Friday, December 23, 2016 2:45 PM / Vetiva Research
The 2017 draft budget submitted to the Joint Assembly falls in line with the countercyclical fiscal policy stance of the present administration. Proposed increase in expenditure (20%) and revenue (28%) reflect a renewed desire to reflate the economy in light of a more positive fiscal outlook on the back of expected higher oil earnings.
Whilst the Federal Government (FG) will hope that size translates directly into impact, it is important to assess just how large the 2017 budget is as we draw a line between optimism and hope. Here is our attempt to gauge the true size of the budget.
Accounting for inflation
Nominal projected expenditure in 2017 is 20% greater than the budgeted amount for 2016, an identical change between the overall 2015 budget (including supplementary) and 2016 budget. But in real terms (2016E average inflation: 15.6%), projected expenditure is only 4% greater, also marginally in line with the increase between 2015 and 2016.
Meanwhile, whilst 2017 revenue is expected to grow by 28% in nominal terms, real growth is estimated at 11%. This is significant as it will be the first real growth in budgeted revenue since 2013, which documented a mere 1% year-on-year increase in real revenue. This lends credence to the view that the 2017 revenue target is somewhat ambitious.
Dollar expenditure marginally lower than gross external reserves
Looking at the budget in dollar terms shows the effect of naira depreciation. Expected expenditure is $24 billion, a 22% fall from 2016 and lower even than current level of gross external reserves ($25 billion). Likewise, 2017 figures are lower than 2016 figures across all key line items.
This is relevant as 40% of government revenues are expected to come from oil in 2017 (compared to 21% in 2016) which means that dollar earnings are crucial and provide a fair way of assessing the budget. On this view, with total revenue (in dollar terms) projected to be the lowest in our six-year review period ($16 billion) – largely due to depreciation, the charge of an overambitious revenue target looks weaker.
That said, the FG must continue to work with relatively low oil prices ($42.50 per bbl in 2017 vs $79 per bbl in 2014) though naira depreciation cushions the effects on earnings. Moreover, the size of dollar earnings depends on whether oil production target (2.2 mbpd) is met.
A national income comparison
Expenditure as a proportion of GDP in 2017 is the highest in our survey period. However, the ratio of expenditure to revenue is expected to moderate slightly in 2017 – indicating that projected spending may be rising at a slower pace than budgeted revenues. Meanwhile, budget deficit (% of estimated GDP) is flat y/y at 2.2% whilst remaining significantly higher than average of 1.2% between 2012 and 2015.
Capital spending on the rise…
Although capital expenditure (capex) is expected to increase 30% in nominal terms, this pales in comparison to 2016 when capex was projected to triple the 2015 number. Nevertheless, capex constitutes a larger part of 2017 budget (31% vs. 29% in 2016). Moreover, capex/debt servicing has been rising since 2014, one indication that the rate of expansion in economic capacity should outpace rising debt.
All of this points towards a measurable improvement in capex allocation in the 2017 budget but the FG is still a distance from observed State levels where capex usually gulps a larger share of budgets. Perhaps a bit too much is still being spent on steadying the ship and keeping the government running (recurrent expenditure).
A comparison of actual capex spend in recent years further tempers this view of improvement. Just 73% of 2015 budgeted capex was disbursed (compared to a near 100% rate for recurrent expenditure). Capex lagged even further behind in 2016 – barely over half of pro-rated capex allocation was disbursed by September 2016. This paltry implementation record must be set as the background against an even more ambitious capex target.
Rising debt levels
Debt servicing costs are projected to increase by 20% – above inflation – indicating a real increase in debt burden. Despite this, the pace of debt servicing growth is slowing (2016: 45%), debt servicing as % of expenditure is flat (23%), and debt servicing as % of revenue is down slightly (from 36% to 34% in 2017).
Nonetheless, 2017 debt servicing costs represent 1.6% of GDP, the largest expected share in our survey period. This is due to the expansion of public debt in a time of recession i.e. shrinking national income. Though rising debt servicing costs are a concern, the logic of such a policy prevails under countercyclical fiscal policy.
Faith as little as a mustard seed
Whilst our analysis presents a slightly mixed picture for projected expenditure, the increase in revenue is much plainer. As mentioned above, oil earnings are the largest contributor to FG revenues, thus making dollar earnings key to the attainment of budget targets.
A rudimentary analysis of the numbers reveals the change in budgeted oil revenue for 2017 as 142%. Meanwhile, there is a compounded 73% increase in oil revenue parameters – combined growth in oil price (12%) and exchange rate (55%). This difference is most likely accounted for by projected increases in oil royalty and tax payments.
As we do not have sufficient information about those revenue streams, it is difficult to properly assess if this oil revenue target is feasible. Meanwhile, the most suspect parameter is the one that remained unchanged – oil production target. Given the unresolved militant situation in the Niger Delta, it is doubtful that the target will be met.
In a similar vein, it takes a bit of faith to imagine a completely successful budget execution, in view of recent experience. After annualizing 2016 figures, we get implementation rates of 75% and 79% for revenue and expenditure respectively, worse than 2015 rates of 80% and 94%.
The 2017 budget is even larger nominally so could be more difficult to execute. On the other hand, the budget looks set to be passed sooner and the FG now has an invaluable full fiscal year under its belt. This is crucial as the ultimate measure of the size of the 2017 budget will be its execution.
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2. President Buhari's 2017 Budget Speech - Full Text
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