By UCHE CHRIS
Since the details of the 2020 budget were first released through the Medium Term Expenditure and Fiscal Paper, MTEF, for the budget years 2020-2022 budget cycle not a small anxiety has gripped the nation. Most experts have averred that the premises and parameters are suspect and the assumptions could lead the nation into deeper financial problems.
The actual budget presented by President Buhari on October 8, 2019 where more details were made public did to dispel the misgivings of most Nigerians, especially those familiar with the budget process and implementation. Apart from the finance minister, in whose purview lies the budget, who has been bullish about it, this year’s financial document has scarcely few supporters, including members of the APC in the National Assembly.
During their preliminary review of the budget after presentation, virtually all the speakers in both chambers picked holes in it, thus raising serious doubt and concerns over its viability. General apprehension over the budget has been on the issues of revenue, debt, oil price, and recurrent expenditure. Their views and positions find agreement with those of experts outside government who have dismissed it as tendentious and no different from the previous budgets of this government.
Ultimately, it will be the job of Mrs. Zainab Ahmed, Finance minister to implement the budget and prove the sincerity and public good of government. Not many people believe she can discharge the arduous task before her creditably because as accountants would say, the balance sheet did not balance.
She admitted the incongruous nature of the critical aspects of the budget in a recent statement but is determined and confident to pull the chestnut out of fire. At last week’s meeting of the World Bank /International Monetary Fund in Washington, she explained the underlining assumptions behind the budget.
“The fact that our revenue is underperforming is not an excuse to bring down the revenue projection that is required to fund the national budget. In 2018, revenue performance was 55 per cent. Half year 2019, the performance moved up slightly to 58 per cent, but that is not an excuse to reduce revenue because it means that we are all sanctioning underperformance. We have to push the agencies and push ourselves to be able to achieve those targets. Those targets are not set by the ministry of finance or ministry of budget and national planning. The agencies proposed those targets,” she said.
By depending on such revenue targets, government built revenues of N8.1 trillion and deficit of N2. 2 trillion into the budget, to be financed by more borrowing, privatization proceeds, signature bonuses from oil blocks, and draw down on loans secured for specific purposes. One of such loans is the $3.5 billion expected from the World Bank and $5 billion from China. This level of borrowing and deficit will surely increased our already suffocating high debt profile of $81 billion or N26 trillion. The percentage of the deficit is 27 percent of the N10.33 revenue and 21 percent of the N8.18 trillion respectively.
The second issue on revenue is that since 2015 budget oil price benchmark has always been over optimistic such that it ended defeating the revenue projections because of the volatility in the market. In 2018 the oil price bench mark was $60 per barrel, which proved high unrealistic as the price hovered around that level in most of the year, leaving very little for the Excess Crude Account, ECA, which currently stands at just $272 million.
All available oil price projections for 2020 from OPEC, International Energy Agency, and U.S. Energy Information Administration, indicate that price will be sluggish as over production by non-OPEC producers is anticipated. So oil price of $57 per barrel for the budget is considered exuberant and exaggerated.
Although government had suggested a price of $55 which agreed with most experts’ views but the NASS hiked it to $57 by raising the budget from N8.1 trillion to N10.33. Also revenue projections in the past three years have performed below average, with the highest being 58 percent in the first half of 2019. Such abysmal performance rate has been responsible for the spike in borrowing and debt.
There is also the issue of production output pegged at 2.3 mbpd in budget against Nigeria’s OPEC quota of 1.8 mbpd. Questions are asked how this could be achieved given the fact that the country has not been able to consistently meet even its official OPEC quota. Nigeria’s highest production level in the past five years has been 1.8 mbpd.
However, the most troubling aspect of the budget is the rising debt service and prospect of more debt. At N2.7 trillion or 68 percent of recurrent expenditure and a third of the total budget, most commentators are worried that Nigeria has embarked on journey of no return if the brakes are not applied quickly. Recently the IMF also warned that the country was living on borrowed time. Nigeria’s debt stock has ballooned in the past five since the coming of this government from N11 trillion in 2015 to the present N25 trillion.
But Mrs. Ahmed has been the most vocal defender of the debt stock, arguing that at just about 18 percent to GDP, Nigeria’s debt is still below international bench mark. The global rate allowable is 48 percent debt to GDP; some countries like China, Argentina, Brazil, Mexico etc have gone as high as 60 percent. But as others have argued, it is deceptive to use GDP to determine the debt profile as the level of our GDP does not reflect our revenue base since the economy is mono-cultural. Revenue is directly tied to oil price and its instability distorts its contribution to the revenue. Moreover, the economy has been in doldrums that virtually most sectors are struggling.
