Budget and Plans | |
Budget and Plans | |
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Friday, December 08, 2017 08.00AM / Proshare Research
· Increase the price benchmark or
· Widen the deficit
Oil Price
There is a gradual reverse in the cycle as the earlier patterns of excess crude supply give way as it is replaced by marginal excess demand. In response the global balance of stock of crude has experienced backwardation. Thereby the current price assumption of 45$ per barrel is considered conservative enough.
A mark up in budget oil price is inevitable to cover the production cap. The inability to mark-up the price benchmark in the budget could widen the budget deficit.
Fig 4: Supply and Demand of Crude Oil
Source: IEA
Nominal Currency
The introduction of the Nigerian importers and exporter’s window in June 2017 coupled with improves oil receipts restored calm to the exchange widow. Thus the exchange rate assumption of N305/$ hint on a few things
· The federal government will maintain the crawling peg exchange rate regime
· Rate fragmentation will still exists, thereby unification of rates won’t occur
· The N305 to a Dollar is largely meant for oil subsidy in 2018
Price Stability and the Rate Channel
Inflation has slipped from 18.72% at the end of 2016 to 15.91%, factors largely responsible for inflation were
· Base effect
· Weaning core inflation
· Central bank’s dynamic sterilization, softened month on month inflation
· Delayed rains, weak harvest and rising cost of transportation have bolstered food inflation, making it an up risk to price stability.
Fig 5: Headline and Food Inflation across Selected African Nations
Source: Trading Economics
Budget assumptions on inflation are still in tad, as we are convinced food inflation will remain high in 2018 coupled with an already exhausted base effect.
Although the central bank has made it clear that its numerical target for inflation is 15% and the bank won’t cut rate until it hit that target.
“Moving forward, the CBN must distinguish between when price alone maters and price do matter. In 2018 price do matter, just as other fundamentals such as growth and unemployment matter more”. After all, the natural rate (MPR) is indexed as a baseline for government borrowing.
A research paper delivered by CBN on February 2016 in one of its monetary paper session, titled “Relevance of inflation targeting in the new normal for developing countries: Nigeria a case study.
The bank in its concluding remarks stated
“It appears that a full-fledged Inflation targeting framework may not be too relevant in the new normal as it may not address the exchange rate and foreign reserves variability, economic growth as well as employment objectives of the Nigerian economy. However, the alternative scenario of Nominal GDP targeting framework seems more plausible, as it generates higher economic growth, increment in foreign reserves, more stable exchange rate as well as lower inflation rate”. I guess it couldn’t be said better.
Growth
Fig 6: Growth Projections for 2018
Source: IMF, Office of the budget of the Federation, World Bank
The 2018 budget projects a 3.5% growth for 2018, which is far ahead of the International monetary fund projection of 1.9%. At the same time the World Bank forecast a 2.4% growth in 2015, while the regional and global growth forecast stands at 3.2% and 3.3% respectively. The present missing output in the real sector put a 3.5% growth under threat. Certainly there is a limitation to how far 1.8 million barrel couple with possible mark up in the price benchmark can go as scaffold.
The ability to achieve growth above 3% hinges largely on how best to lift the real economy from negativity: In house projection for 2018 lie between 2.5% to 2.8%
Budget Projection and Economic Freedom: Priming the Pump
Policy objectives of 2018 budget;
Highlights | 2018 Trillion (N) | 2017 Trillion (N) | Change (%) | Ratio to GDP (%) |
Oil revenue | 2.442 | 1.985 | 23 | 2.16 |
Non- oil revenue | 3.31 | 1.37 | 142 | 2.93 |
Independent | 0.85 | 0.81 | 5 | 0.75 |
Aggregate revenue | 6.61 | 5.08 | 30 | 5.85 |
Deficit | 1.77 | 2.14 | 17 | 1.57 |
Capital expenditure | 2.43 | 2.24 | 8.4 | 2.15 |
Non- interest Recurrent expenditure | 3.494 | 2.9 | 20.4 | 3.1 |
Interest expenditure | 2.041 | 1.66 | 22.95 | 1.81 |
Aggregate expenditure | 8.612 | 7.44 | | 7.62 |
External | 0.84 | 1.07 | 21 | 0.74 |
Internal | 0.84 | 1.25 | 33 | 0.74 |
Source: Budget office of the Federation
Fig 7: Allocation across Priority Sectors
Source: Office of the Budget
Key Take Away
Freedom | 2018 Budget | Verdict |
Business | · Supporting private public partnership through concessions · Providing tax’s credit for firms willing to build infrastructure · Mobilising revenue through the sale of non- oil asset, encourage private contribution to gross capital formation. · Tax incentives for Foreign Direct Investment · Slashing import and export requirement · Improving the ease of doing business | Positive |
Financial/ Financial Deepening | Rebalancing debt portfolio will stop the crowding out effect experienced by firm Eventually enhancing financial freedom but possible shortfall in non-oil revenue threaten it. | Positively cautious |
Monetary | Maintaining the crawling peg coupled with an expansionary monetary policy puts monetary freedom largely neutral | Neutral |
Certainly, improved macro management such as institutional reforms and a more accommodative stance towards the private sector is responsible for bolstering of business freedom.
