Budget 2018 is not budget of consolidation, it is ‘budget that may not happen’

President Muhammadu Buhari presented the 8.612 Trillion Naira 2018 Appropriation Bill to the National Assembly a week ago. A breakdown of the budget as presented reveals the following:

a. Recurrent Costs = N3.494 trillion;

b. Debt Service = N2.014 trillion;

c. Statutory Transfers = N456 billion;

d. Sinking Fund = N220 billion (to retire maturing bond to Local Contractors);

e. Capital Expenditure = N2.428 trillion (excluding the capital component of Statutory Transfers).

DEBT SERVICING
Nigeria’s current debt portfolio is divided 79 percent domestic and 21 percent foreign. The ₦2.014 budgeted for the servicing of debt is 23 percent of the entire budget, this is as the government, based on its budget, plans to reduce its domestic debt by 11 percent, bringing it down to 60 percent with the external debt portfolio to be at 40 percent. This debt service figure is about ₦300 billion higher than the ₦1.7 trillion budgeted for similar expenditure in 2017. These two expenditure items have therefore shot up by approximately ₦800 billion in the last one year. Noted that these two expenditure items are usually non-negotiable expenditure items. The non-debt recurrent expenditure, which is mainly composed of salaries and overheads has been traditionally cash backed 100 percent while debt service is also always cash backed 100 percent since the government cannot afford to default on its debts. It is building on this assumption that the ₦1.699 Trillion to be borrowed to fund the 2018 budget will be sourced 50 percent from the external markets and 50 percent domestically.

Borrowing under the present government has raised concerns and have been calculated by analysts, with the most recent being approximately ₦102,000 per citizen.

Combined, non-debt recurrent expenditure and debt service stands at ₦5.5 trillion in 2018, which is higher than the country’s total budget in 2015, the year President Buhari became President. Nigeria’s total budget in 2015 was ₦4.4 trillion, of which ₦2.6 trillion was earmarked for non-debt recurrent expenditure, and ₦943 billion for debt service. This basically means that between 2015 and 2018, Nigeria has added a cumulative ₦2 trillion to its recurrent and debt service bill.

The significant increase in recurrent and debt service should be of concern to the government and Nigerians, especially considering that these expenditure lines are always cash backed, and usually at the expense of capital expenditure. Another uncomfortable sign is that recurrent expenditure has gone up even though the government is yet to negotiate the new minimum wage demands from the labour unions. It is important to note this because if, and when the government finally agrees a new minimum wage, recurrent expenditure would expand even further.

At a time, the country was hoping to put a cap on recurrent expenditure, we have actually added about a trillion more even before we agree a wage increase.

The outlook for debt service is also not looking good and looks set to keep rising. The 2018 budget is projecting non-oil revenues of ₦4.2 trillion. This is about ₦1.2 trillion more than the ₦2.955trillion that the government projected from non-oil revenues in 2017. President Buhari admits that non-oil revenue projections for the 2017 budget was not met, so it is unrealistic to hope that the projections will be met in 2018.

RECURRENT COSTS
At ₦3.494 Trillion, the Recurrent Costs take up 41 percent of the 2018 budget. Plans by government to reduce Recurrent Costs will be difficult for one, due to interventions and job creation schemes–such as N Power–being undertaken by government. The proposed 12 percent increase in Personnel Cost and 26 billion Naira in Overhead Cost, makes for an interesting look as the government plans to reduce its debt while still having money to cover its massive Recurrent Costs.

CAPITAL EXPENDITURE
Ngozi Okonjo-Iweala, Nigeria’s immediate past Minister of Finance and Co-ordinating Minister of the Economy is on record to have said Nigeria requires $8 Billion annually to meet its infrastructural needs, while in September 2017, Mr Andrew Alli, the President of Africa Finance Corporation (AFC) put the amount at $3 Trillion in the next 30 years which is equivalent to $100 Billion annually. The Capital Expenditure budget of 2.428 Trillion translates to approximately $8 Billion, which seems to put the government on track but looks to be insignificant when compared with the $100 Billion figure of the AFC President.

