Budget 2017, Between The Rock And a Very Hard Surface
OUTSIDE THE BOX
BY ALEX OTTI
This intervention is not about the fact that it took about six months for the National Assembly to pass the 2017 budget which was sent to it by the Presidency on December 14, 2016. After all, the National Assembly needed to do a thorough job and look at it with a fine-tooth comb to ensure that there are no incidents of “padding” in the budget. Besides, there are other competing assignments and bills to be attended to, in the midst of oversight functions and constituency projects supervision. We are also not concerned that what came back from the National Assembly as the approved budget had transmogrified from N7.298t to N7.44t, since no one expected that the role of the National Assembly was that of a “rubber stamp”. The legislators must not only make inputs where necessary, but they must be seen to have made such inputs. It is our contention that there are a few issues we must pay attention to if the budget termed “budget of growth and recovery” would realise its purpose.
On the face of it, the budget looks large. For the first time we crossed the N7trillion mark. However, interrogating the numbers would immediately show that it is not as big as it looks. At the originally submitted figure of N7.298t it was supposed to be 20.4% higher than the 2016 budget. However, if we factor in inflation which averaged 18% in the last one year, it would be clear that in reality, this budget is almost at the same level with the 2016 budget. This is a real concern because this is the first year of the implementation of the Economic Recovery and Growth Plan of the government. The N7.44t approved by the National Assembly makes the case look a little better as it would now be 22.8% larger than last year’s budget in nominal terms. In reality, however, significant growth may not be delivered by the budget. Of course I am quick to concede that growth may not happen just because numbers have increased as reallocation of priorities may have a significant impact on the economy. Greater efficiency in resource allocation and utilisation is also bound to produce better results.
When we convert the numbers from Naira to dollars, the situation becomes more alarming. The 2016 budget was based on an exchange rate benchmark of N197 per dollar. In dollar terms, therefore, the size of the N6.06t 2016 budget was slightly less than $31b. Compare this with the current budget with a benchmark of N305 per dollar. The size of the 2017 budget would be just above $24b. Should you use the parallel market rate of N380/$ to convert, the budget size would drop to $19.6b. So when you adjust for inflation or for exchange rates, you are bound to have a budget size that would be in conflict with the promises of government.
The more fundamental point is that we are still battling with recession or better still, stagflation. We had argued in the past and the government had also confirmed that the chosen route to get the country out of the economic challenge is by issuing stimulus packages and increased spending particularly in the area of infrastructure. This would have required a massive expansionary budget. Given the above analysis, the budget that has just been approved is anything but expansionary. Again, the infrastructure spend of about N2.174t is just about 29% of the budget. Recurrent expenditure still occupies its pride of place at about 71% of the budget. Out of the total revenue of N5.08t, over 46% or N2.35t is going to be borrowed. This means that our budgeted revenue cannot even fund our recurrent expenditure of N5.27t as the latter is higher than the former by over N500b.
The major constraint to the kind of budget that would massively impact growth is our capacity to generate revenue. The amount of money that a government and in fact any entity can spend depends on how much that government can generate in revenue. In the event that the government intends to spend over and above its revenue, it must borrow the difference. From the analyses made earlier, it is clear our expenditure far outstrips our revenues, leaving us with the debt option. Our situation is such that our revenue is less than our recurrent expenditure, so, we are technically borrowing to pay salaries. But, we cannot continue to borrow ad infinitum. This is because, there is a cost to borrowing. Recently, the Central Bank of Nigeria cried out over the level of government borrowing. After the Monetary Policy Meeting of May 23, 2017, the CBN is quoted to have expressed concern over the borrowing activities of the federal government arguing that the government’s borrowing has exceeded the target for the 2017 fiscal year. According to the CBN Governor, Mr. Godwin Emefiele, “the Net Domestic Credit, NDC grew by 1.40% in April 2017, annualised to 4.21% which is significantly below the 17.93% provisional growth benchmark for 2017. However, net credit to government grew by 24.08% over end of December 2016, representing an annualised growth of 72%”. The Monetary Policy Committee was, therefore, concerned that credit to government continued to outpace the programmed target of 33.12% for fiscal 2017, while credit to the private sector declined considerably far below the programmed target of 14.88%. So, if the full implementation of the budget is yet to kick off and the pace of government borrowing has already exceeded target, we need to worry. Other than the argument of crowding out of the private sector, there is also the issue of cost of borrowing which is bound to continue to go up. This would put further pressure on the budget as debt servicing whose budget is put at N1.66t or about 23% of budget or 32% of recurrent expenditure is sure to go up. Meanwhile, maturing bonds of over N170b which will be due for repayment within the year may attract higher coupons, should the government decide to reissue them. Commenting on the vulnerabilities of the country’s debt profile, PWC notes that the debt service to revenue ratio has risen from 9.5% in 2009 to 30.9% in 2015, above the country specific threshold of 28%. In 2016, it rose to an all-time high of 50% of revenues which was largely due to unfavourable financing terms and weak revenue growth. PWC estimates that average interest rates on domestic debts, went up from 10.8% in 2015 to 13.2% last year.
