 2015. Industry analysts said that the Custom revenue capability will be pressured and may not deliver target unless the importation window is re-open. There has been significant reduction in level of imported goods into the country due to shortage of dollar supply.

Financial consultants at SCP Professionals told BusinessHallmark that; “the numbers do not add up. It is easy to come up with intentions to spend, the difficult part to establish remains the sources of earnings.

FG plans to equate the income side to its expenditure corollary with borrowed funds.

The nation’s deficit budget is to be financed partly through domestic and foreign borrowing worth N984 billion and N900 billion respectively. CardinalStone Research notes that the deficit of N2.22 trillion is equivalent to 2.16% of GDP and takes the country’s overall debt profile to 14% of GDP.

FG’s increased capital expenditure portion of the budget rises from N557 billion in the 2015 budget to N1.8 trillion, in the 2016 budget. In the 2016 fiscal plan, capital expenditures represent 30% of the total budget. The increased capital expenditure commits significant resources to critical sectors such as Works, Power and Housing – N433.4 billion; Transport – N202.0 billion; Special Intervention Programs – N200.0 billion; Defence – N134.6 billion; and Interior – N53.1 billion.

Comparative review with the previous budget reveals that this 223% year on year growth in capital expenditure demonstrates the government intention to embark on infrastructural development to aid economic growth and more capacity building at the industries level.

”It is clear the budget cannot stand as presented, because it is reckless and insensitive” commented the economist, Mr. Henry Boyo in a television intervention.

Addressing the Senate leadership on Wednesday, Lagarde said: I see an immediate priority—a fundamental change in the way government operates. The new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but what needs to be done so that Nigeria can deliver to its people the public services they deserve—be it in education, health or infrastructure.

She said Nigeria should be careful on borrowing. ”Nigeria’s debt is relatively low at about 12 percent of GDP, but it weighs heavily on the public purse. Already, about 35 kobo of every naira collected by the federal government is used to service outstanding public debt.

More importantly, she advised on the quality and efficiency of every naira spent. This she said was because, as more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery. Lagarde also wants government to focus on three particular areas to restart the economy, which include transportation, a sound banking industry and fighting corruption.

The IMF is in Nigeria to endorse her legibility for external borrowing. The 2016 budget anticipates a foreign debt projection of N900 billion, which will require IMF endorsement of the economy before investors can participate. It is part of its Surveillance Protocol on member countries.

Chief Emma Nwosu, former Managing Director, ACB International said that though Lagarde was not talking about IMF or Bretton woods borrowing, it does not mean that there isn’t a debt component in the budget. The question is how much and from where?

‘I had done a series of articles on the issue that if we continued the way we were going, in terms of borrowing, we were going to over borrow or over shoot the threshold. No sooner had I done that than we found ourselves in that condition. I do not think that we are broke. It is just that we are over spending.

We can achieve higher revenue through efficient taxation. I don’t mean over taxing the poor but we can tax the rich and luxury goods. We should also be seriously plugging the holes in such areas as the customs and bunkering among others. We should also try to diversify the economy by developing solid minerals and agriculture. I believe we can re-invent the country”, he said.

Dr. Boniface Chizea, MD/CEO at BIC Consultancy Service said that the challenge with the budget is implementation. ”What was said is that Nigeria does not need to borrow from the IMF. And this should be obvious to all. IMF is there to extend credit to countries in distress, that have imminent balance of payments difficulties and that are challenged to find other sources.

Most certainly Nigeria is not in that situation. Nigeria is a beautiful bride as far as sourcing credit from other market related sources is concerned. This budget is realistic even if we must admit that its implementation will not be a walk in the park. It will not be very easy to borrow the quantum of loans included in the budget, particularly the earmarked level of borrowing from overseas and from the preferred sources preferably from concessionary sources.

One of the difficulties with borrowing from the IMF is that it comes with conditionalities which implies that you lose some of your ability to take independent decisions relating to devaluation, privatization, liberalization and removal of non tariff barriers to continue to underwrite free flow of world trade.

I remain optimistic that budget 2016 will take us far along the desired road if we record good success with its implementation,” he said.

