2017 Bud­get Will Not In­spire Nige­rian Eco­nomic Re­cov­ery

Financial Nigeria Magazine - - The Fixes From The Managing Editor -

In the par­lance of APC – when it was as an op­po­si­tion party – Nige­ria will most likely re­vert to ‘sta­tis­ti­cal’ eco­nomic growth in 2017. Fair enough; that will see off the 2016 re­ces­sion. The as­sur­ance for this lurks in the aware­ness that it is the dis­mal eco­nomic data of last year we will be com­par­ing 2017 GDP data with.

In that con­text, the GDP growth rate of 2.5 per­cent an­tic­i­pated in the 2017 bud­get will be very weak, in­deed. It will prove in­ef­fec­tual in restor­ing the ma­te­rial well­be­ing of most Nige­ri­ans. The jobs, busi­nesses, op­por­tu­ni­ties and hap­pi­ness that dis­ap­peared in 2016 will largely re­main lost.

In other words, there will be no eco­nomic re­cov­ery in 2017. Ac­cord­ing to Wikipedia, “An eco­nomic re­cov­ery is the phase of the busi­ness cy­cle fol­low­ing a re­ces­sion, dur­ing which an econ­omy re­gains and ex­ceeds peak em­ploy­ment and out­put lev­els achieved prior to down­turn.” There­fore, the prom­ise of re­cov­ery in the 2017 bud­get is in tune with the ac­cus­tomed, but of­ten ig­no­rant ex­ag­ger­a­tions of the APC gov­ern­ment.

But, even the an­tic­i­pated GDP growth is not a done deal. In the last quar­ter of 2016, the Niger Delta mil­i­tants ob­served a respite from bomb­ing oil in­stal­la­tions. That helped ramp up oil pro­duc­tion to 1.63 mil­lion bar­rels per day in Oc­to­ber and 1.69 mil­lion bpd in Novem­ber. How­ever, an un­for­tu­nate re­lapse to oil sab­o­tage could ac­tu­ally see pro­duc­tion dip be­low the level reached in Q4 2016. This will push daily oil pro­duc­tion fur­ther be­low the ex­ces­sively op­ti­mistic tar­get of 2.2 mil­lion bpd bench­marked in the bud­get.

Gov­ern­ment’s bar­gain for peace in the Niger Delta – a ne­ces­sity for bol­ster­ing oil pro­duc­tion – is in­creased bud­getary al­lo­ca­tions to the Min­istry of Niger Delta, Niger Delta De­vel­op­ment Com­mis­sion, and the Amnesty pro­gramme, to­talling N161.5 bil­lion. But this eas­ily trans­lates to a chick­e­nand-egg sit­u­a­tion. Which comes first: peace that is re­quired to boost oil pro­duc­tion or the fund­ing that is re­quired to guar­an­tee the peace?

Even if the dilemma is re­solved in favour of the gov­ern­ment, there are ad­di­tional con­cerns for fis­cal 2017. Mostly dis­cerned is the ex­change rate of N305/$1. This rate will put at risk the com­ple­men­tar­ity of for­eign in­vest­ment in­flows when oil prices are on a re­cov­ery path. In­creases in oil re­ceipts since the mid-2000s spurred for­eign in­vestors’ in­ter­ests in Nige­ria. Be­tween 2011 and 2013, the coun­try at­tracted av­er­age $7.2 bil­lion yearly in FDI in­flows, and for­eign port­fo­lios pig­gy­backed the cap­i­tal mar­ket. Th­ese liq­uid­ity-boosts fur­ther sup­ported eco­nomic growth.

But the 2017 bud­get is set to per­pet­u­ate the present Nige­rian cur­rency risk. By De­cem­ber, the gap be­tween rates in the of­fi­cial and par­al­lel mar­kets had widened to 53 per­cent. Rather than in­stil con­fi­dence, CBN’s man­age­ment of the forex de­mand­sup­ply dis­e­qui­lib­rium cre­ated un­even play­ing field that scared off for­eign in­vestors. If CBN’s cur­rent of­fi­cial rate is main­tained in the bud­get, much of the prob­lems as­so­ci­ated with it in 2016 will also hold sway in 2017.

Be­sides, the forex pol­icy will erode the ad­van­tage of the con­ser­va­tive bench­mark oil price of $42.50 per bar­rel. In­stead of help­ing to build re­serve sav­ings, con­sid­er­able dol­lar earn­ings would be used to main­tain the of­fi­cial ex­change rate. And if the OPEC sup­ply-cut agree­ment col­lapses, and oil prices drop be­low the floor of $50, the do­mes­tic forex mar­ket could re-en­ter the cri­sis mode of the past 12 months.

