Forecasting is an occupation that confers respectability on the field of astrology. But, even everyday people have the right to predict the scale of the dark storm hovering over Nigeria’s economy as the oil price continues its free summersaults. Such is the dire situation of a country whose finances depend mostly on a mono-product – crude oil.
When oil price stood above the $79 per barrel benchmark used in estimating the 2013 budget, the Nigerian government had to resort to borrowing (N744billion) to meet her capital expenditure obligations due to revenue shortfall. At the moment, oil price hangs around $61 a barrel (below the benchmark price of $65 per barrel), and the market threat to drag prices even lower is stronger than we have ever known. What will 2015 hold for Nigeria’s finances?
Where’s the austerity?
The 2015 Budget Appropriation Bill as presented to the National Assembly on December 18, 2014 contradicts the basic economic definition of austerity. If the common man is a priority in government’s strategy, the sharp dip in the capital expenditure negates that notion. Austerity describes policies used to tighten government expenditure, close loopholes that cause revenue losses and a gross reduction of budget deficits during adverse economic conditions. However, from the recent steps taken, Nigeria is simply prioritizing government staffing and wage bills, as against the overall health of the economy.
From Table 1 below, based on BudgIT’s analysis, recurrent expenditure (salaries, overheads, statutory transfers and debt service costs) totaled N3.97trillion, which is an unbelievable 91% of the entire 2015 budget proposal. Our analysis treats subsidy for reinvestment and empowerment programme (SURE-P) as an externality to the aggregate budget, because except the oil price rises, the landing cost of fuel will still be low, leaving too little savings for SURE-P. Typically, this is to say that the aggregate budget as presented currently is to keep government running – nothing more.
While presenting the budget, Minister of Finance, Ngozi Okonjo-Iweala, subtly micromanaged the flaws in the 2015 Appropriation Bill, announcing to the world that Nigeria will be running a capital budget of N634billion, leaving Nigerians with the impression that the capital expenditure figure is inclusive of SURE-P.
If the total recurrent expenditure of N3.97trillion (as placed in Table1 above) is removed from the aggregate budget expenditure of N4.358trillion, then “the common man’s priority ” – the capital expenditure – will come down to a paltry N387billion, a mere 9% of the budget.
Comparing the 2015 capital vote of N387billion to N1.119trillion provision in 2014, the stark difference is very frightening. This corroborates BudgIT’s recent policy paper, which asserted that capital expenditure would be under severe threat in an era of declining oil prices.
To actually show that government is not applying any cuts, note that statutory transfers to public institutions, such as National Assembly, National Judicial Council, Independent National Electoral Commission (INEC), etc. go up from N408.69billion (2014) to N411.84billion (2015 proposed), notoriously higher than the Capital budget (N387billion) in a country with a gross infrastructure deficit?
The Debt Trap
Nigeria has also been subtly accumulating debts in recent times, with domestic debt rising from N4.55trillion in 2010 to N7.65trillion as at September 2014. It is very alarming to see debt servicing fees rise from N828billion in 2013 to N943billion in 2015, an equivalent of 22% of the aggregate expenditure.
Key questions requiring pertinent answers from our budget managers. Why will personnel costs increase from N1.77trillion (2014) to N1.84trillion (2015)? Is the government planning a massive recruitment drive in an austerity year? Or is this being brought on by the proposed elections in 2015?
One thing for sure is that part of the recurrent component of the 2015 Appropriation Bill will be funded with debt. The budget deficit, which should mainly finance capital projects in line with the provisions of the Fiscal Responsibility Act (FRA) is higher than the capital expenditure budget. This means, as presented, the executive is seeking approval from the NASS to borrow N387billion to finance the entire capital budget and the remaining balance (N368billion) of the proposed deficit will be spent on recurrent items.
The government is also planning to draw down N80billion from the excess crude account (ECA), which is only possible if the oil price rises above $65 per barrel oil benchmark proposed in the budget.
In other words, if oil prices stay below $65 per barrel, there will be more borrowing. If the volume of crude oil sold falls short of targets, more borrowing. If the overly optimistic non-oil revenue generation target, which the government has failed to raise successively, falls short, government’s borrowing spree will continue to meets its obligations.
What if oil prices stay below $50; how does the government intend to survive, including the states and local governments, most of which are already struggling to meet their obligations to workers and people in their various domains? Our reforms are therefore long overdue.
Borrowing and budgeting are not strange bedfellows. Nigeria over the years consistently failed to meet revenue targets, even when crude oil stayed above set benchmark price.
In 2013, oil revenue actual receipts for the federal government totaled N1.99trillion, as against N2.35trillion projected in that year’s budget, despite oil prices staying above average $100 per barrel against the $79 per barrel benchmark.
Non-oil revenue, including independent revenue form government agencies, was actually N1.07billion in 2013, as against N1.48trillion proposed in the budget for 2013. The shortfalls have always been financed by borrowing, or deferred capital spending. Therefore, even at a N1.68trillion non-revenue target for 2015 budget, Nigeria has set the bar high for massive borrowing during the year.
Non-Oil Revenue Assumptions
The spirit of the budget in terms of non-oil revenue growth is good. But how can a 10% import surcharge on new private jets, a 39% import surcharge on luxury yachts, a 5% import surcharge on luxury cars and a 3% luxury surcharge on champagnes, wines & spirits solve decades-old problems in its first effectual year?
Even then, is there any guarantee that this target will be met? How effective would these be? What core rationale would drive tax collection under the Federal Inland Revenue Service (FIRS)/McKinsey initiative, which expects to generate N160billion to shore up Nigeria’s coffers in 2015? What will become of government revenue from Customs and Excise duties when the Economic Community of West African States (ECOWAS) common external tariffs (CET) comes into force in 2015? Is the government Appropriation Bill using its impact study of the ECOWAS CET to project revenue streams?
Source: BudgIT, Ministry of Finance, Center for Social Justice
Based on documented presentations/speeches, Nigeria will spend N20billion (N16billion already earmarked in 2014 budget) to create a Development Finance Institution (DFI), described as “a wholesale financial institution that will support our private sector, especially small and medium enterprises (SMEs), to access more affordable financing with longer tenure.”
Intervention programmes as stated include the Presidential Initiative for the North East Security (PINES) increased from N2 billion to N5 billion, social safety nets are expected to reach three million households in 10 years, and the transfer of 2,400 children from high-risk areas for the full implementation of the Safe Schools Initiative (SSI).
The solutions needed in these dire times are pretty obvious. Government itself needs to take on more austerity measures. The National Assembly must put a minimum of N50 billion from its allocation on the table of poor Nigerians as a starting point to creating tangible change. Independent revenue agencies need to double up their efforts. The Petroleum Industry Bill (PIB) bill must be given accelerated attention and passage, to mention just a few things that must happen to enable our mono-product economy weather the volatility of oil prices. It is time for the reforms that we have left too late.
Should reforms and austerity measures not take hold quickly, Nigeria will be left at the mercies of another miracle. A fervent prayer that the crude oil price hits a new ceiling. A safe haven that may or may never come. A ceiling that is the playground of world economic powers – Saudi, U.S., Russia – with Nigeria left feeling like the grass trodden underfoot by big elephants.
For the 2015 Budget to adequately oil the machinery of governance and Nigeria’s economy calls for a miracle, as estimates on the revenue end are overly optimistic. We have recurrent receipts which must be paid, as well as pressing capital expenditure obligations to citizens. Interesting times indeed lie ahead. Let’s pray for miracles. Nigerians need it now.
*BudgIT is an online analytics agency on public finance