ANALYSIS: Nigeria risks borrowing to pay salaries in 2015, BudgIT explains

FILE PHOTO: Former Nigeria's finance minister, Ngozi Okonjo-Iweala and Former President Goodluck Jonathan

The dire consequences of crude oil prices free-fall are looming large on Nigeria, as Brent crude continues its slide from a peak of $112.42 per barrel June 1, to its current level below $68.13 per barrel on Tuesday.

Some analysts say oil prices have come under intense pressure from oversupply of global oil; weak economic growth in developing economies; improvements in alternative shale gas technology, as the U.S. intensifies effort to achieve oil independence and recent global political tensions around major oil producing regions.

The final chance to moderate supply through Organisation of Petroleum Exporting Countries, OPEC, by cutting production quotas, was missed last week, as the group resolved to keep output at its 30million barrels per day.

For Nigeria, the reality of the crisis is that we cannot escape the repercussions of wasting years of boom in the era of high oil prices. Since 1973, Nigeria has experienced six circles oil booms, including 1981, 1990, 2002, 2008 and 2011. The country has been left in shock for these years of wastage without accurate explanation of how the oil booms were managed.

Amid another boom, Nigeria’s external reserves stood at about $62.07billion as at September 2008. One wonders why the country was scraping to manage $37billion at a time when oil prices hovered above $100 per barrel for 41 consecutive months.

Today, the excess crude account has come under intense pressures from another round of distribution with its current balance at about $4.11billion.

At the last Federation Accounts Allocation Committee, FAAC, meeting in November, the states had submitted request for another $2billion from the account to offset debts to contractors for ongoing projects.

The Central Bank of Nigeria, CBN, Monetary Policy Committee, MPC, document for October 2011 expressed concern about the genuineness of the country’s huge appetite for petroleum imports.

In 2014 alone, oil marketers have spent over $7 billion of foreign exchange on importation of petroleum products, resulting in the depletion of the country’s external reserves. The Committee said the demand may have been fuelled by rent-seeking and subsidies.

By consciously refusing to tackle the scourge of crude oil theft, reform the state oil company, NNPC, by passing the Petroleum Industry Bill, PIB, and allowing theft of fuel subsidy to flourish, Nigeria has found itself in an open goal situation with no players in her defence.

Other countries that understand the volatility of oil and the need to invest revenues from the wasting asset have built a cushion in Sovereign Wealth Fund, SWF. However, Nigeria has managed to build a similar fund with a balance of $1.55billion, considered grossly inadequate, compared to Angola ($5billion), Algeria ($77billion), Saudi Arabia ($763billion), and Qatar ($1trillion).

Implications for the Budget

The CBN governor, Godwin Emefiele, said at the end of the MPC meeting on November 25, that setting oil price benchmark at $73 per barrel was grossly optimistic.

The oil price benchmark and oil production target is what governments at all levels use in determining how much revenue would be shared.

When oil price nose-dived in the wake of global financial meltdown, Nigeria’s “conservative” $45 per barrel oil benchmark of 2009 had resulted in a lesson that is still being reviewed and debated..

Some believe falling revenues from crude oil exports should help out the devaluation of the naira from N155 to N168 to the dollar. Technically, the government should now earn N16,800 on every $100 receipt from crude oil exports, instead of N15,500 under the old order.

But, history, has, however, proved otherwise. Gross revenue of the Federation dropped by 38.5% from N7.87trillion in 2008 to N4.84trillion in 2009 despite the CBN devaluing the exchange rate from N117.98 to the dollar (January 2008) to N150.85 to the dollar (November 2009). Worst still, Nigeria’s external reserve was at its peak of $62.08billion in September 2008. Today, it has declined by 5.4 per cent to $36.763billion on December 1, compared to the $38.763 billion in November.

The effect in terms of inflation in service and goods used by the government and the tail wind would take recurrent expenditure to another high. History again tells us the Federal Government recurrent expenditure bill increased from N2.12trillion in 2009 to N3.10trillion in 2010, N3.rillio in 2011, N3.32trillion in 2012 and N3.68trillion in 2013.

The impact of the devaluation of the currency and the intensity of growth in recurrent expenditure (payment of salaries, allowances, payment of debt servicing, compulsory payment to government agencies (National Assembly, Judiciary and the Independent National Electoral Commission (INEC) and running costs of government) is huge.

What is left of the nailed down revenue squeezed out from our diminishing oil and gas reserves? The congenitally deformed Tax system? Or the non-oil revenues? How do we navigate through the tough times? Salaries have to be paid, interest on debts have to be settled, and the machinery of governance must continue to run. Cost? Again History.

The provisional report of the 2013 budget Implementation shows that N3.5trillion was federal government’s total revenue from oil, taxes and other sources, while recurrent expenditure bill was N3.6trillion.

In plain langiage, the federal government spends the entire oil and non-oil revenue running government when oil price was above $100 per barrel. What of capital budget? How have we been funding capital budgets? Borrowing and more borrowing.

Nigeria had an actual deficit of N1.1trillion in 2013, which is 22% of the entire budget. To finance the deficit and fund capital expenditure, a total of N781billion was borrowed from local and international lenders, N223.93billion was borrowed from special accounts (Ecology, Stabilization and Natural Resources Account), and N195billion as federal government share of stabilization accounts.

With the decline in oil prices, federal government would possibly not have N3.6trillion revenue it posted in 2013. Analysts estimate that at $70 per barrel with average exchange rate of N170 to $1, and oil production at 2.23million barrels per day (first quarter figures), federal government’s total share of revenue is estimated at N2.95trillion.

