Last week, on Tuesday, December 22, President Muhammadu Buhari presented his government’s budget estimates and proposals for FY 2016 to the National Assembly. In view of the falling revenues from oil and non-oil sources this year, it is a bold budget. The Federal Government intends to spend N6.08tr in the fiscal year, of which N1.84tr (more than 30 per cent of the budget) will need to be borrowed from internal and external sources. The FG is optimistic it can cover the deficit. As the president observed in his budget speech at the National Assembly, the budget deficit, though huge, is equivalent to less than three per cent of Nigeria’s GDP. But it will take our overall debt profile to 14 per cent of the GDP. This is well within the acceptable threshold of debt to GDP ratio.
As it was his first after his election as president the budget was eagerly awaited by the public to see how the promised changes in the country would be reflected in it. Fiscal year 2015 had been quite bad for the domestic economy. It is estimated that the growth rate which had averaged seven per cent before 2014 dropped to less than five per cent this year. Revenue from oil exports fell sharply by nearly 70 per cent. In the course of the year, the FG resorted to huge deficit financing to the tune of about N1.5tr to keep the economy going. Twice, the outgoing PDP and the new APC federal government had to borrow from the CBN to pay salaries and pensions. Only a month ago the new APC federal government secured the approval of the National Assembly for a supplementary budget of N500bn. And last week the Finance Minister announced that funds available for sharing by the three tiers of government in November fell by N132bn from the previous month. The ECA has been virtually depleted. The SWF and the limited foreign reserves are facing pressures.
Revenue/Expenditure Profile
Revenue projection of the FG in 2016 is N3.86tr, a little over half of the proposed budget of N6.08tr. The FG intends to finance the deficit by a combination of domestic borrowing of N984bn and foreign borrowing of N900bn totalling N1.8tr. In both cases, it is going to be tough financing such a huge deficit. The crude oil benchmark is $38 per barrel but the price of oil in the global market has dropped to $32 per barrel. There is some expectation in official quarters that the oil price will rebound next year, but this is by no means certain. On account of this, the projected revenue from oil in 2016 is only N820bn. Non-oil revenues from Company Income Tax, VAT and Customs and Excise is expected to yield N1.45tr.
On the expenditure side, the budget provides N1.8tr for capital projects, an increase of N557bn on the 2015 budget. The balance of N5tr will be accounted for by recurrent expenditure, still rising despite the government’s efforts to reduce the cost of governance. There is a special intervention fund of N200bn to take care of the government’s phased social welfare programme.
A mildly reflationary budget
The proposed FG budget did not elicit much surprise as it was, basically, a modestly reflationary budget, intended to give the spluttering domestic economy a short in the arm, Although many commentators thought it to be the biggest FG budget ever, it is not quite so. In 2014, the PDP federal government planned a bigger budget. It was forced to scale back the budget by prevailing economic realities. Its projected revenue was given as N7.33tr. In the current year it was N6.83tr. But there was a loss of some N1.5tr in revenue in the course of the year. The actual FG expenditure in the current year, including the deficit financing of some N1.5tr, is quite close to the budget proposals of N6.08tr for 2016. In spite of the fall in oil revenues the government recognised the need to increase public expenditure to stop the economy from going into outright recession. It was already stagnating. The approach of the new FG to the 2016 budget is neo-Keynesian. It is bold and it involves spending more to keep the economy afloat, even if it means a huge deficit financing, essentially more borrowing from domestic and foreign sources. The alternative to this mildly expansionist budget is slower growth, if any.
However, some questions need to be asked regarding revenue projections. The obvious sources of additional revenues are company tax, customs duties and taxes, all of which are projected to rise in FY 2016. But I think that, in present circumstances, the optimism regarding revenue increases from those sources may prove illusory. In the case of customs duty, the prohibition placed on some imports will negatively affect total revenue from that source. This is one of the reasons that tariff increases are considered preferable to outright bans. In the case of taxes, revenue from company tax is unlikely to increase by much, if at all, as the manufacturing industry has slowed down in the last two years. With regard to VAT, an increase from five per cent to 10 per cent, will not lead to a significant addition to the national revenue as income from VAT represents an insignificant part of the total national revenue. An increase in VAT could also lead to a reduction in consumption and tax derived from it.