The incomplete assimilation of fiscal adjustment in the budget is responsible for the position of financial and monetary freedom respectively. Most importantly it underlines the short pits of an expenditure switch policy in the face of a revenue mismatch.
2018 Budget and the Household: What is the True Value Of the 2018 Budget? : Secular Stagnation
Budgets are people centred, while such centre is largely driven by forward looking policies. At the same time the policies are made up programmes and project. Over the years the Naira has lost its value both internally and externally, ascertaining the real value of the budget is inevitable. In order to determine the root of the expenditure, therefore what is?
1. The actual value of the 2018 Nigeria budget?
2. The actual cost of expenditure per person and government spending per person
3. The budget’s contribution to per capital income and Purchasing Power Parity (PPP) per Individual.
Budgeting over the years have been quantitative driven, most circumstance comparison are most done base on the face value on the Naira. Even though given the nature of our economy as an export concentrated one, we are forced to readjust rate in order to calculate revenue appropriately and tap into external debt.
In most circumstances budget comparison has been base on face value of the naira whereby filtration either of exchange rate or inflation is not done. Just like we had earlier done in the previous section, we end up relying on the nominal value.
The inherent monetary illusion associated with the nominal value make it hard to determine the actual value of the budget. Therefore what is the real value of the Nigerian budget and how deep is the budget spending root on an ordinary Nigeria?
Table 3: The Value of Projected the 2018 Budget in Dollar Terms from 2000 to 2018
Year | Amount Billion ($) |
2000 | 6.71 |
2001 | 7.98 |
2002 | 4.77 |
2003 | 5.40 |
2004 | 6.66 |
2005 | 10.29 |
2006 | 11.92 |
2007 | 15.09 |
2008 | 18.01 |
2010 | 26.42 |
2011 | 23.44 |
2012 | 25.3 |
2013 | 32.01 |
2014 | 28.43 |
2015 | 22.80 |
2016 | 19.92 |
2017 | 20 |
2018 | 23 |
Source: CBN
*The end user value of exchange rate was used, it has as stronger correlation with inflation *
Sector | 2018 | 2017 |
Oil | Neutral · Oil prices have risen but the balance of stock crude is margin. Besides the cap to production will limit capital investment in the upstream | Neutral |
Portfolio Investors | Neutral · On-going, rebalancing of debt portfolio by government will dent yield on their risk free asset. Therefore reduce the revenue mobilization | Winners |
Agriculture | Winners/positive · Government increased intervention in the agriculture sector | Winners |
Construction | Winners/ positive · Increased spending in capital expenditure will blister the construction sector | Winners |
Banks | Neutral · In response to rebalancing government portfolio high, which were a major source of revenue for banks | winner |
Accommodation | Neutral | Neutral |
Mining | neutral · Increased attention in the solid sector remain a budding stage | Neutral |
Real estate | Losers · Real estate have been a third feeble, due to the fact it is cramped behind road and energy | Losers |
Exporters | Winners · Slashing requirements for exporters coupled with the export promotion policy of the present admiration | Winners |
Manufacturing | Neutral
| Neutral |
ICT | Positive cautious · Promoting e-government · Establishing ICT clusters | Neutral |
Transport | Winner · Continuous investment in rail and road | Winner |
End
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References
2. Nigera's Medium Term Expenditure Framework (MTEF) submitted by PMB
3. FG releases Economic Recovery Plan for Nigeria
4. GDP Grew by 1.40% in Q3’17 from 0.72% in Q2’17; 2nd Consecutive Quarter of Positive Growth
5. Headline Inflation Drops to 15.91% in October 2017, 0.07% Lower Than 15.98% September Rate
6. Money and Financial Markets - B.H Hole
7. Relevance of inflation targeting in a developing Economy in the new normal: Nigeria A case study. – CBN – 2016
8. Models of Budgeting - OECD 2015
9. Nominal Targeting – Prof. Larry Summers
10. Critical Evaluating of the Nigerian Budget - Prof Akilo
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8. Nigeria: Ambitious Revenue Assumptions in The 2018 Budget Proposal
9. Budget 2018: Still Priming the Pump
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From ARM’s H2 2017 Nigeria Strategy Report
1. NSR Q4 2017 (10) FI Strategy: Go Long but Be Mindful Of Duration Risk
2. NSR Q4 2017 (9) Fixed Income: Yields Trend Lower As Apex Bank Changed Front
3. NSR Q4 2017 (8) - Is MPC at a turning point?
4. NSR Q4 2017 (7) - Inflation: Still an Eye into CBN’s Monetary Policy Mind
5. NSR Q4 2017 (6) Naira Resilience: New Normal or Fleeting Reality?
6. NSR Q4 2017 (5) - Balance of Payment to Survive Murky Waters
7. NSR Q4 2017 (4) - Nigeria’s Net Creditor Status Diminishes Again
8. NSR Q4 2017 (3) - Fiscal: Federal Revenue Growth Shows Signs of Life
9. NSR Q4 2017 (2) - GDP: Uphill with the Handbrake On
10.NSR Q4 2017 - Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?