In 2013, federal government compulsory payment to service debt was N828billion, with another expected charge this year, less than N2.12trillion would be left to pay wage bill, pensions, service wide vote, statutory transfers and the rest, which already gulped N2.77trillion in 2013, leaving a gap of N650billion.

Additional deficit that should not be funded with debt. This means Nigeria would have to possibly borrow to run government and pay salaries. The deficit for next year in actual terms would nearly hit N1.8rilliotn (from N1.1trillion in 2013) considering need for capital expenditure and related elections cost.

The key questions remain: If government would truly adopt austerity measures in its conduct of business thereby taking haircuts in its overhead costs, would we increase our oil production output, to reach 2.5 million barrels per day target, which guarantees estimated additional N400billion?

Would statutory institutions, like the National Assembly, cut down its blanket N150billion that has no detail? How much would be left in the special accounts? Would the federal government go ahead and take discriminately from it again? Would we reform NNPC and allow it to be more transparent in receipt of oil revenues to every Nigerian, raising its level of efficiency?

Would federal government rethink how it expands its tax base to raise its share of non-oil revenue which stood at N760billion in 2013? Would we give indiscriminate waivers thereby losing scarce revenues again? Would independent government agencies double their contributions to the Consolidated Revenue Pool?

These are times for tough choices for the federal, state and local governments. It is time for Nigerians to brace up for the challenges ahead and demand utmost efficiency from their leaders as the burden races to trickle down.

Download full report by BudgIT here.


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  • amazing2012

    Jonathan christmas gift to Nigerians. Sooner you will hear retrenchment of workers by government and private sectors. Jonathan is a curse !

  • Dr Pat Kolawole Awosan

    Nigerian people must for once stand up and claim their country from foreign IMF/WB organisations who dispatched Dr Ngozi Okonjo Iweala to Nigeria to implement anti-people economic policies to render our nation an unstable economic nation with groing impoverishment and massive corruption practices of fuel-subsidy scam,import waver scam and triple increases in non-available power supply and devaluation of naira.Nigerians must vote out Ebele Jonathan and his South-South/East ethnic team to avoid Nigeria becoming a hugely indebted nation to IMF/WB foreign organization again for recurrent budget funds.

  • Okemute1

    This criminal with a bow hat along with his frog eye accomplice have totally rendered Nigeria legless in 4 years of Okonjonomics. I can see where Goodluck lead a Nation when other seek competence. What a sad state of affairs.

    • Tunsj

      Well said my friend.

    • Bigzy

      Na bad belly go kill you.

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  • Dr Pat Kolawole Awosan

    Poor managerial skill and corrupt-ridden style of president Ebele Jonathan and Dr Okonjo Iweala,have been exposed with the continuing fall oil price around the globe.When per barrel price of oil was S124 dollars and foreign external reserve of Nigeria were S67 billion dollars president Jonathan/Dr Okonjo Iweala were spending imprudently and travelling wide around the world.
    Dr Okonjo Iweala did not reduce the 73% recurrent expenditure and refocus our national budget and diversify Nigeria from

    relying mainly on oil-revenue,as cocoa,timber,ceramic,coffee,bitumen and entrepreneurship suffer.Now oil price has fell and there are going to be a stop to foreign further loans borrowing and reduction of the ten presidential jets to a manageable three presidential jets at maximum and less foreign travels for Ebele Jonathan and his corrupt cronies.

    • Lakeview

      Check your record very well. Okonjo Iweala did reduce the recurrent expenditure. It was high before she came. She was able to reduce it.

  • tsunami1earthquake

    With the benefit of hindsight, would this government have misappropriated the staggering sum of $20 billion? With the benefit of hindsight would this government have condoned mass corruption and embezzlement? Now that the nation is being brought to its knees it is incumbent on this nation to recover all these stolen monies. Telling Nigerians to tighten their belts or to go into austerity is the greatest disservice to humanity. The long-suffering Nigerians have endured all the corruption in the time of plenty. Now these same Nigerians are being told to endure austerity! Why must Nigerians continue to support this government? In other climes the people would have removed this government and recovered all these loots even before this coming general elections.

  • Ajanaku

    Sometimes i wonder the kind of economists we are saddled with especially the writers of this article. How can we aid the govt in perpetrating corruption by saying they may go and borrow due to dwindling oil revenues. Stats show that we are spending over a thrillion as subsidy, now that oil prices are way below bench mark prices is there still a subsidy or a tax/levy on petrol. The savings now on fuel what is being done with it. Note that we now have 2 types of savings from fuel: firstly the savings gotten from fuel increase used in SURE-P and now the savings to be realised from selling petrol at 97 naira and making over 32 naira gain by this govt. Now i think the article writers need to do a follow-up article with the new insights provided.

  • 47Code

    Where are all the GEJ supporters making noise? I think this analysis is too advance for them to understand hence you are not reading loads of rubbish comment here. 2008 here our external reserve stood at $62.07b but today it less than $5b irrespective of the fact that we had oil boom. Can you show me one thing they have done with all these monies? I guess not except the $20billion missing.
    What we need right now and urgently is a very discipline set of leadership. Things are going to get tougher and bad enough, Nigeria as a Nation and Nigerians are not ready when the economic hurricane hits.

  • amazing2012

    ………. When some PDP governors who could not pay salaries of their staff gathered to roll out billions of their respective states for continuation of poverty.
    Born to rule in progressive system is better than born to suffer in unprogressive system !!