2018 Budget: Full of sound and fury, signifying nothing -By Jekwu Ozoemene

Filed under: Economic Issues |

Jekwu Ozoemene

 

The first reality check on the 2018 budget proposals is the illusion of a “record budget” or “record spend” as propagated by some sections of the local and foreign media. To detonate this myth, we have to adjust for the years when Nigeria’s official exchange rate increasingly disconnected from the parallel market rate that is more reflective of the Real Effective Exchange Rate.

The proposed 2018 N8.6tn budget at the current official exchange rate of N305 or the NAFEX rate of circa N360 is either $28bn or $23bn respectively. Neither of which can be termed a record budget. Nigeria had budgets that approximated or exceeded $30bn in 2010, 2011, 2012, and 2013 (2013 was circa US$32bn by the way). Simply refer to the official exchange rates at the time. Our “Austerity” budgets started in 2014 (US$28bn), 2015 (both initial and supplementary budgets approximated $25.76bn) while 2016 was $30.7bn, but that is if we apply the official exchange rate of $197. Conservatively, apply say $300 to 2015 and 2016 will result in $16.6bn and $20.23bn respectively while the 2017 Budget of N7.44tn was $24.4bn (using an official exchange rate of N305). A parallel market exchange rate of approximately N360 applied to the 2017 Budget will be $20.6bn.

So, from a Purchasing Power Parity and Spend perspective, we can argue that the 2018 Budget of the Federal Government of Nigeria was US$30.7bn (N3.58ttn at N116.50) in 2008, $25.6bn (N3.76tn at N146,63) in 2009, $31.04bn (N4.61tn at N148.50) in 2010, $29.69bn (N4.484tn at N151) in 2011, $30.17bn (N4.7tn at N155.78) in 2012, $32.03bn in 2013, $27.9bn in 2014, $25.76bn in 2015, $20.23bn in 2016 and $20.6bn in 2017 while the proposed 2018 “record” spend is $23.8bn at the official exchange rate of N305/US$1. In essence, our proposed 2018 $23.8bn “record” budget is approximately $2bn less than the 2009 Budget of $25.6bn.

But then budget proposals do not equate actual spend, especially in Nigeria. Particularly in an era when our projected revenue has become totally disconnected from actual revenues. In the last two budgets, the major culprits for this disconnect have been bogus and aggressively optimistic assumptions under Independent Revenue Sources and Other Revenue Sources (read plugging of leakages and “loot” recovery).

Budgets are usually based on assumptions, some tested, and others still in the realm of hypothesis. Revenue assumptions/parameters that have not been tested and found to hold true will most likely fail outright or at best fall short of expectations.

The need to make up for the shortfall from our aggressive revenue projections has led to an increasingly expanding deficit funding with the attendant exponential increase in debt service. Half year 2017 debt service of N1tn (against a full year projection of N1.66tn) is already approximating full year debt service of N1.4tn in 2016. Not unexpected, given that Debt Portfolio has increased from approximately N12.36tn as of September 2015 to N20.37tn as of September 2017 (made up of N4.6tn equivalent in External Debt and N15.68tn in domestic debt) and government is still borrowing aggressively!

Earlier this month, the Federal Government received the Senate’s nod for an additional $5.5bn in external debt of which $3bn will be used to refinance some of our domestic debt and $2bn applied to the 2017 Budget. If this complexion of our debt does not change over the new financial year, it implies that domestic debt will reduce from the current N15.68tn to N14.76tn while external debt will increase from N4.6tn to N6.277,5tn (assuming an exchange rate of N305/US$1). In all, total debt will increase from the current N20.37tn as of September 2017 to N21.042tn.

Why is this increase as well as the complexion of the debt important? As of June 2017, debt service approximated N1tn, with the proposed increase as well as new complexion, assuming an average interest rate of 14 per cent per annum on the naira debt and six per cent per annum (factoring in lower borrowing rates from multilateral lenders) on the US$ Debt, Debt Service alone on a simple interest basis will approximate N2.445tn against the 2018 projected N2.01tn (this can grow to N2.8tn if we adjust the rates to 16 per cent per annum naira and seven per cent per annum US$). We think that this debt service will be much more because we expect a much bigger deficit given the issues with the flawed revenue assumptions.

The 2018 proposed budget has the same bogus and aggressively optimistic assumptions of President Buhari’s last two budgets. Independent revenue of N847.9bn, Sundry Income of N678bn, and recoveries of N512.4bn are all suspect. Non-oil revenue of N4.17tn when this line has not exceeded N2tn in the last three years is a reckless assumption. If this will be based on the sale of Non-Oil assets, then we assume that not only have these assets been identified and valued but that the sale must have progressed considerably if sales proceeds are to be received within the 2018 fiscal year. To put it in further perspective, this 2018 projected Non-Oil Revenue of N4.17tn is N1.2tn more than the N2.955tn projected for 2017, particularly worrisome given that by second quarter of 2017 government’s gross Non-Oil revenue was ₦697.84bn, a shortfall of ₦654.82bn (or 48.33 per cent).

Again, there has been much ado about a record N2.062tn CAPEX Budget for 2017. The reality is that of the proposed N2.062tn, not a kobo had been released by June 2017 and a total of N480bn (this includes the N100bn Infrastructure Sukuk bond), circa 23 per cent had been released by October 2017. This casts significant aspersions on the projected ‘record’ N2.43tn CAPEX for 2018. Should we also assume 23 per cent release based on historical performance?

We note that Non-Debt Recurrent Expenditure has increased from N2.5tn in 2015 to N3.5tn in the proposed 2018 Budget, and this we assume, does not include the N458m government intends to pay the Malaysian consultant who is to conduct a study that will validate the implementation strategies for the Economic Recovery and Growth Plan. So, why is Non-Debt Recurrent Expenditure (salaries and wages) increasing when the minimum wage has not increased? Has government hired additional staff? It will help to know because an often overlooked factor is that the N18,000 increase in minimum wage in February 2011 (which is circa $111 per month, $3.58 per day, well over the international poverty benchmark of $2 per day) increased the Federal Government’s salaries, pensions and wages bill by 53 per cent to N1.96tn. Since this development, government has been unable to generate sufficient revenue to service both OPEX and address our CAPEX shortfall. Consequently, we cringe to think what a justified increase of minimum wage to Labour’s proposed N56,000 per month will do to government’s OPEX in the current deteriorating revenue environment.

We have purposely opted not to analyse the impact of the budget oil price benchmark as well as the proposed exchange rate of N305/US$1.

In summary, government’s Non-Oil Revenue, Debt Service and Deficit assumptions for the proposed 2018 Budget are grossly unrealistic. To then bother to evaluate the proposed expenditure lines (padded or otherwise, relevant or not) based on already compromised revenue projections will amount to appraising a tale “full of sound and fury, signifying nothing”.

Dr Ozoemene is a Lagos-based financial services specialist and investment banker

 

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