Opinion: Will the 2016 budget resuscitate the Nigerian economy? (LONG READ)

The year 2015 was a tough year for Nigeria. The country recorded one of the lowest growth profiles in decades with GDP growth averaging 3.1% in the first nine months of the year, compared to 6.3% in the previous year. For the most part of the year, inflation rate trended upwards to a peak of 9.6% in December, the highest since December 2012.

Similarly, dollar scarcity and rationing arising from the fall in crude oil prices was dominant while government revenues and consumer spending fell significantly.

Furthermore, unemployment rate rose to 9.9% in 2015q3 from 8.2% in the previous quarter. To resuscitate the Nigerian economy would require massive investment in infrastructure, skills & training; enacting and enforcing enabling-business laws/incentives to stimulate production of goods and services for local consumption and exports and having a clear fiscal and monetary policy direction for the economy. This report attempts to examine whether the 2016 budget has the necessary provisions required to resuscitate the economy.

About seven months after assuming office, President Muhammadu Buhari in December 2015 presented Nigeria’s 2016 Appropriation Bill before the National Assembly, detailing the administration’s spending plans for 2016. The bill, which proposed an expenditure of N6.08 trillion for the federal government (FG), the highest in the nation’s history, is themed the “Budget of Change” with specific focus on infrastructure, job creation and promotion of social welfare.

The 2016 budget is significant for a number of reasons. First, it is the first budget presented by President Buhari with the expectation that it covers a good number of the campaign promises that were made prior to the 2015 general elections. Consequently, many Nigerians have placed high hopes on the budget, which of course is a vital document through which “Change” will come to Nigeria. Second, it is an expansionary fiscal policy tool that has the potential to cure the uncertainties that has trailed the Nigerian economy since early 2015 even as each Ministry can begin work to deliver their plans to Nigerians.

Third, the budget remains important in complimenting monetary policy, which has struggled to keep the economy afloat since 2015.

Ideally, the budget is a subset of a broader economic policy, which details how the government influences the economy and performs three overarching roles: Allocative, Stabilization and Distribution functions. The absence of such coordinated and clear macroeconomic policy framework raises the level of uncertainty on the direction of the economy and as such limits the movement of capital and investments in productive sectors.

Nigeria’s economic reality suggests the need for an expansionary budget to stimulate economic activities. The total expenditure of N6.08 trillion represents an increase of 36% from last year’s budget of N4.46 trillion. A breakdown of the budget shows that capital expenditure accounts for 26%, while recurrent takes a share of 74%.

Over the last 8 years, except in 2015 where capital expenditure (capex) had a share of 13%, capital budget has accounted for at least 26% of the annual budget and this therefore implies that allocation for capital projects in 2016 did not record any significant improvement in percentage terms, when compared with other budgets.

In nominal terms however, the capital budget was increased by 188% from last year’s figure to N1.62 trillion. If dequately implemented, this aspect of the budget will have enormous impacts on infrastructure, GDP and job creation efforts of labour intensive sectors like cement and construction.

Recurrent expenditure increased in 2016. Recurrent budget may reach N5 trillion by 2017 Another important feature of the 2016 budget is the increase in recurrent expenditure, which is commonly referred to as the cost of running the government. When compared with 2015 budget, recurrent expenditure (non-debt) expanded by 1.6%, debt servicing by 56% and statutory transfers declined by 6.4%. Overall, Federal Government (FG) total recurrent expenditure of N4.48 trillion for 2016 is higher than the total budget of 2015 and consists of overhead cost (51%) and personnel cost (49%).

The rising cost of governance can be traced to a higher wage bill in 2016, recurrent components of social intervention programs, service wide votes and allocations to key agencies including the Presidency (N39 billion) National Assembly (N115 billion), National Judicial Commission (N70 billion), among others.

At a period of significant decline in crude oil revenue, one would have expected a deliberate and significant cut in recurrent allocations to the National Assembly and other agencies. A detailed look at allocations in the 2016 budget suggests the absence of any major improvement in its structure as allocations in the previous budget were merely revised upwards. Simply put, the budget looks business-as-usual except for a few intervention programs.

The focus on special intervention programs is a welcomed development that will likely improve the welfare of targeted Nigerians. The current administration plans to spend N500billion on special intervention programs including free education for science, technology and education students in tertiary institutions, recruitment of 500,000 teachers, conditional cash transfers and feeding for “home-grown” primary school children in public schools.