The ad­van­tage of the ex­pan­sion­ary bud­get of N7.3 tril­lion, in fuelling do­mes­tic pro­duc­tion and job cre­ation, is also at risk. When­ever the gov­ern­ment gets on track with the N4.9 tril­lion rev­enue and N2.36 tril­lion deficit fi­nanc­ing tar­gets, we can ex­pect a naira liq­uid­ity sur­feit. To this, the knee-jack re­sponse of the CBN would be the en­act­ment of its ex­pen­sive Open Mar­ket Op­er­a­tion of mop­ping up ‘ex­cess liq­uid­ity’ to stave off in­fla­tion. Banks will hap­pily trans­fer the liq­uid­ity to CBN’s vault and earn good, risk-free in­ter­est from do­ing so, in­stead of lend­ing to the real sec­tors and SMEs to boost do­mes­tic pro­duc­tion.

It is dis­ap­point­ing that the in­fra­struc­ture in­vest­ment mantra was fur­ther hyped up in the bud­get. Cap­i­tal ex­pen­di­ture rose 30.7 per­cent above the 2016 fig­ure to N2.24 tril­lion. The bet is that this huge out­lay will ‘re­flate’ the econ­omy and cre­ate lo­cal jobs. But as the gov­ern­ment boasted of the dis­burse­ment of un­prece­dented N753 bil­lion for cap­i­tal projects in 2016, even so was the econ­omy in re­ces­sion, and un­em­ploy­ment wors­ened to 13.9 per­cent in the third quar­ter of the year.

This is a con­se­quence of ap­ing for­eign eco­nomic or­tho­doxy. As I re­cently ar­gued in the piece: “Nige­ria’s Mis­placed Pri­or­ity in In­fra­struc­ture In­vest­ment,” Nige­rian rail and high­way projects can­not achieve the same ob­jec­tives that are re­alised with sim­i­lar in­vest­ments in the ad­vanced economies. Pre­cisely be­cause ev­ery­thing needed for the Nige­rian projects – rang­ing from fi­nanc­ing, tech­nol­ogy, ex­per­tise, ma­te­ri­als, and, in some cases, labour – are sourced from abroad.

With­out this re­al­i­sa­tion, the Buhari ad­min­is­tra­tion is press­ing on with huge deficit fi­nanc­ing for some in­fras­truc­tural boon­dog­gles. So do­ing, it has trans­mo­gri­fied the fis­cal pol­icy of bor­row­ing to ex­clu­sively fund in­fra­struc­ture projects to fi­nanc­ing in­fra­struc­ture en­tirely by bor­row­ing. With that, the al­ley for pub­lic debt to spi­ral out of con­trol has been cre­ated. And, quite para­dox­i­cally, when bio­met­ric au­dit of the fed­eral work­force has sup­pos­edly weeded out tens of thou­sands of ghost-work­ers, re­cur­rent ex­pen­di­ture has bal­looned to N2.98 tril­lion in the 2017 bud­get.

In­deed, the Na­tional Assem­bly has a lot of work to do on the bud­get. The key as­sump­tions of the MTEF should be re­vised, es­pe­cially the ex­change rate. A down­ward re­view of the oil pro­duc­tion bench­mark to a re­al­is­tic level of 1.9 mil­lion bar­rels per day is nec­es­sary. If un­der­taken, it will be­come ob­vi­ous that the cur­rent bud­get deficit is too high as a per­cent­age of gov­ern­ment rev­enue.

How­ever, the bright spot in the 2017 bud­get is the N500 bil­lion so­cial in­vest­ment pro­gramme. As a con­cept, the pro­gramme can fur­ther catal­yse do­mes­tic pro­duc­tion by im­prov­ing ef­fec­tive de­mand. Thus, if the re­cov­ery an­tic­i­pated this year would have wel­fare im­pact, a sig­nif­i­cant part of that will come about with ef­fec­tive im­ple­men­ta­tion of the pro­gramme. But this pro­gramme, al­though not new, has noth­ing to learn from – in­clud­ing its politi­ci­sa­tion. It hardly got off the ground when first in­tro­duced last year.

In sum­mary, the APC co­horts that dis­par­aged pos­i­tive sta­tis­tics as an op­po­si­tion party must of­fer more than sta­tis­ti­cal growth to con­vince on the vi­a­bil­ity of its eco­nomic poli­cies and pro­grammes. Wel­fare im­pacts of eco­nomic growth must be felt by Nige­ri­ans in line with the APC’s dic­tum. For greater ef­fects, the so­cial in­vest­ment pro­gramme should be scaled up, and di­rected more at boost­ing pro­duc­tion and con­sump­tion.

The scope for such ex­pan­sion in­cludes pub­licpri­vate part­ner­ship ven­tures in which the fed­eral gov­ern­ment holds mi­nor­ity stakes in food pro­duc­tion and pro­cess­ing plants. With this in­no­va­tion, the gov­ern­ment can fi­nally make a true claim to an orig­i­nal ini­tia­tive in Nige­rian agri­cul­tural re­form. To fund the JVs on the gov­ern­ment’s side, the al­lo­ca­tion for so­called in­fra­struc­ture projects should be slashed, with the cuts added to the so­cial in­vest­ment pro­gramme.

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