Analysts also believe that the budget, prepared at a time global oil prices continue to exhibit unstable patterns, is based on fundamental fiscal assumptions, which are unrealizable thereby putting it in jeopardy even before its passage and implementation.

For instance, the budget is premised on an oil price benchmark of $38 per barrel, when the current price is as low as $34. Also, revenue projection is based on 2.2 million barrel oil production when we are only doing 1.8 million, representing a short fall of 400,000 barrels per day.

Analysts are of the view that in spite of the fact that total earnings from oil exports account for less than 20 per cent of the budget, it is preferable to underestimate the nation’s revenue as it has probably been overstated. Also they wonder how the budget could propose a welfare expenditure of N500 billion, when it plans to borrow N1.2 trillion.

According to analysts, global oil prices are not showing any sign of sustainable stability. The recent stability, and perhaps upsurge in the price of oil is not expected to last except if the rift in the Middle East economies continues unabated. That is however almost unlikely and Nigeria cannot afford to gamble with its fiscal plan on uncertain projections.

The 2016 budget document has shown that the nation’s aggregate spending is capped at N6.08 trillion. Meanwhile, projected revenue of N3.86 trillion is estimated, which implies a deficit of N2.22 trillion.

While the expenditure side of the budget remains a welcome development for the already beaten economy, there have been issues on the income side. Compared with 2015, fiscal spending plan is 34 per cent above the previous budget.

The FG plans to rake in N820 billion from earnings from oil while its projected non-oil revenues of N1.45 trillion are to be sourced from company Income Tax – CIT, Value Added Tax – VAT, Customs Duties and Federation Account levies. Also, independent revenues were estimated at N1.51 trillion which include revenues from Ministries, Departments and Agencies, MDAs.

“Very well, government may achieve 200 days for oil production in a year but the exchange rate fixed at N198 to a dollar is not realistic. The nation’s external reserve is not gaining strength in spite of the fact that the nation has partially paralysed importing activities but there are concerns on exchange rate position”, SCP Professionals noted in a chat.

As part of the revenue generation drive, Federal Inland Revenue Service may find it quite difficult to meet the revenue target for 2016. The breakdown of FIRS shows that N1.03 trillion is expected to be generated from company income tax at the time when companies’ activities are contracting because of the Central Bank of Nigeria’s managed FX policy stance. Also, FIRS estimate N1.789 trillion for collection for petroleum profit tax.

“Lack of economic policies coordination between fiscal and monetary policies may produce some level of unintended results.

CBN restriction of FX policy in no doubt is affecting productive activities in the already wobbling real sector even as some service oriented businesses grumble”, SCP Professionals stated.

According to budget estimate, the government is expecting to generate N1 trillion from Customs and excise duty in 2016 as against about N935 billion in 2015. Industry analysts said that the Custom revenue capability will be pressured and may not deliver target unless the importation window is re-open. There has been significant reduction in level of imported goods into the country due to shortage of dollar supply.

Financial consultants at SCP Professionals told BusinessHallmark that; “the numbers do not add up. It is easy to come up with intentions to spend, the difficult part to establish remains the sources of earnings.

FG plans to equate the income side to its expenditure corollary with borrowed funds.

The nation’s deficit budget is to be financed partly through domestic and foreign borrowing worth N984 billion and N900 billion respectively. CardinalStone Research notes that the deficit of N2.22 trillion is equivalent to 2.16% of GDP and takes the country’s overall debt profile to 14% of GDP.

FG’s increased capital expenditure portion of the budget rises from N557 billion in the 2015 budget to N1.8 trillion, in the 2016 budget. In the 2016 fiscal plan, capital expenditures represent 30% of the total budget. The increased capital expenditure commits significant resources to critical sectors such as Works, Power and Housing – N433.4 billion; Transport – N202.0 billion; Special Intervention Programs – N200.0 billion; Defence – N134.6 billion; and Interior – N53.1 billion.

Comparative review with the previous budget reveals that this 223% year on year growth in capital expenditure demonstrates the government intention to embark on infrastructural development to aid economic growth and more capacity building at the industries level.

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