With these programs, it is no doubt that the administration is ambitious to deliver its campaign promises, however and more importantly, the modalities of operation for each of the program should be adequately planned for, with input from the private sector and other stakeholders. Revenue projection for 2016 likely to be unmet On the revenue side, the budget projects N3.86 trillion to be earned by the FG in 2016.

For the first time in decades, non-oil revenue accounts for a significant share of projected revenue at 79%, while oil revenue projection takes 21%. This implies that Nigeria has been forced to rely on non-oil revenue to finance the budget, following the decline in crude oil price and the absence of fiscal savings.

With a crude oil benchmark price of $38 per barrel, predicating a focus on taxes and independent revenues, and proposed crude oil production of 2.2 million barrels per day (mbpd), there is a huge possibility that projected crude oil revenue of N820 billion may be overstated, given the weak outlook of crude oil prices (traded US$25pb on January, 14, 2016), persistent supply glut in the international market and the unstable crude oil production volumes in Nigeria.

Furthermore, the government plans to raise N1.51 trillion from independent sources and N1.45 trillion from taxes, with no plans to increase taxes for businesses but expand the tax base. According to data from the Budget Office, actual FG non-oil revenue stood at N1.08 trillion in 2014 suggesting that the 2016 projected revenue of N3 trillion is a huge feat, given the harsh operating environment and other constraints facing businesses in the country.

In summary, the possibility of achieving the projected revenue is low and this would result in either an under-performance of the budget with respect to capital expenditure or a situation where the government overly exceeds its fiscal borrowings for the year. Based on debt to GDP, there is still room to borrow

The 2016 budget has a record deficit of N2.2 trillion, which will be largely funded by borrowings- N1.88 trillion and recovery of stolen funds. This amount to be borrowed is higher than the capital expenditure of N1.62 trillion and suggests that the government would “technically” borrow to fund recurrent expenditure during the year.

With Nigeria’s debt profile at N12.6 trillion (US$65.4 billion) as at December 2015, the additional debt in 2016 would increase total public debt to N14.5 trillion, representing 16% of GDP, which is far below the stipulated 30%-40% limit set for developing countries like Nigeria. Therefore, based on debt to GDP, there is still room to borrow.

However, Nigeria must exercise caution as debts are paid by revenue rather than GDP and also given the low tax-to-GDP ratio. Furthermore, incurring more debt in the current year would mean adding pressure on future budgets due to debt servicing obligations.

Structural challenges limit the implementation of capex

One of the biggest risks facing the budget is the poor implementation of capital projects, which is a major concern for stakeholders in the economy, and to a large extent influences the level of impact of the budget on the private sector and the economy. In Nigeria, annual capital budget implementation has never achieved 65%, and has averaged 52% in the last seven years. In the 2015 budget for instance, out of the capex budget of N556 billion, only N250 billion (45%) had been released for projects as at September 2015.

In the case of the 2013 budget, implementation rate stood at 60%, higher than the 52% average, partly as a result of timely passage of the appropriation bill into law when compared with other budgets. The following factors are responsible for the poor performance of capital budgets in Nigeria:

Undue elongation in the process to pass the Appropriation Bill into law
Inadequate revenue occasioned by reliance on oil
Delays in the bidding process
Delays in processing payments for projects
Delays in obtaining approval from Ministers and Permanent Secretaries at various stages of the procurement process
Lack of planning and experience in project management of some Ministries, Department and Agencies (MDAs) officials
Poor project supervision and lack of transparency and accountability.

For the 2016 budget to have the desired impact on the economy, it is essential for the government to address these challenges with the goal to improve performance of the capital budget.

Recurrent expenditure has always outperformed capex

While capital expenditure records lower implementation rate in the budget, the same cannot be said of recurrent expenditure. Over the years, the performance of this aspect of the budget has remained at almost 100% and in some cases, actual spending has exceeding budgeted expenditure. In 2013 for instance, actual amount spent as recurrent expenditure (including debt servicing) exceeded the budgeted amount by 6%, while non-debt recurrent expenditure showed an implementation rate of 99%, according to the Budget Office; whereas capital expenditure recorded an implementation rate of about 60% in the same year.

