The Nigerian Budget and Nigeria’s future
After close to 7 months without a cabinet, Nigeria’s president has finally settled down and formed a cabinet made up of people of disparate abilities and levels of recognition. APC (a party that campaigned on a manifesto placed before the Nigerian people prior to the elections) has effectively been implementing the policies recommended by the Joda committee (a supposedly transition committee) after the elections.
The Nigerian budget is an interesting notice of intent by the APC government for the year 2016. It is premised on a massive increase of public spending to the tune of 6 trillion naira and public debt acquisition of 2.2 trillion naira during a period of a massive contraction of public revenue accrued from oil sales receipts and a decrease in tax revenue from the non oil sector caused by an ill advised foreign exchange policy emanating from the central bank of Nigeria which is contracting the manufacturing base of Nigeria. After reviewing the trends in the global oil industry, President Buhari said his budget was based on an estimated oil price of $38 per barrel and oil production sales amounting to 2.2 million barrels a day in 2016. An over- ambitious (if not mistaken) review of the global oil industry when one considers the level of over supply of oil relative to the level international demand for oil (in view of the weak economic positions of the major oil importing countries) in the near term and the difficulty Nigeria is facing in finding an end market for its oil in the global market place following America’s shale oil revolution. Nigeria will do well to enter into oil put options and forward contracts that will insulate itself from the shocks that will emanate from the further decline in the price of oil in 2016.
As of early 2015, Nigeria’s debt servicing burden amounted to 20-25% of its then budget. In view of the fact that Nigeria’s budget in 2016 is significantly higher than 2015 and its revenues are likely to be significantly lower than in 2015, Nigeria’s debt servicing burden (as a percentage of its actual revenue) is likely to grow exponentially as a result of the governments stated borrowing intentions in 2016.
The deficit (according to President Buhari) would be financed by increased foreign borrowing of 900 billion naira and domestic borrowing of over 984 billion naira. The foreign borrowing will be an increased burden for Nigeria especially in light of Nigeria’s markedly overvalued exchange rate. It would be advisable that the country enters into FX derivatives in order to insulate itself from any further declines in the value of the naira over the course of the debt. The massive domestic debt acquisition will have significant adverse effect on the domestic economy and the private sector. The government will effectively crowd the private sector out of the market for debt driven investment. One can only imagine the effect this may have on private sector business development in 2016.
The budget no doubt also has its positives. The massive investment in capital expenditure of 1.8 trillion naira will have a stimulative impact on the economy especially as the money will be spent in the areas of works, power, housing and transportation. The reduction in the costs of running a small business due to a reduction of small business taxes will aid the recovery if such FG driven tax reductions are not overtaken by added state driven tax increases. I refer readers to my article entitled “The immigration Tragedy and the way forward”. That article listed in basic terms, the steps needed to be taken to ensure the massive growth in small businesses in Nigeria. I believe the government’s strategy is not yet inclusive enough to achieve the aim of a massive increase in small business establishment across Nigeria. I doubt that a 5,000 naira advance for the establishment of a small business for artisans is a serious policy position. The greater efficiency drive through the Efficiency Unit across all MDA’s is a welcome idea should reduce spending significantly.
The governments spending in the area of education is to be commended. Graduates are to be employed as primary school teachers across Nigeria. This is a needed investment in Nigeria’s youth. I hope a significant percentage of such teachers will be sent to the North in order to start the process of the repositioning of the North into an elite educational zone. The FG will have to reduce the influence of religion in the North in order to allow for the acquisition of a more conventional education by its people. Ultimately, the North must be a safe place for all Nigerians if the stated teachers’ recruitment policy is to work.
The free education to be provided to undergraduate students studying science and technology as well as education courses is to be commended and is consistent with Buhari’s policies in his first stint as head of state. I think Buhari should continue with the funding of post graduate scholarships for graduates that attained first class degrees (as started by former president Jonathan). This is a needed investment in Nigeria’s future.
Ultimately, as stated by Ayo Teriba, it is more effective to encourage foreign direct investment into Nigeria than go on a foreign borrowing binge. Foreign direct investment in private enterprises within Nigeria stays in Nigeria even if the initial investors exit the country. That is because they tend to sell the enterprises to local or other foreign investors should they choose to exit the market. Foreign debt is a continuous burden which increases in line with reduced revenue and a falling domestic currency value. The key to continuing to attract foreign direct investment is to reduce (a) regulatory red tape and (b) local taxes and eliminate foreign exchange control policies. The CBN has to work much harder to significantly reduce domestic interest rates as well as allow more money to be kept with banks in order to further generate and stimulate the domestic economy. Its foreign exchange policy is misguided and counter productive and should be jettisoned.
In a nutshell, the increased spending by the federal government should stimulate the domestic economy provided the monetary policy embarked upon by the CBN is in alignment. 1.8 trillion naira of a 6 trillion naira budget geared to capital infrastructure will have a stimulative impact on the economy. The massive debt drive allied with the unrealistic oil price that underpins the 2016 budget raises fears that the budget deficit will be higher and the debt service burden to Nigeria will be significantly greater than the government envisages. President Buhari definitely has his work cut out for himself.