The Assumptions and Policies of 2016-18 Medium Term Expenditure Framework

Proshare

Tuesday, December 15, 2015 09:25 AM / FBNQuest Research 

The new administration has revealed its fiscal colours in the 2016-18 Medium Term Expenditure Framework (MTEF), which the head of state sent to the president of the Senate on 08 December. We will look today at some underlying policies and subsequently at the numbers.

Our first point is that the framework is pragmatic on the oil price, projecting averages of US$38/b for next year and US$50/b for 2018. That it invites comparisons with 1986 reinforces our point. The document notes that the FGN has the capacity to boost official production, referring to “new state-of-the-art surveillance” systems, and not the international price.

Spending on the new administration’s social investment is projected at N500bn, which helps to explain the rise in total expenditure by the FGN to N6.08trn (US$30.8bn) in 2016. This represents a part of the APC election manifesto.

The role of the state and its agencies to fund long-term development is to be enhanced. Alongside the existing development banks, an Infrastructure Development Fund is to be established to “warehouse” monies for official capital projects.

Once this idea is developed, we will see what are the implications, if any, for the CBN’s many credit windows (agriculture, aviation, MSMEs, real sector and others) and the Nigeria Soveriegn Investment Authority
.

The underlying GDP growth projections are conservative: 4.4% for next year rising to 5.1% in 2018. There are high expectations of agriculture and solid minerals. We suggest that the projections assume gradual implementation of (and some resistance to) the programme of sectoral reforms.

The eagle-eyed will notice that the average exchange rate is projected at N197 per US dollar through to 2018. This is standard practice in previous frameworks and does not say anything about policy. If the CBN had a devaluation in mind, it would not be happy with a signal in the MTEF.

Two omissions from the framework point to changes in policy. The allocation for the presidential amnesty in the Niger Delta is halved to N20bn next year, and scrapped thereafter. Secondly, the MTEF omits the Subsidy Reinvestment and Empowerment Programme (SURE-P) from the framework period.

The core test for the approved 2016 budget in our view will be the ability of the administration to deliver better value for money. The projected increase in FGN expenditure is substantial (35% on this year’s budget). Few will complain about the rise in borrowing, however, if the appropriations can be seen to be deployed more visibly and productively than hitherto.


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