By Obinna Chima
As part of its strategy to get the economy out of recession, the federal government has been advised to focus on rapid infrastructure development this year.
Analysts at the Renaissance Capital Limited (RenCap), which stated this in a report on Nigeria’s 2017 budget proposal, pointed out that Nigeria’s strategy to get the economy out of recession was captured by the following phrase: ‘grow what we eat, and consume what we make,’ adding that the budget proposal was premised on an ambitious 28 per cent increase in revenue to N4.9 trillion.
President Muhammadu Buhari recently presented a 2017 budget proposal to the National Assembly, budget outlining expenditure of N7.3trillion, a 20 per cent increase versus the 2016 projection.
However, as revenue in September was 25 per cent below the pro-rata full-year projections, RenCap stated that they struggle to see how the federal government of Nigeria will achieve the said 2017 projection.
“With the 2017 budget, the FGN plans to pull the economy out of recession and wean it off crude oil, via agriculture (by ultimately making Nigeria self-sufficient in food) and manufacturing (by producing what Nigerians consume, including petrochemicals, cement and light manufacturing products).
“We like the plans to focus on “rapid” infrastructure development, particularly rail and power. Buhari promised “tangible benefits” from 2017. We take this to mean we should see the stimulatory effects of the capital expenditure spend in the short term, which we find encouraging. We think the Presidential Enabling Business Council mandate of making it easier to do business – which Buhari mentioned – is critical, because the economy needs substantial private sector investment to help restore sustainable growth.
“Budget provisions to clear outstanding electricity bills and debt of N2.2 trillion owed to contractors and other third parties should improve liquidity, which is positive for growth,” the report added.
However, the report pointed out that the flaws in the proposed 2017 budget emerged when “we look at the revenue projections – an ambitious 28 per cent increase to N4.9 trillion in 2017 – particularly when the federal government has failed to meet its 2016 target, due to low prices in first quarter 2016 and disruptions to crude oil production.”
At September, revenue was 25 per cent below the pro-rata 2016 target. To the federal government’s credit, it revised down its independent revenue projection for 2017, which at N807 billion is almost half that projected for 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 federal government’s oil revenue projections, to N2 trillion. This, may, in part, be due to an optimistic assumption of oil production of 2.2mn 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,” it added.
The report reiterated the federal government’s plan to raise spending in 2017 by 20 per cent to N7.3 trillion ($23.2 billion at official FX rate). The biggest allocations will go towards capital expenditure (N2.2 trillion, or 31 per cent of the budget), personnel costs (N1.8trillion; 25 per cent) and debt servicing (N1.7trillion; 23 per cent). Education, defence and health services will get seven per cent, five per cent and four per cent of the budget, respectively.
The main capex recipients will be power (24 pe cent), transportation (12 per cent) and housing (4.5 per cent). The president had pointed out that despite capex suffering from project formulation delays and revenue shortfall, in May-October 2016 the FGN released a record-high amount of capex. Because of this, work resumed on some stalled projects, including the construction of new airport terminals, several road projects, key power transmission projects and completion of the Kaduna-Abuja railway.
As at June 2016, the budget deficit for the immediate past fiscal year came in wider than projected at 3.2 per cent of GDP, by RenCap’s estimate.
“This was largely due to a shortfall in revenue. As we expect revenue to come in below the federal government’s 2017 projection, we forecast a wider deficit of about three per cent of GDP in 2017. This implies that borrowing will be higher than the federal government is currently projecting – suggesting further upside risk to debt servicing costs, which were already at two-thirds of revenue in June, a proportion we find concerning.
“Notably, the federal government did not reveal how it planned to finance the 2017 budget. Given the federal government’s resource constraints, we expect a marked increase in foreign borrowing compared with the days when former finance minister Ngozi Okonjo-Iweala, who was averse to raising foreign debt (which she could afford to be, because revenue was high), was in office,” it stated.
Commenting on the ability of states to be self sufficient, it stressed that Lagos – has internal revenue collections that allow it to be self-sustaining.
Furthermore, it pointed out that the other states depend on allocations from the federation account for their administrations to function.
“The collapse in oil revenue and the recession have significantly hurt their finances. Buhari said that stabilising the states is a key objective. In June, a conditional budget support programme was introduced, which offered state governments N566 billion to address their funding shortfalls.
“To participate, state governments were required to subscribe to certain fiscal reforms centred on transparency, accountability and efficiency, including publishing audited accounts and introducing biometric payrolls that will help them to eliminate ‘ghost’ workers.
“We think the conditions the federal government to put in place for states to receive funding will play a positive role in helping to root out corruption at state level, and create more efficient and productive sub-national governments,” it stated.