In essence, revenue shortfall in government budgets seldom affects plans for recurrent expenditure, which in most cases is often prioritized by the government vis-à-vis capital expenditure. To move forward as a country, we must reverse this position in the 2016 Budget, which must focus on delivering projects that has the potential to improve the business environment as well as living standards of the citizens.

What should we do as a country going forward?

The government must earnestly pursue reduction in cost of governance

• Irrelevant and luxury items must be pruned out of the budget. In the State House (Presidency) Budget of N39 billion for instance, purchase of motor vehicles, buses, computers, furniture, kitchen equipment etc. accounts for over N4.6 billion, while maintenance and repairs of buildings, furniture, plant and machinery and equipment totalled N2.7 billion for the year.

Other cost items include purchase of 33 Seater coaster buses- N158 million, purchase of 16 Seater Toyota Hiace Coaster Buses- N204m; purchase of BMW saloon cars- N3.6 billion; linking of cable to driver’s rest room at Villa admin- N322 million; construction and provision of recreational facilities- N764 million and upgrade of internet infrastructure in state house- N111.4 million.

These costs raise concerns on whether the current administration is truly pursuing a lean government in the face of economic
downturn. If this trend continues, recurrent expenditure in the 2017 budget may rise to N5 trillion, while capex will relatively continue to receive meagre allocation.

• Review downwards the National Assembly budget. Crude oil price has declined by over 70% since June 2014, however the National Assembly budget only saw a decline of 4% from N120 billion in 2015 to N115 billion in 2016. NASS budget is higher than allocations to key ministries like Youth Development, Agriculture and Science and Technology.

In the best interest of the nation, our lawmakers must consciously work towards reducing their recurrent expenditure.

Budget assumptions must be realistic and take into cognisance current and future economic developments

• Lower and realistic crude oil benchmark price and other key variables would facilitate adequate planning and encourage savings for the rainy days when crude oil price exceeds the benchmark in the budget. Nigeria must adopt conscious efforts to build its economic buffers such as Excess Crude Account (ECA) or the Sovereign Wealth Fund (SWF).

Place emphasis on growing the capital component of the budget and enhance its implementation

Capital expenditure is the most important aspect of the budget that connects with the common man on the street. The government must set targets to ensure that capital budget implementation exceeds 85% each year. The situation where recurrent expenditures get over 95% implementation rate and capital budget suffers low implementation rate must be addressed.

To do this, the government must reform the procurement process to remove bottlenecks, undue bureaucracy that causes delays. In addition, where savings are made through the blocking of leakages, funds should be channelled to capital projects. If unnecessary recurrent items are removed from the 2016 budget, capex could be as high as N2 trillion, which would have a much more bigger impact on the economy.

As a country, we must inculcate a culture of timeliness in the budget process. A situation where the budget for 2016 is still being debated in the first quarter of the budget year would only stall implementation. It is important to introduce a structured budgetary process as practised in the United Kingdom and other countries. In India for instance, the budget is presented to the House on the last working day of February (themed Budget Day) and it is expected to be passed by the House and come into effect on April 1, the start of the country’s financial year.

Adopting a similar approach in Nigeria would go a long way to ensure early disbursement of funds to contractors and overall improve the performance of capital expenditure. There must also be disclosure on the performance of the budget in a frequently and timely manner (budget implementation report), in line with section 30 (2) and 50 of the Fiscal Responsibility Act, to update stakeholders on budget variances, and status of selected projects.

Despite the challenges that the 2016 budget might face, the budget is unique in its disclosure of specific cost items of MDAs. This is a huge step towards ensuring accountability and transparency in the public sector. However, more disclosure is needed on the spending plans of the National Assembly and the Universal Basic Education Commission (UBEC). Whether the budget will meet up to the expectations of Nigerians and deliver the promised “change” depends largely on the implementation of institutional and structural reforms targeted at improving the budget process.

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Wilson Rume E. is an Economist with years of experience in research, finance and advocacy. Wilson has made several television appearances discussing issues on the Nigerian Economy, Education and Youth Development.

Wilson currently works as a research analyst, with interest and expertise in monetary policy, fiscal policy, industry analysis, macroeconomic management, Education, Youth Development and poverty studies.

All views expressed in this report are those of the author and do not represent the views of, and should not be attributed to, any organization he works for.

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