Budget 2016: Changed budget, Changed People, Changed Leaders

Proshare

Wednesday, December 23, 2015 06.25AM / FDC
 

 

Introduction
In what was his first address before the joint session of the Na-tional Assembly, President Muhammadu Buhari presented the pro-posed 2016 budget with a theme consistent with its campaign slo-gan of “Change”.
 

The spending and revenue estimate is based on the Keynesian model of countercyclical spending to stimulate growth. Spending in real terms is up 20% and the deficit is to expand to $11bn – 2.16% of GDP.
 

For an austere and frugal leader, deficit financing – requiring an additional N1.84trn – is a bitter pill to swallow especially the ref-erence to both domestic and more importantly, international bor-rowing. the Eurobond market will be a real test of Nigeria's credit worthiness. The most notable shift in his economic ideology re-mains the mute but tacit acceptance of the adoption of a flexible exchange rate – a no go area up to a few days ago.
 

The budget sought to protect the poor with a social safety net in-cluding scholarships and food provision in schools
 

Budget Assumptions: Mostly Realistic

Key Assumptions:

Oil price: $38pb

Oil Production: 2.2mbpd

Exchange Rate: N199/$

Projected GDP growth rate: 4.37%
 

The budget also clearly acknowledges current inadequacies in the supply of foreign exchange to Nigerians and its impact on traders and business operators who are hugely reliant on imported inputs. It also went as far as assuring Nigerians and foreign investors that the Central Bank of Nigeria will incorporate some flexibility to its foreign exchange management which will encourage additional inflows of foreign currency. The use of administrative measures to defend the currency has negatively affected the sentiment to-wards the Nigeria’s debt and equity markets. The central bank has resisted calls by investors to make further downward adjustments to the naira despite a fall in oil revenue.
 

A devaluation may have not been mentioned, but this could signal the shift of the Central bank’s monetary policy to a path more suited for an oil exporter.


Budget Breakdown

The budget proposes N6.08trn in expenditure and a revenue pro-jection of N3.86trn. Oil related revenues are expected to contrib-ute just N820bn – 21%, while tax collection and public expendi-ture reforms in MDAs will account for the rest. A deficit of N2.2trn is projected – 2.16% of GDP. This is considerably higher than the deficit of 0.79% of GDP in the 2015 budget. The debt profile is set to rise to 14% of GDP. Financing it will require N1.84trn in bor-rowing to be sourced locally (N984bn) and internationally (N900bn).
 

Perhaps bent on signaling its intent to revive a flagging economy, capital expenditure has been tripled to N1.8trn and represents over 30% of total expenditure. This may be compromised if reve-nues fail to reach projected levels. Significant spending on infra-structure and security is set to complement reforms in Agriculture and Solid minerals. The budget also emphasizes the need to re-structure the oil and gas sector and has given directives to the Petroleum Products Pricing Regulatory Agency (PPPRA) to keep the selling price for all marketers of petrol at N87/liter for now.


Conclusion

The budget is clearly consistent and is part of the 3-year Medium Term Expenditure Framework (MTEF). It seeks to stir Nigeria off the path of oil dependence. It hopes to achieve this through a fo-cus on non-oil revenues by broadening the tax base and improv-ing the effectiveness of our revenue collecting agencies. However, the renewed drive to boost non-oil revenues may not be sufficient to cover the gap from lower oil revenues. It seeks it boost growth to 4.37% in 2016.
 

From a relatively static and dogmatic ideological position, Buhari has moved forward in the spectrum of economic reform which is a welcome development for most economists and investors.
 

 

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