The Nigerian Budget is set at just over N6 Trillion with a budget
deficit estimated at N2.2 Trillion approx. $11 Billion USD at the official
exchange rate of approx. N198:$1 with Oil price benchmarked at an average of
$38 per barrel of Oil in 2016.
The Budget suggest the Federal Government of Nigeria (FG) is looking
to spend its way out of a severe downward pressure on the economy as a result
of dependence on and fall in the price of its major revenue earner Oil.
One of the aims of the 2016 Budget is to diversify the economy as well
as provide jobs. It is allocating exactly 30% to Capital Expenditure.
Critical Concerns -Assumptions
The size of the deficit is heavily influenced by the price of Oil as
well as the Naira value of the repayments on foreign debts.
1.
The benchmark for
the Price of Oil at $38 was very optimistic when set and when the 2016 Budget
was read late in December 2015 it has since dropped below $28 within 30 days of
the 2016 Budget being presented. The prudent estimate which can allow for
Excess Crude Account Funds is an average of $25 per barrel of Oil in 2016.
It the effect on the quantum of the Budget Deficit that is
notable.
2.
The Naira is under
immense trading pressure against other major currencies. There is a lack of
supply of Foreign Exchange to meet demand. It is currently trading at N300:$1
on the parallel Market. The true market value of the Naira is arguably close to
between N250:$1 and N320:$1 in2016 as opposed to the arbitrarily set N198:$1 by
the Central Bank of Nigeria (CBN) or thereabouts. The downward pressure on the
Naira can only be reversed if the Current Account improves which will see
Nigeria exporting less than it is importing. This is unlikely to be achieved
within the next 10 years given that this has always been the national objective
for more than 40 years. The period can be lower than a decade if there is an
unexpected upward trend in Oil Prices. De facto Devaluation has occurred. It is
understandable that official devaluation of the Naira is definitely not
palatable and will constitute political suicide for the Government of the Day.
That said, a rapid depletion of the foreign reserve currently around $29 Billion
will occur within 24 months at the current rate which would be more damaging
politically and economically. The subject of what should happen to the Naira is
not the aim of this intervention but it is difficult to see how the 2016 Budget
can be passed with uncertainty surrounding the true value of the Naira. An
attempt to push on regardless with passing the 2016 Budget can best be seen as
an attempt to bury once head in the sand and wish the problem away.
The compound effect of the uncertainty around the Naira is as follows:
it will affect the Naira cost of borrowing on the International Market as well
the interest rates on borrowing locally. These will both affect the
consequential true cost of borrowing to finance the planned deficit. It
is the effect on the immediate and future cost of borrowing that is being
considered in this piece rather than the CBN policy of the Naira.
Critical Concerns –The DEFICIT and its Financing
1.
The 2016 Budget
Deficit is not a one off. Once the 2016 Budget has been set at just over N6 Trillion, any
reduction in real terms for future budgets will inflict further pain on the
populace. Reducing the Budget deficit in future will have to result in a
reduction of services and uncompleted Capital projects. It is therefore
reasonable to assume that the deficit will be maintained at a minimum of N2.2
Trillion ($11 Billion USD per year) for the next four years. This assumes that
all other things remain equal. Therefore, the Budget deficit over four years
will be N8.8 Trillion ($44 Billion) based on current estimates.
2.
The actual Budget
deficit is more likely to be closer to $14 Billion rather than the estimated
$11 Billion as a result of the difference between the
benchmark of the price of oil at $38 per barrel as opposed to the
prudent assumption of $25 per barrel. This is because a reduction in the price
of Oil means a drastic reduction in any profits available for sharing between
the Oil Companies and the FG and thus its revenue expectation, if the
suggestion that the cost of producing a barrel of Oil is closer to $30 per
barrel then there is little profit available.
3.
The fall in the
value of the Naira will also increase the Naira cost of financing the current
foreign debt and thus increase the planned deficit. The additional adverse
effect on the deficit will also come in the reduced purchasing power of the
Naira and the consequential effect on the rate of Inflation.
4.
The large deficit
in itself as well as the falling Naira will necessarily fuel inflation and thus
widen the already large deficit as project cost increase in nominal terms.
5.
The major concern
is that an average annual deficit of $14 Billion USD will lead to a loan book
of $56 Billion over four years. By 2019, the cost of borrowing will be an
additional $7-8 Billion USD. Presently Nigeria is spending 35 Kobo of every N1 it earns on funding
its existing debt. This will increase to at least 60 Kobo of every N1 it
earns by 2019.
1.
Any borrowing must
only be on investments that will generate direct revenue which will be used to
pay back the money borrowed. Any borrowing for consumption is not advisable.
The Nigerian economy will crumble under another heavy burden of debt. As part
of the Nigerian generation that helped campaign for a debt write down in 2005,
we would be going back to the situation we came out just over 10 years ago.
2.
Any borrowing should be term capped at say $20 Billion for four years,
with a clear demonstration of how the interest and repayment will be financed.
The approved level of borrowing should also be linked to the projected cost of
borrowing. At the moment, international financial analysts suggest Nigeria
cannot borrow at less than 10% from the International markets due
to depleting Oil revenues and the associated risks of default. The cost
of borrowing locally will also be over 15% and that depends on the stability of
the Naira and control of inflation. It is reasonable to expect the interest
rate of borrowing to be around 18% locally.
3.
Financing of
Capital projects should be Private sector led under a Public Private Financing
(PPF) arrangement. The National Assembly (NASS) should consider each project on
its own merit. While it can authorise the projects, it should reserve the right
to authorise the funding arrangement on a case by case basis. Alternatively, it
can approve an Infrastructure Fund which will be used to fund FG contribution
in a PPF arrangement. Essentially, borrowing should only to be for projects
with a clear revenue generating capacity to repay the funds borrowed.
Overall,
the intervention is to draw the attention of NASS to:
A. the level of the deficit that will be generated from the proposed 2016
Budget
B.
the cumulative
effect of the deficit from the budgets of: 2017, 2018 & 2019 and its impact
on the cumulative cost of borrowing thereafter
C. The need to revisit the unstable value of the Naira as a result of its
knock on effect not only on the budget deficit but also on the Nigerian economy
as a whole
D.
the fact that NASS
not only needs to review the budget deficit but also the true cost of borrowing
from the local and international markets given the pressure on the Naira and
the increasing level of inflation.
This is my
humble submission to the current debate on the 2016 Budget. It an opinion, it
is not meant to be exhaustive. It is meant to draw serious attention to an
aspect of the 2016 Budget which is pivotal for its whole.
The
watchword is that what may appear politically expedient today is likely to be
economically and politically damaging as a result of the hardship it will bring
to an unforgiving electorate.
God Bless Nigeria.
God Bless Nigeria.