Speaking last week in Washington, she admitted some challenges in the fiscal policy of government. “We agree with the IMF that we need to look at how to improve governance and not just the NNPC but across all of government because poor governance results in underperformance. We have introduced new measures to enhance our monitoring of the revenue generating agencies and monthly reconciliation exercises where all the agencies bring their data and we reconcile.
“Budgets of countries are supposed to be based on taxes that the country is able to generate. It is an anomaly for us in Nigeria that our budgets have not been focusing on revenue. What we are trying to do in 2020 is to harness the full potential of revenue mobilisation. The only increase in taxes in 2020 budget is just VAT.
“Everything else is just maximizing the potentials of existing tax streams that we have and we hope that we will be able to do this to be able to move our tax to GDP ratio from the current seven to eight per cent of GDP to 15 per cent. We can only develop in a manner that is sustainable when we are using tax revenues to fund our national and sub-national budgets.
However, two-time finance minister, Dr. Idika Kalu, told this newspaper last week that the budget is not only misplaced but highly inadequate for country as big as Nigeria in term aggregates.
“I don’t even think it’s necessary for me to go into all those fractions. By acts or omissions and commissions; by the time you adjust those nominal values or real values, you find out that those budgets are small relative to the enormous problems that we have. I don’t think the analysis requires you to even be focusing on those little percentages that would be going to debt service, recurrent and capital expenditure. It is clear that our budget is one of the smallest in the world in relative terms.
“What that really connotes is that our public sectors – and I’m including federal and states and other public agencies – are not really socially mobilising enough. When you don’t mobilise enough, your revenues will be small because the base from which you are mobilising is not responding to the need for further development through the public sector. If you are providing schools, hospitals, roads and what have you, it is so much easier to rationalize the basis for higher levels of mobilisation, which will result in higher real and relative values of your budget in relation to your GDP.
“Now, the question of how much we spend on recurrent is critical: Ideally, by now, we shouldn’t really be spending more than 60 percent… We should not be spending less than 30 or 35 percent on the capital side. The debt should just be a fraction. But that fraction could be much higher than what we have now in real terms, if the growth is as high as it should be… And we are not doing well despite the fact that the percentages already tell you that we must be spending too much on overheads. We are probably spending ridiculously too much, especially on salaries, in relation to income.
“And certainly, given the level of social services and the hard infrastructure, we are spending far too little on incremental investment and maintenance. Those are obvious enough; you don’t have to do any in depth analysis to arrive at that conclusion,” he said.
Mr. Kennedy Iwundu, a chartered accountant and president of Tax Practitioners of Nigeria, Abuja branch, believed that government is cutting its nose to spite its face.
“VAT increase will increase liquidity in the system with consequent effect on inflation, which is going to compound the job of the CBN; and higher inflation will worsen poverty level and erode present purchasing power; it is called cost inflation because producers who are paying the VAT would pass it on to the consumers through pricing. It does not make economic logic to raise tax in a depressed economy”, he said.
Dr. Bonifce Chizea, CEO, BIC Consultancy, believes the budget will not do Nigeria much good. “With the level of deficit in the capital vote, we should not expect poverty reduction next year; the challenge we must confront is to strive for private sector led economy because as government has proved abjectly incapable of managing the economy. Just 10 years ago Nigeria was debt free; today we have doubled what we owed then. And with falling revenue, it will get increasingly more difficult to repay”, he said.
Ordinarily, given the size of the GDP, $82 billion debt is still acceptable; but as the minister admitted, the revenue crisis is even worse than the debt itself because it is the revenue that is used to pay the debt.
Eze Onyepkere, Lead Director, Open Society and Social Justice Centre, said the country is in fiscal crisis – like one digging in a hole; what is expected in a situation like this is certain innovative idea and not treading the well beaten path. “The FIRS was expected to raise N7 trillion in 2019 but only managed N3. 8 trillion; so where are all the moneys being declared by the agency? Something is not right”, he queried.
“There should be a convergence between fiscal, monetary and industrial policies to produce the right mix of outcomes. As it is today, there is no direction and we are getting deeper into trouble. For instance, why do we still have fuel subsidy when the economy is choking from low revenue? Why is government pouring money into social intervention when it cannot fund capital project which is a more sustainable way to improve the economy? It doesn’t make sense!
“It doesn’t correspond and that’s another worry. It is not really bad for government to borrow, but when government borrows, it is important to use the funds to finance projects that will benefit future generations who will pay back the loan,” he said.
“Unfortunately we borrow to pay medical expenses and pay salaries. That’s the sad thing. We are not borrowing to invest, we are borrowing to consume and we don’t even consume them well. Most still go back to where we borrowed them from,” he said.