Again, it was thought that savings from a reduction in the cost of governance would release additional funds for spending. Here, the savings will not be much as there are still 37 ministers. Though a commendable achievement, the reduction of federal ministries from 36 to 27 will not lead to much savings. The federal bureaucracy remains unduly large and President Buhari, understandably, does not want to stir up political and ethnic crises by applying a severe cut in the federal bureaucracy. A merger of some federal agencies is on the cards. While this has become necessary it may not lead to much savings. It was argued that privatisation of some public enterprises would reduce the cost of governance. It should have, but it has not as new FG agencies were started again.
The Oil Subsidy
Although President Buhari has carefully refrained from announcing the end of the so-called oil subsidy, it appears he has been finally persuaded that it is time for it to go. It is no longer financially sustainable. There is no explicit provision for it in budget 2016. Nearly 30 per cent of the total FG budget (some N1.5tr annually) was being spent on this subsidy. Even after the fall of global oil prices, the oil importers were still claiming subsidies on their oil imports. For instance, the price of diesel, long deregulated, at the gas stations has fallen by over 30 per cent. But not so oil. This shows clearly that the so-called oil subsidy was a massive fraud. Some of the fortunes made by the oil importers almost certainly found their way into the PDP electoral war chest.
If a rigorous audit of the NNPC, a cesspool of corruption and theft, is done, it will be discovered that these oil importers were some of the biggest financial donors to the PDP in the recent presidential and general elections. If the subsidy is finally removed, there will be savings of some N1.5tr. This will substantially reduce the huge budget deficit of the federal government. It might not need to borrow more than N500bn in the next financial year. In fact, what the FG should do is to place oil imports on open licence. With competition among the importers the price of fuel in Nigeria will fall rapidly and significantly. It will then be seen clearly how, over the years, the nation has been massively defrauded by its oil importers.
Sectoral Allocations of the Budget
It is in the sectoral allocations of the budget that one can see a lot of bold initiatives by the Buhari APC federal government. Power, Works and Housing get a hefty N433.4bn, the highest ever. Considering Nigeria’s huge infrastructure deficit, this allocation is commendable. But though quite capable, many think that the Minister, former Governor Babatunde Raji Fashola, is being overloaded with responsibilities for three key economic sectors. It is better for him to handle power alone, the most critical of the three sectors, while an additional minister is appointed for Works and Housing.
Both Education (N369.6bn) and Health (N221.7bn) have also received reasonable allocations, while Transport will get N202bn, not unreasonable in our present difficult financial situation. However, it is doubtful that the continuing rehabilitation of the railways, the completion of the southern coastal road, the Lagos-Ibadan highway and the second Niger Bridge, can be fully addressed within these limited financial provisions for public transportation, unless it is the intention of the FG to resort to external borrowings for these huge capital projects. Alternatively, these projects may be included in the medium term plan and executed over five or more years. It is unlikely that foreign investors will show any interest in these giant projects, or lend funds for them. China and India have both been forced by the global economic slow down to cut back on their investments in Africa.
Defence will get only N294bn. This is strange in view of the ongoing insurgency and other internal threats to the security of our nation. However, interior/police will get N145bn. When added to the defence vote, this is as high as the vote for Power, Works and Housing. It is also possible that the new APC federal government has found ways of increasing defence spending in the current fiscal year, including the $1bn it had planned to raise abroad.
The Proposed Welfare Package
To redeem its electoral pledge, the APC federal government will introduce two new welfare packages next year. These are the feeding of school children once a day and a welfare payment of N5,000 per month to the poorest in our country. The cost of these has not been shown in the budget. But it is likely to be minimal. First, there are less than 100 federal secondary schools in the country. The programme will not extend to the states, some of which have similar programmes. Equally, the number of the poorest to benefit from the N5,000 per month largesse will be kept pretty low, far less than the 25 million originally planned. If not, the two commendable programmes will be unsustainable. The President also deserves commendation for his plan to recruit some 500,000 university graduates as teachers in federal institutions. This will have a positive impact on the situation of mass unemployment that is a source of concern in our country, as it has the potential of fuelling social conflict.
Altogether, this is a courageous budget reflecting official concern for the poor in our country. It points the way to the development of a more compassionate society. As usual, the implementation of the budget will be difficult, as there will be some major constraints, one of which is that Nigeria does not yet have the executive capacity for such a huge budget. Some aspects of the budget, such as the removal of oil subsidy will be resisted by Labour, which is also asking for an increase in the minimum wage. The government has to find a way of mollifying Labour on these issues to avert damaging industrial disputes and strikes in the country.