There is this misleading argument made by “experts” about Nigeria’s debt sustainability. The argument goes this way: “Nigeria has a lot of room to borrow more and more to the extent that our debt to GDP ratio is lower than the average of 42% for developing countries and 56% benchmark as per the IMF/World Bank Debt Sustainability framework”. The problem with this argument is that it does not take into account the revenue earning potential of the country. It also doesn’t account for the low tax to GDP ratios of the country. While Nigeria’s tax to GDP ratio is a meagre 6%, the global average is about 15%, leaving the country with oil as the major financier of the budget. Given the heavy drop in oil prices, the ability of the country to generate revenue is therefore impaired. In the quoted report, the Federal Government is said to have ramped up its debt “at a compounded annual growth rate of 16.2% over the last 5years to about USD42.1b (N13.8t) in 2016. Going by the borrowing plans for 2017, the debt stock could increase by as much as 20% year on year to USD54.4b (N16.6t) with debt to GDP rising to 17% from 15% in 2015”. You cannot isolate the issue of debt to GDP ratio from debt service capacity. If at 15% debt to GDP ratio, we are using up to 50% of revenues to service debt, it follows that doubling the debt would still leave us below the debt to GDP ratio threshold while we may use all our revenue to service debt annually. This does not work and is the problem with argument of the experts.
The dilemma therefore, is that since the economy is in recession, the government must continue to reduce wasteful expenditure while at the same time increasing productive expenditure to stimulate the economy and consumption, generate employment, improve capacity utilisation and ensure positive economic growth. To do this, government must make use of its revenue or borrow. Since government revenue is not inelastic, the only option left is to borrow. From our analysis, it is clear that there is a limit to how much it can borrow. Government is already receiving warnings from regulatory authorities and multilateral financial institutions about its borrowing activities. Besides, the debt service obligations are already strangulating and choking it. This is where the challenge is and must be recognised by the implementers of the budget to be able to do something about it.
Readers who had followed this column would recall that we had drawn attention to this dilemma last year when we advised against the proposed $30b borrowing. In that column, we attempted to estimate mathematically, the optimum level of debts we could manage given some of these realities that have now become apparent. Somehow, we were misunderstood by the DMO which took out one paged advert in several newspapers to accuse us of “dangerous misinformation”. We would have loved to be wrong and the dilemma, averted.
So, faced with this situation, what does the government do, should be the question that every patriot should ask? The easiest option is to do nothing. The outcome of this option is that all the lofty goals set by government, particularly, in terms of exiting recession and institutionalising growth will not be achieved. In fact, the modest gains achieved so far in the area of slowing the decline in GDP growth can easily be reversed. Nobody wants that. We must therefore put on our thinking caps to work out solutions. One sure approach is to begin to work seriously on shoring up government revenue. In doing this, we must de-emphasise mono-product revenue source and push the tax option frontier. Increasing tax rates may look like the way to go, but it is not. The most sustainable option is to expand the tax base and bring more people into the tax net. Of course, it is only those who are empowered that can pay tax. We must, therefore, do all to positively engage as many people as possible, in economic activities. The other option is to look at the private sector to fill the gap. Strictly speaking, the private sector is a bit shallow in Nigeria. Most of what you have today as private sector is dependent on the public sector. The public sector had over the years assumed a larger than life image dominating every facet of the economy. That has created a private sector that is filled with government contractors and vendors. In some cases, where big money is required for investment, such monies seem to be non-existent in the country. Even the banks which should ordinarily support the private sector seem to be more interested in lending to the public sector given the high risk-free interest rate regime in the country in the last couple of years. That is exactly the major reason for the ‘crowding out’ argument advanced by the CBN above. It is therefore incumbent upon us to ensure that the private sector is not only strengthened, but encouraged to play its role in the economy. Closely related to this is foreign investment. Statistics show that in the last couple of months, we had lost a lot of foreign investment owing to our economic challenges which were not helped by our foreign exchange policies. I believe that this may be a good time for us to look at unifying the exchange rates, sequel to the gains made by ensuring that the foreign exchange market remains liquid. This new policy had the positive effect of bringing down the parallel market rate from over N530 per dollar to the current rate of about N380 per dollar.
If per chance oil prices go up beyond the benchmark used for the budget, we would be able to build up additional funds in the excess crude account which would help in funding the deficit. Recovery of more stolen funds than anticipated by the budget would also help in resolving the challenge. If none of these happens and we are unable to see any traction in the area of private sector involvement and improvement in tax collections, then we should be prepared for a partial implementation of the 2017 budget.