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The Beginning of the Annual Tussle

Proshare

Wednesday, November 08, 2017 / 10:30 AM /FBNQuest Research 

President Muhammadu Buhari yesterday presented the 2018 budget to the National Assembly, and took the first step in the lengthy yearly process which weakens the ability of the government to govern. It follows the release last month by the Budget Office of the Federation of The 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper. We have already shared our thinking on the revenue and spending elements of the planning documents (Good Morning Nigeria, 25 and 30 October 2017).

 

The core assumptions are those in the framework, namely: an unchanged average exchange rate of N305 per US dollar; oil production of 2.30 mbpd; an oil price of US$45/b; and GDP growth of 3.5%, which had been revised down from 4.8% in the Economic Recovery and Growth Plan 2017-20 of February this year.

 

Cursory media accounts of the presentation yesterday indicate some changes from the framework. Total FGN spending and the capital element remain N8.6trn and N2.4trn respectively. However, the accounts put the deficit at N2.0trn rather than the N2.9trn in the framework.

 

If they are confirmed, the FGN has either pushed up its revenue projections or trimmed the recurrent expenditure, or a combination of both. The former would be more likely because governments the world over tend to reduce the salaries, allowances and pensions of their employees as a last resort. It would also be less plausible, given the uphill struggle to lift the FGN’s non-oil revenues from a pitiful 2.9% of GDP in 2016.

 

The media accounts also report that borrowing of N1.7trn will cover the greater part of the deficit. There is no detail about the non-debt creating sources of financing for the balance. These could be asset sales, signature bonuses and recoveries, for example.

 

In line with international practice, the budget would ideally be passed in time for its implementation in the New Year. This, however, would be little short of miraculous because of the assembly’s holiday in December and the obvious tensions between the executive and the legislature. The process has sometimes dragged into mid-year.

 

This accountant’s nightmare leads to delays in capital releases, prevents the correct monthly distributions from the federation account and creates confusion over deficit financing, not least for investors. In Q1 2017 the FGN raised US$1.5bn from Eurobond sales, which were deployed to cover the deficit in the 2016 budget year (that ran through to May this year due to the annual tussle).

 

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