The executive should avoid padding the 2017 budget
A “mega” 2017 budget is a risk. Very few people will buy its hope, precisely because of the disappointment of the mega 2016 budget.
The 2016 budget turned into a fiasco as early as June ending. GDP data shows the economy contracted by 0.36% in Q1 and 2.1% in Q2. The year-end projection of Nigeria's GDP growth by the IMF is -1.7%. This completely negates the projection of “a real GDP growth rate of 4.37%” in the budget.
This mockery of planning is quite extraordinary. The 2016 Appropriation Bill was ceremoniously presented to the National Assembly only on December 22, 2015, by no less than President Muhammadu Buhari. And by the time the budget was passed on May 6th with the same growth projection, economic contraction had gained traction. Official data confirms the economy fell into a recession just a few weeks later.
Promises versus reality
Against many promises of positive impact, fiscal 2016 has dealt the economy and individual and corporate Nigerians so much blows. The humongous plans of N1.59 trillion capital expenditure, N500 billion social investment, and N2.2 trillion deficit financing are now clearly unrealisable, by wide margins. The failed stimulus spending, conspiring with financial and exchange rate stresses, has dented consumption and, in effect, corporate profits. Many organisations have consequently been downsizing employee headcounts; some have suspended operations.
The gap between promise and reality in fiscal 2016, and the urge to make further promises, have now created a dilemma in making the 2017 budget. However, this assertion is true only to the extent there is more presence of mind in making the 2017 budget than there was in the previous year. The reality has proved that the 2016 budget was a punch above the weight of those who drafted it, as much as it is for those who passed it, as well as those who are supposed to implement it. An admission of this would indicate a margin of increase in capacity of the policymakers, such that fiscal 2017 would hold more assured hope.
Avoiding grandstanding
The 2017 budget may actually run counter to reason. An indication of this is the expansionary N6.8 trillion interim budget proposal President Buhari sent to the National Assembly on the 4th of October. It hints at the same sheer optimism of the N6.08 trillion budget for 2016.
Even if disbursements for capital expenditure reach N750 billion by December ending, that only verges close to 50% of projected capital spending in 2016. The late disbursement will actually mean project delivery envisaged for this year will spill into next year. In which case, if another high capital budget is made for 2017 to accommodate undisbursed 2016 budget, there still will be the challenge of grappling with significant execution risk.
With regard to deficit financing, the big efforts that are being made towards the end of this year is to fund the 2016 capex. These efforts are unlikely to conclude this year, if the external borrowing plan of $4.55 billion remains in focus. Yet, deficit financing for 2017 capex would require its own capitalraising. But beyond financing constraints, there has been a loss of momentum in project delivery, given the low morale which the idleness of the past 16 months has fuelled in the civil service. Uncertainty also persists in government's establishments, especially where there have been no substantive heads for nine months.
Need for policy convergence
Therefore, a measured move towards fiscal consolidation is necessary in 2017. It doesn't matter if it runs contrary to the popular notion that “we have to spend our way out of the recession.” For one, fiscal and monetary policy cannot continue to diverge next year as they have done this year. Therefore, the 2017 budget would have to reflect the intent of the fiscal and monetary authorities to move towards a common ground.
Already, the bias of recent monetary policy decisions has not only generated controversy, it is flawed. The reliance on foreign portfolio flows to help normalise the exchange rate is excessive. And CBN's low confidence in domestic intermediation by the banks is defeatist. However, the assertion of price stability by the monetary authority is legitimate, given its mandate. But to forge alliance with the fiscal authority that has broader mandates of economic performance and citizens' welfare, the CBN can formulate and clearly communicate a new inflation outlook that extends the horizon for achieving its inflation target of single digit. This gesture would have to be seconded by moderate fiscal retrenchment in the short-term, in the spirit of give-and-take. Both authorities will then have to commit policies to the hard target of achieving significant spike in domestic production.
