EDITORIAL: The 2016 Budget, the Naira, the CBN, and National Priorities

As it worked on its first full budget, the Buhari administration had to contend with two unfavourable factors inherited from the previous administration.

First, was the unusual, and ultimately deleterious management of the economy during President Goodluck Jonathan’s five years in office. Then there was the drop in oil prices, which accounts for a disproportionately high portion of government’s revenue, beginning mid-2014, which reduced by half the country’s earnings from the sector.

Given this, the challenge for the 2016 budget is how to revamp the economy via increased government spending in the light of dwindling official government revenues.

The new budget seeks to do exactly that. Of the proposed N6.08tn, N3.86tn is revenue projected to come from the much-diminished crude oil sales and what to us seem like excessively optimistic earnings from “non-oil taxes” and “independent revenue”.

In the budget, the administration has allocated N4.28tn for recurrent expenditure and N1.8tn for capital investments. PREMIUM TIMES note that the budget proposal breaks with a long-standing harmful tradition that has seen daily spending consume more of the national budget than the economy’s need for infrastructure and productivity-enhancing spending would suggest.

With 30% of the budget, the capital allocation makes the right nod to infrastructure, and the need to secure the parts of the country currently ravaged by an insurgency-induced war, both of which are necessary if business is to thrive. The 9% drop in recurrent expenditure, while sufficiently indicative of a more prudent approach, does however raise the question of the large portion of the budget (N1.36tn) dedicated to debt servicing. In terms of the economy’s overall size, this remains a piffling sum.

However, against the expected revenue streams, there is much to be worried about what is in absolute terms the country’s largest allocation for debt service.

And this is where the worries over the 2016 appropriation bill begin. First, it comes with an unusually large deficit (N2.2tn]. More worrisome is that its projected financing for the deficit—N900bn from overseas sources, N984bn locally, and N380bn from recovered misappropriated funds—includes what appear to be heroic\unrealistic assumptions even in the best of times.

For one, higher interest rates in the United States would mean that the eventual costs of servicing such loans, as we will acquire would be significantly higher than proposed. Although it has been argued that with the right structure (extended moratoria), and sources (a lot of borrowing from the Chinese) we may keep this manageable, this remains a source of worry.

However, it is doubtful that the current situation in monetary policy will aid the budget. Many commentators doubt that non-residents would willingly put money in an economy with no discernible outlets for repatriating earnings, which is one consequence of the Central Bank of Nigeria’s (CBN) current management of the nation’s foreign exchange space.

A far bigger worry is with the deficit’s impact on the domestic space. Whereas N984bn might not seem big enough to disrupt the market for domestic borrowing, it is doubtful whether current market rates are sufficient to attract domestic savers to invest in government securities. And it would not help to have the CBN mandate banks to lend at current rates. Higher yields on government debt, though, would mean that the private sector faces elevated borrowing costs just as consumer demand falls off.

There is a strong case for government to run an expansionary budget this year, if only to help prop up falling consumer spending. And indeed, government reinforces its spending priority most emphatically by opting to spend more on education this year than it plans to on defence.

Over a much longer horizon, the economy’s crying need is for reforms that make it easy for businesses to thrive. And this would include rapid transitions to market-based pricing, whether for domestic fuel sales or for foreign exchange transactions. The planned unbundling of the Nigerian National Petroleum Corporation (NNPC) is but a half-way house in this direction.

Ultimately, a budget requires for its success, disciplined execution. The 2016 appropriation bill raises enough questions to make us worry about the likelihood of its successful implementation. Yet, PREMIUM TIMES permits itself to hope that things would be different this time around.

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