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The 2017 budget was approved by the National Assembly on 11 May so we are now waiting for the sign-off by the acting president or the president. At that point the FGN will publish the details but for now we are dependent upon the media for the outline figures. We will confine ourselves to five brief comments on the content.
First, we endorse the increase of US$2/b in the average oil price assumption to US$44.5/b. This leaves some room for manoeuvre in the event of any underperformance on the output assumption of 2.20 mbpd. The record of OPEC for quota compliance is not brilliant and the resilience of the US shale oil industry may have been understated. However, when we allow for the gentle pick-up underway in the global economy, we are quite comfortable with US$44/5/b.
Second, we also like the allocation of N77bn for the amnesty programme. The fact that the amount has been raised from N65bn in the president’s budget speech in mid-December points to a shift in official thinking. The forces of pragmatism have established the correlation between payments within the programme and the incidence of sabotage. The shift adds to the credibility of the assumption for crude output this year.
Third, the president’s speech pledged to hold FGN spending on personnel to about N1.8trn. Data from the CBN for January and February suggest that this has been achieved but then we had the May Day speech promising a new national minimum wage. The fallout from the last increase included the rapid accumulation of payment arrears at state government level, which has led the FGN to launch five separate debt relief initiatives. In these circumstances talk of another rise came as a surprise.
Fourth, the budget has set capital spending at N2.24trn, which compares with the actual figure of a record N1.20trn for the 2016 budget year (through to 06 May). We would expect the FGN to fall short of its target because its underlying revenue projections are ambitious. Further, governments everywhere struggle against logistical and organizational hurdles to implementing their capital programmes. A 50 per cent increase on the 2016 outturn would still have a useful impact, particularly if it was accompanied by an improvement in project management and delivery.
Fifth, the media coverage implies a deficit of N2.50trn for 2017 and refers to borrowing of N2.36trn. Our take is that the small balance (of N140bn) is to be raised from a combination of asset sales, recoveries, signature bonuses and the like. The deficit would fall comfortably within the 3 per cent of GDP ceiling set in the Fiscal Responsibility Act. We assume that the domestic component of the borrowing remains N1.25trn, and note that the Debt Management Office has already raised N750bn from its first five monthly auctions of the year.
On the external side, the FGN has collected US$1.5bn from the sale of its 15-year Eurobond. (It is a shame that its hands are effectively tied behind its back and that it was not able to take greater advantage of the strong oversubscription.) The balance of the projected external financing for this year (and last) will prove a greater challenge: whereas buyers of the Eurobond appear to have had a cursory look at the external balance sheet and approved its content, the multilaterals rightly insist upon detailed discussion of policy and plans for which the FGN does not appear always to have the stomach and the skills-set.
A column on the budget would not be complete without comment on the process of approval. We have compared the details in the local media on the broad figures approved by the assembly with the president’s budget speech. The figures for debt service, capital outlays and total expenditure are identical. The same is true of two of the three core assumptions (average crude output and exchange rate). So the legitimate question to ask is how the process took close to five months. Even after making allowances for the president’s ill-health and copious holidays for public servants, we struggle to find an explanation that reflects well on the two parties.
This year was going to be different! We hear from the legislative side that three to four months are essential for a “good process”. The challenge becomes for the executive to deliver the 2018 document in September and put the argument to the test. Without labouring the point, this annual constraint upon growth, good government and employment is unprecedented among forward-looking emerging economies.
There is a danger of overstating the fiscal stimulus that government in Nigeria can provide. Total FGN spending in the 2017 budget represents just 6.3 per cent of GDP estimated in the latest Medium-Term Expenditure Framework. The share for actual spending in 2016 was even lower, at 5.2 per cent. This is pitiful even by frontier market standards. The figure for Kenya in the 2015/16 fiscal year was 28.3 per cent.
We maintain that the stimulus, however limited, will still be the principal driver of growth this year, which we put at 1.6 per cent. The more the FGN can boost its revenue, particularly from the non-oil economy, the more it can spend and the more it can drive growth. This is hardly a socialist call: minimalist would best describe the influence of the state in the economy and society.
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Gregory Kronsten
Head, Macroeconomic & Fixed Income Research FBNQuest