Ahead of announcing the 2016 budget, I made a proposal on boosting domestic production and patronage of local manufactures as the route to sustainable economic performance. But in spite of their rhetoric of supporting made-in-Nigeria products, government officials continue to patronise foreign-made vehicles, instead of supporting the nascent local vehicle assembling plants.
Executive budget padding
Certain admissions must be made to help resolve the 2017 fiscal dilemma. The 2016 budget of N6.08 trillion was significantly padded. This is not referring to the 'restructuring' of the budget by the National Assembly. The more farcical padding was done by the executive. Increasing the federal budget by 35% from 2015 to 2016 was a leap in the dark. Coming on the heels of the 2015 general election that featured high campaign spending, and with the roundly dismal implementation of the capex, everything about this year's budget seems deliberately exaggerated.
But while we have been surprised by the less-than-commanding performance by the ministers, it was doubtful the civil servants who struggled to implement smaller capital projects would be able to administer the 2016 capital expenditure that increased by 173% over the previous year. This inadequate capacity, which remains an untested hypothesis because of lack of financing for this year's capex, can thwart a repeat of expansionary fiscal policy in 2017.
Fostering credibility
A “mega” 2017 budget is a risk. Very few people will buy its hope, precisely because of the disappointment of the mega 2016 budget. When in March Moody's placed Nigeria's Ba3 government bond and issuer ratings on a review, it said it would assess “the credibility and sustainability” of the government's plans. When the review was concluded, Moody's issued a rating downgrade for Nigeria in August.
Scaling down from the 2016 budgetary Olympian height is not without the risk of misperception. But the risk can quite smartly be eliminated by communicating proactively the movement toward evidencebased fiscal policy. This is prudent, given that both government revenues and investment markets are expected to remain volatile. Therefore, an initial moderate fiscal outlook can be expanded later through supplementary budgets when the previous projections have been met and there is the need to scale results within the fiscal year. This approach will supply credibility to the fiscal regime, instead of doubts and disillusionment.
To further strengthen believability, the 2017 budget must avoid the ideological padding of the 2016 budget. Most serious this year was the conflicting stances on the management of the exchange rate. In his December budget speech, President Buhari said: “I am however assured by the Governor of Central Bank that the Bank is currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure.” Months later, there was still a standstill on the then peg of the naira to the dollar at N197.00. Even after the flexible interbank forex market was relaunched in June, President Buhari still expressed scepticism towards it. On its part, the CBN has continued to contradict the market-based exchange rate it put in place by maintaining the ban it placed on accessing forex for importation of some 41 items.
There was also the clash of statism and private sector-led economic model. In its worst manifestation, the federal government allocated disproportionately large quota of petrol importation to the national oil company, NNPC (Nigerian National Petroleum Corporation), relative to private sector importers and retailers. It proved disastrous. Weeks of acute petrol scarcity sapped productivity domestically and projected a country in crisis internationally.
Going into 2017, an ideological crisis is already brewing with regard to the proposals on the sale of some public assets. It makes sense to quell the controversy this has generated so far, and not allow it to mar the outlook of fiscal policy in 2017. The sale of nonperforming government assets should not be factored into fiscal financing in 2017, not least because of the time it will take for the sales to be consummated through a transparent process. But as many commentators have argued, it is ill-advised to sell government's stake in a profitable and well-structured venture like the NLNG.
Projecting a rosy fiscal outlook and statist intervention is not as helpful as making fiscal policy more credible and its goals achievable.
Conclusion
Overall, one recognises the need to instil confidence in the economy. But projecting a rosy fiscal outlook and statist intervention is not as helpful as making fiscal policy more credible and its goals achievable. 2017 is not another year the government should promise so much and deliver so little; and thus continue to fuel crisis of confidence in the fiscal regime. On the contrary, steps should be taken to converge fiscal and monetary policy towards non-inflationary financing of domestic production to put the economy on the track of sustainable growth.