Optimism, Commendations Greet Proposed 2017 Budget

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President Buhari laying the 2017 appropriation bill before the National Assembly

The estimates of the proposed 2017 budget submitted to the National Assembly by President Muhammadu Buhari have elicited reactions from analysts and stakeholders in the economy, who have rated it as yet another ambitious budget but are expectant and optimistic of better deals from government, reports Kunle Aderinokun

President Muhammadu Buhari has submitted to the National Assembly federal government’s proposed budget of N7.298 trillion for 2017 fiscal year. The budget, representing 20.4 per cent increase over the 2016 estimates of N6.08 trillion, is based on a benchmark crude oil price of US$42.5 per barrel and an oil production estimate of 2.2 million barrels per day at an average exchange rate of N305 to the US dollar.

Taking cognisance of these assumptions, aggregate revenue available to fund the federal budget is N4.94 trillion. This is 28 per cent higher than 2016 full year projections. Oil is projected to contribute N1.985 trillion of this amount.

Non-oil revenues, largely comprising companies income tax, value added tax, customs and excise duties, and Federation Account levies are estimated to contribute N1.373 trillion.
As proposed, the government has set a projection of N807.57 billion for independent revenues and receipts of N565.1 billion from various recoveries. Other revenue sources, including mining, amount to N210.9 billion.

With regard to expenditure, the government proposed N7.298 trillion which is a nominal 20.4 per cent increase over 2016 estimates. 30.7 per cent of this expenditure will be capital in line with government’s determination to reflate and pull the economy out of recession as quickly as possible.
This fiscal plan is expected to result in a deficit of N2.36 trillion for 2017 which is about 2.18 per cent of GDP. The deficit will be financed mainly by borrowing which is projected to be about N2.32 trillion. The intention of government is to source N1.067 trillion or about 46 per cent of this borrowing from external sources while, N1.254 trillion would be borrowed from the domestic market.

Breakdown
Further details revealed that the federal government has proposed an aggregate expenditure of N7.298 trillion which will comprise statutory transfers of N419.02 billion, debt service of N1.66 trillion; and sinking fund of N177.46 billion to retire certain maturing bonds. Non-debt recurrent expenditure has been estimated at N2.98 trillion; and Capital expenditure, including capital in Statutory Transfers budgeted at N2.24 trillion.

For the Statutory Transfers, Buhari disclosed that, “we have increased the budgetary allocation to the Judiciary from N70 billion to N100 billion.”
This increase in funding, he explained, was “further meant to enhance the independence of the judiciary and enable them to perform their functions effectively.”
As for the recurrent expenditure, Buhari noted that, “a significant portion of recurrent expenditure has been provisioned for the payment of salaries and overheads in institutions that provide critical public services.”

The budgeted amounts for these items are: “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 president said the government had maintained personnel costs at about N1.8 trillion. “It is important that we complete the work that we have started, of ensuring the elimination of all ghost workers from the payroll. Accordingly, adequate provision has been made in the 2017 Budget to ensure all personnel that are not enrolled on the Integrated Personnel Payroll Information System platform are captured.”
“We have tasked the Efficiency Unit of the Federal Ministry of Finance to cut certain overhead costs by 20 per cent. We must eliminate all non-essential costs so as to free resources to fund our capital expenditure.

Analysis of the capital expenditure showed that it was estimated at N2.24 trillion (inclusive of capital in Statutory Transfers), or 30.7 per cent of the total budget. Buhari enthused that the proposed capital budget reflected government’s “determination to spur economic growth”, pointing out that, “these capital provisions are targeted at priority sectors and projects.”
“Specifically, we have maintained substantially higher allocations for infrastructural projects which will have a multiplier effect on productivity, employment and also promote private sector investments into the country,” he explained.

Key capital spending provisions in the Budget include: Power, Works and Housing, N529 billion; Transportation, N262 billion; Special Intervention Programmes, N150 billion; defence, N140 billion; water resources, N85 billion; industry, trade and investment, N81 billion; and interior, N63 billion.

Others are education, N50 billion; Universal Basic Education Commission: N92 billion; health, N51 billion; Federal Capital Territory, N37 billion; Niger Delta Ministry: N33 billion; and Niger Delta Development Commission, N61 billion.
According to the president, “N100 billion has been provided in the Special Intervention programme as seed money into the N1 trillion Family Homes Fund that will underpin a new social housing programme. This substantial expenditure is expected to stimulate construction activity throughout the country.”

Reaction
FBN Quest Ltd, the investment banking and research arm of FBN Holdings Plc, which described the proposed budget as “a second, larger dose of fiscal expansion”, posited that, Nigeria’s exit from recession depends upon its expansionary fiscal stance, and the monetary policy committee will not play a supporting role unless it performs an about-turn from its communiqué in November.
The firm of analysts noted that, “the headline figure in the budget is total FGN spending of N7.30trillion (US$23.9billion), compared with N6.06trn in the 2016 budget and, more significantly, an outturn of N2.42trillion in H1 2016.”

