Thursday, June 29, 2017 09.28AM | FDC
The 2017 budget was approved 6 months late. The FGN is now determined to play catch up. It now has to spend N7.4trn in 27 weeks instead of 52. The absorptive capacity of the economy to optimize the use of the financial resources has become a major constraint to budget execution.
The first disbursement of N350bn, a mere 4.7% of the total expenditure was greeted with euphoria and is already impacting the aggregate demand for dollars in the forex market.
However, we are now seeing a surge in some key business proxies, retail sales, average daily, turnover in the stock market, airline load factors and shipping movement. This is great news for GDP growth which is now estimated to jump to 2.1% in 2018 (EIU).
In this article, the FDC Think Tank delves into the budget analysis as a tool for economic management and highlights the shortcomings of a protectionist stance in a period of economic crisis.
Budget Signed in June
The acting president has finally signed the budget into law, ap-proximately one month after the Senate passed the 2017 budget on May 11, 2017. Some adjustments were made to the proposed fiscal plan. For instance, the total expenditure increased to N7.44trn from the initial proposal of N7.29trn. The benchmark oil price was adjusted upwards to $44.5pb from $42.5pb. Other adjustments are captured in the table below:
Termed a budget of recovery and growth, it is actually a reduction in dollar terms, $24.39bn, relative to 2016’s budget of $30bn. Nonetheless, the objectives of the fiscal plan are commendable: its focus on building critical infrastructure such as railways, roads, etc; encouraging small and medium scale enterprises as drivers for job creation and productivity; provision of social safety nets for poor and vulnerable Nigerians as growth engines, but to name a few.
How will the budget be funded?
The funding of the budget resonates in everyone’s mind. The economy is in recession and the budget is all about growth and recovery. With a projected revenue of N4.94trn to fund its expenditure plans, approximately 40% will be from oil proceeds, 28% from non-oil revenue such as taxes, while the rest stems from other sources, such as recoveries of looted/misappropriated funds. This means that the government anticipates a deficit of N2.35trn, (estimated at 2.18% of GDP).
The projected oil revenue of N1.99trn is premised on an average oil price of $44.5pb and a production level of 2.2mbpd. Currently, Brent crude (a proxy for Bonny Light) is trading at $46.92pb (June 20th), $2.42pb above the benchmark price. The year-to-date (YTD) average is $54pb, $9.50 above the benchmark price. Oil prices have been volatile recently in spite of the Middle East crisis and extension of the OPEC cuts to 2018. Rising US shale production is not helping matters. The good news is that Nigeria is exempt from cutting production through this agreement.
On the production side, the nation’s output level has been sub-optimal at an average of 1.55mbpd YTD. In May, Nigeria’s output level was 1.68mbpd (OPEC Monthly Reports ) . The average so far this year is 29.55% be-low the budget benchmark. The shut-ins and vandalisms this year have been few and far between, thanks to the engagement be-tween the government and Niger Delta militants. Yet, achieving an output level of 2.2mbpd seems overly optimistic. If Nigeria can attain an output level of at least 1.8mbpd with oil prices at cur-rent levels, the pressure on revenue will be dampened. Neverthe-less, given the possibility of another adjustment in the exchange rate, the naira value of the oil sold in dollars will be higher. This will improve the government’s fiscal position. The exchange rate used to calculate the 2017 budget is N305/$; the exchange rate used in 2016 was N197/$.
Other funding options
The government plans to fund its budget deficit via borrowing. The government has already raised funds from the Eurobond market twice this year (a total of $1.5bn) and both issues were suc-cessful. The government also raised a $300m Diaspora Bond, the first of its kind. There are other foreign borrowing plans that the government is working on with multilateral agencies such as the World Bank and Chinese EXIM Bank. A $6.9bn loan is proposed for rail projects, the rehabilitation of the North-East and projects in education, agriculture and health sectors.
Domestic borrowing is likely to be minimal due to rising costs of servicing the debt. In 2015, the cost of debt servicing was 23% of expenditure, compared to 10% in 2010.
What’s next?... Spending! Spending!! Spending!!!
The authority to incur expenditure has been issued and disbursements have begun. The FGN has already approved the release of N350bn for capital projects and a slew of others are expected to follow.
Impact of the disbursement of budget funds
Increased level of economic activities
The release of funds means that projects that have been abandoned or suspended due to lack of funds will be renewed. This is expected to boost the level of economic activity. We expect to see a decline in salary arrears also as funds are released for recurrent spend.
Increased revenue generation
The 2017 budget is capital intensive. The Power, works and Housing ministry has the highest capital allocation - 56% of capital expenditure. A higher infrastructure spend will increase revenue generation opportunities and over time, significantly reduce the fiscal deficit.
Increased liquidity in the money market
Money market liquidity is also expected to increase. The average opening position of banks year- to date- (up till June 19th) is N3.55bn long with pockets of negative positions mid months. Short term interbank rates have oscillated between 12% and 15% on average due to liquidity shortages, with sporadic aberrational spikes to as high as 200% pa (CBN).
The increased liquidity anticipated from the release of budget funds has an inflationary impact. Nigeria’s headline inflation slowed further to 16.25% in May. However, this is still above the budget’s benchmark of 15.74% and the CBN’s target of 11%. Broad money supply contracted by 8.48% in April and when annualized, by 25.44%. This is significantly lower than the CBN’s provisional growth benchmark of 10.29% for 2017. We expect this trend to change once budget funds kick in and demand pull pressure weighs on the general price level.
Increased demand for dollars will weigh on the exchange rate
With increased funds available in the money market, the demand for dollars will intensify the pressure on the exchange rate, which as at June 19th, was trading at N368/$ in the parallel market. Heightened demand pressure means that the CBN may have to deplete its external reserves further to defend the currency. Nigeria’s external reserves level reached $31bn in the first few days of May, before falling to its current level of $30.21bn (June 16th - CBN). The slowdown in the reserves level could be attributed to the maturity of forward contracts sold early in the year.
The level of budget implementation has been suboptimal over the years, due to delays in the Senate’s approval and the Presidential assent. This usually affects the extent to which projects are completed and also sometimes the quality of the projects implemented. It could also deepen the economic crisis and delay the recovery process as funds are cut off. The 2016 budget was passed by the Senate in March and signed into law in May. The 2017 budget was passed roughly 2 months later than last year.
In conclusion, the 2017 budget is a laudable plan with optimistic objectives. The long wait in the budget process could undermine the effectiveness of the fiscal plan as a tool for evaluating the government’s performance. Nonetheless, it is a budget of recovery and growth. All things being equal, it should achieve this goal to some degree, at least.
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