The Budget Ritual and Reality

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MARKET INDICATOR 

By Obinna Chima

As with other years, President Muhammadu Buhari last week laid before members of the National Assembly, the 2017 Appropriation Bill, which contained the government’s proposed revenue and spending for next year.

The proposed budget estimates, which were developed at a time policy makers in the country are battling to push the country out of  economic recession has been viewed by some Nigerians, as a veritable instrument to drive economic recovery, if well implemented.
The president presented a proposed aggregate expenditure of N7.298 trillion for the 2017 fiscal year to the National Assembly.  Part of the proposed budget estimates showed aggregate expenditure of N7.298 trillion will comprise: statutory transfers of N419.02 billion; debt service of N1.66 trillion; sinking fund of N177.46 billion to retire certain maturing bonds; non-debt recurrent expenditure of N2.98trillion; and capital expenditure of N2.24 trillion (including capital in Statutory Transfers).

A significant portion of the recurrent expenditure was provisioned for the payment of salaries and overheads in institutions that provide critical public services. The budgeted amounts for these items included N482.37 billion for the Ministry of Interior; N398.01 billion for Ministry of Education; N325.87 billion for Ministry of Defence; and N252.87 billion for Ministry of Health.

The 2017 Appropriation Bill was based on a benchmark crude oil price of US$42.5 per barrel; an oil production estimate of 2.2 million barrels per day; and an average exchange rate of N305 to the US dollar. Based on these assumptions, aggregate revenue available to fund the federal budget is N4.94 trillion. This was 28 per cent higher than 2016 full year projections. Oil is projected to contribute N1.985 trillion of this amount. Similarly, non-oil revenues, largely comprising Companies Income Tax; Value Added Tax; Customs and Excise duties, and Federation Account levies were estimated to contribute N1.373 trillion.

To the President, Manufacturers Association of Nigeria (MAN), Dr. Frank Udemba Jacobs, his association appraised and considered the 2017 proposed budget as a tool that  is capable of helping the economy to recovery due principally to the importance accorded capital expenditure with the value of N2.24 trillion, which accounts for 30.7 per cent of the total budget.
This position, according to him, was further reinforced  by the emphasis placed on resource-based production and conscious patronage of Made-in-Nigeria  products by the government.

“However,  since the  budget intends to generate a total sum of N1.373 trillion from CIT, VAT, Customs & Excise Duties and Federal Account Fees for the period,  MAN is of the opinion that tax rate should not be increased and no new tax should be  introduced; rather the Government should reduce the current CIT and widen the tax net,” he added.
Among other things, the MAN boss urged the government to ensure Public Private Partnership (PPP) through the establishment of Concession Agreements under Built-Operate-Transfer (BOT) in road and rail construction and maintenance,  rather than expending  the scarce resources on these projects alone, timely release of capital expenditure funds to the MDAs, as well as ensuring effective evaluation and monitoring of capital projects  so that the nation can obtain value for money.
The CEO, Financial Derivatives Company Limited, Bismarck Rewane, said the budget estimates were a “step in the right direction.”

However, Rewane pointed out that “in terms of its quantity, you need more than a 20 per cent increase in expenditure to move the economy.”
He explained further: ” In other words, if you use the exchange rate differentials, the level of depreciation between last year and this year is about 40 per cent, from N199 to N305, while you increase your expenditure to 20 per cent. So, you need to do at least a 35 per cent increase in expend ure to bring it to bring it to zero. So, you need at least a 50 per cent increase in expenditure between 2016 and 2017 to have an impact. So, anything less than that is actually a contraction in expenditure.”

But in his reaction, the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, welcomed the policy pronouncements components of the budget proposal. These he listed to include the comment by the president that there would be more coherence between fiscal and monetary policy, the decision to continue the Joint Venture Cash Calls as a mode of financing the upstream oil and gas sector, the restoration of the Export Expansion Grant, the restatement of the federal government’s commitment to public-private partnership, as well as the  preparedness by the government to settle the debt it owed the power firms.

Continuing, the LCCI boss also said the assumption of oil price of $42 per barrel was okay, adding that the assumption of oil output of 2.2 million barrels per day “looks a bit optimistic given the challenges of the Niger Delta.”
“But we are hoping that because of the upward review in the amnesty budget, maybe it will have some positive impact on the peace in the Niger Delta. The exchange rate of N305 to the dollar is not the market rate, but I think it is something that we can live with for purpose of budgeting. The provision for debt service is one the high side. This shows that the problem of debt service would continue to be a burden to the economy,” Yusuf added.
Also commenting on the assumption of crude oil benchmark, the CEO of Cowry Assets Management Limited, Johnson Chukwu said: “This is a very optimistic budget. Crude oil is doing about $55 per barrel today and even in worst case scenario and I believe if OPEC sticks to its decision to cut production and if we able to address our local production, I believe that crude oil price should range around $50 per barrel. So, the $42 per barrel assumption to me is realistic. But to me it would be an exceptional occurrence if we meet the volume of production. This is because even if you stop the crisis in the Niger Delta, you are still going to take some time tk restore those oil facilities to their production level.”

On his part, the  Chief Consultant Biodun Adedipe Associate Limited, Dr. Biodun Adedipe, described the proposed budget for 2017 as “good direction in terms of volume, good direction in terms of structure and of course, good direction in terms of emphasis. So, the important thing is to encourage the government to continue in that direction in terms of sectors to focus on, and then putting emphasis on capital expenditure.”
But analysts at Renaissance Capital Limited argued that the flaws in the proposed budget emerged when they looked at the revenue projections, describing it as an ambitious 28 per cent increase to N4.9trillion – particularly when the government has failed to meet its 2016 target, due to low prices in first quarter of 2916 and disruptions to crude oil production.

“At September, revenue was 25 per cent below the pro-rata full year 2016 target. To the federal government’s credit, it revised down its independent revenue projection for full year 2017, which at N807 billion is almost half that projected for full year 2016. Even the non-oil revenue projection is five per cent lower. However, this pragmatism was countered by a 140 per cent increase in the government’s oil revenue projections, to N2 trillion. This may in part be due to an optimistic assumption of oil production of 2.2million b/d, which the country has failed to achieve since 2014.This assumption is partly mitigated by a modest oil price assumption of $42.5/bl,” they added.
Despite these positive outlook, the real question that we will face in the coming days is whether we can trust the lawmakers as well the executive to take wise budgetary decisions that are in the wider, long-term interests of citizens rather than in the narrow, short-term interests of politicians and organised lobby groups.

Over the years, the poor process of budget passage into law by members of the National Assembly, as well as poor implementation by the executive arm have sabotaged key public infrastructure. This has continued to affect businesses as their plans are usually distorted by the weak budget implementation process. Equally, members of the civil society must ensure that they are actively engaged in budget monitoring to put the executives on their toes.

Clearly, the antiquated and often dysfunctional nature of budget process in the country leaves the country to self-inflicted economic dreadful which must be addressed for the nation to make any meaningful economic progress.