It contended that, “Not for the first time, an outperformance on the oil price may compensate for an underperformance on production,” stating that, “The FGN may pursue an “engagement with the oil producing communities” but will surely have to compromise with the various parties responsible for the sabotage.”

FBNQuest noted that the FGN budgets tend to work with the exchange rate in effect at the time of submission, and for good reasons.
According to the firm, “The rate is, of course, effectively administered and not the floating model envisaged in June. We have to move to a flexible arrangement if the FGN’s economic vision is to be realized and we doubt very much that the rate would then remain at N305.

It pointed that the company’s watchlist for 2017 and beyond includes “the standard VAT rate of 5 per cent, the mounting burden of debt service, the external/domestic mix of FGN borrowing, its personnel costs and disbursements under its flagship social interventions.” Nevertheless, it added: “Among events outside the FGN’s control, we have to single out the impact of the Trump presidency on US interest rates and on the Chinese economy in addition to the oil price.”

While welcoming “the relatively early submission of the budget to the assembly”, FBN Quest also “recall the suggestions from the federal finance ministry that the regrettable delay in the final sign-off on this year’s budget (to May) was balanced by important procedural victories at the expense of the legislature, and hope that these successes are visible in 2017.”

“The assembly has a track record of pursuing its institutional agenda ahead of the policies of the political parties in whose names its senators and representatives have been elected.”
To the Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, “this is another very audacious budget like we had in 2016.”

According to him, “Despite the current economic challenges and the declining revenue to the nation, the Federal Government has gone ahead to increase spending estimates by about 20 per cent. Although it is arguable if this is actually an increase considering that the value of Naira had decline by more than 20 per cent over the last one year, it is still a significant amount of money when we factor that fact that it contains a deficit of about N2.36 trillion.”

Pointing out that, “the critical infrastructure sectors are being considered for large expenditure outlay which is also a very good plan,” Ademola, however, said, “it is only a good budget if it is implemented to the letter.”

For instance, he pointed out, “with the 2016 budget, most of the recurrent portion of the budget are being met while the capital budget suffers. If successive governments have implemented the small percentage set aside for capital budget, the huge infrastructure gap won’t be there and the country may not have fallen into economic recession at this time.”
Apart from ensuring that the budget is implemented, especially the capital votes, Ademola noted that, “financing the budget deficit also requires a critical review.”

According to him, “A situation where about a quarter of the budget is used for debt servicing may not be productive at this moment. And it is important that in considering the budget and the borrowing plan to finance the deficit, all stakeholders must be carried along to ensure seamless approval and implementation to the benefit of the citizenry. Once it is agreed that the government need to borrow locally to implement most of its fiscal reforms, monetary tightening by the Central Bank would appear to be counterproductive.”

“Hence, it would be necessary for all the parties to agree in principle the interest rate environment that is needed to support the planned activities and what level of inflation is permissible before monetary policy tools are deployed, especially our monetary policies are ineffective in combating inflation now,” he added.

Ademola therefore posited that, “it would be nice to see how the government implement this budget before it can be adjudged as good or otherwise”.
Also, Chief Executive Officer, The CFG Advisory, Adetilewa Adebajo, acknowledged that, “The revenue assumptions are very optimistic considering the uncertainty with oil prices and the problems of the Niger Delta.”

Besides, he added, “The current budget also had a 50 per cent revenue shortfall that the government had not been able to finance,” however stating that, “The good news is that the government no longer has to fund the JVs and the certainty around funding with the new arrangement will increase the level of investment by the IOCs and also the level of oil production to the projected budgetary levels.”
“The current deficit has still not been financed and carried over to next year. The delay with the Eurobond is affecting the deficit financing. There is however no increase in the deficit from the new budget.”

Speaking on the implications of the proposed budget, Adebajo noted that, “The key issue is implementation to provide the much need stimulus to jumpstart the economy.
The implication for the economy is not the budget, but the alignment of policies; fiscal, monetary, trade, investment and finance. Unfortunately the inability to align policies has been the Achilles heel of this government and its inability to restore confidence to both investors and the economy.”

In the same vein, an analyst and investment manager, Adetola Odukoya, said, “Given the sustained contraction in economic output over the last one year, one would understand why the fiscal authorities are planning to increase spending in order to reflate the economy.”

Odukoya, however, pointed out that, the primary challenge remained “the ability to generate adequate foreign exchange from oil sale against the backdrop of the headwinds and volatility in that sector.” According to him, “opinion that a proper optimisation of the channels of generating non-oil revenues i.e. taxes, levies, duties, means that the revenue expectation from this stream is achievable if not surpassed.”

Odukoya added that, “Another major challenge is the deficit and the borrowing that comes with it,” stressing that, “In view of the high interest rates within the economy, which makes borrowing very expensive, it’s obvious that both monetary and fiscal authorities need to find a balance regarding the trade-off between economic growth and inflation, which that may result from the expansion in government spending.”