Power, Works and Housing = N555.88 billion;

Transportation = N263.10 billion;

Special Intervention Programmes = N150.00 billion;

Defence = N145.00 billion

The Capital Expenditure budget for Education stands at N61.73 Billion which is 2.5 percent of the Capital budget. There are possibilities of a confrontation between labour unions in the education sector and government, most notably the Academic Staff Union of Universities, as the amount budgeted for the sector will make it virtually impossible for government to meet the demands agreed to with the union.

OVERALL BUDGET PROJECTIONS AND BENCHMARKS
Nigeria’s inflation rate dropped to 15.98 percent in September 2017, for the 8th consecutive time in 2017. If the trend continues, the 12.4 percent inflation rate projected for 2018 is very much likely to be met.

The $305 exchange rate set for the 2018 budget is at odds with the $360 rate at the parallel market. Although the Central Bank of Nigeria’s unconventional means have succeeded in keeping the dollar at a relatively steady rate for the last two quarters both at the inter-bank and parallel markets, oil price fluctuations and Nigeria’s debt are capable of affecting this rate.

2.3 million barrels per day set as the production benchmark does not look out of place as Nigeria has succeeded in negotiating its production quota with OPEC. If this production quota stands all-through 2018, Nigeria will have to contend with an agitated Niger Delta where as recently as 4th of November, militants issued new threat to begin bombing oil installations. The Nigerian Navy has in equal measure responded in the affirmative that it is capable of nipping such in the bud. Nigeria requires the Niger Delta to be peaceful in order to meet its budget implementation plans. Projected oil and gas revenue is 2.442 Trillion which is 28 percent of the budget. Having a peaceful Niger Delta is a crucial factor in the 2018 budget and it can be seen with the 65 Billion budgeted for the Presidential Amnesty Programme. Energy analyst, Dolapo Oni is of the opinion that the production estimates are “moderate”, while expecting the government to be able to do “more than that.”

The bitter truth is that since President Buhari came to office, his government has never met any of its revenue projection targets for non-oil revenues. It will not happen in 2018. But on the positive side, the projected oil revenues of ₦2.4 trillion could be met, and may even be surpassed because of geopolitical reasons. At the moment, crude oil prices are well above the US$45 benchmark used in the budget, and Nigeria’s crude oil production has also been quite healthy. We hit a 12-month high of two million barrels per day in August.

If militant groups such as the Niger Delta Avengers are kept pacified, and thus stay away from Nigeria’s oil assets in the whole of 2018, if OPEC manages to keep a lid on production, and if the brewing crises in the Middle East escalate, oil prices are likely to remain in the high US$50s or go even higher, keeping Nigeria’s oil revenues healthy enough to perhaps fill in some of the gaps that could open up by not meeting non-oil revenue targets.

Nigeria successfully exited recession in the second quarter of 2017 with a 0.55 percent GDP growth, and by so doing has projected a GDP growth of 3.5 percent for 2018. By the end of the 4th quarter of 2014, Nigeria’s GDP stood at 5.94 percent, while in 2015 World bank figures put it at 2.7 percent, right before it officially entered recession in August 2016. The 3.5 Real GDP growth is attainable, but will require proper economic management.

Brent prices averaging $60 per barrel in November makes the $45 benchmark for the 2018 budget reasonable. In 2017, the benchmark for the budget was $44.50 making it a 50 cents increase for 2018.

The 2018 Appropriation Bill although being an increase from the 2017, is unlikely to be fully implemented considering that the 2017 budget which was only recently passed in June 2017, has faced finance shortfall , and is less than 15 percent implemented with the year at its tail end. It is due to this, that the governments plan to implement a budget cycle running from January to December is highly encouraged. The 2018 budget might have been tagged a “Budget of Consolidation”, but until its entire content are made public, what it aims to consolidate on can only be speculated.