Bor­row­ing Our Way into Eco­nomic Woes

Financial Nigeria Magazine - - Financial Nigeria -

For the first time since 2004, Nige­ria will have a con­trac­tionary bud­get in 2019. The rolling three-year bud­getary frame­work, so-called Medi­umterm Ex­pen­di­ture Frame­work and Fis­cal Strat­egy Pa­per (MTEF-FSP), which the Fed­eral Ex­ec­u­tive Coun­cil ap­proved last month, cuts back the 2019 fed­eral bud­get to N8.73 tril­lion. This rep­re­sents 4.5% con­trac­tion, com­pared with the 2018 bud­get of N9.12 tril­lion.

Ac­cord­ingly, the 2019 bud­get deficit will scale back. The Min­is­ter of Bud­get and Na­tional Plan­ning, Udoma Udo Udoma, had hinted that the deficit will prob­a­bly re­duce to N1.6 tril­lion, from N1.95 tril­lion in 2018. Even so, the to­tal out­lay for cap­i­tal ex­pen­di­ture will shrink. With this, the to­tal amount of bor­row­ing in the 2019 fis­cal year will also re­duce.

Why this sud­den change of fis­cal di­rec­tion? One, the Pres­i­dent Muham­madu Buhari ad­min­is­tra­tion failed to re­alise its rev­enue pro­jec­tions in the 2016 and 2017 ex­pan­sion­ary bud­gets, and it al­ready fore­sees a sim­i­lar fate in the 2018 fis­cal year. Two, the pub­lic debt has now spi­ralled out of or­der, ris­ing from N12.1 tril­lion in June 2015 to N22.3 tril­lion in June 2018. Three, the il­lu­sion of Buhari’s debt-fu­elled, ex­pan­sion­ary fis­cal strat­egy is now glar­ing, and it is time to stop chas­ing shad­ows.

His ex­pan­sion­ary fis­cal strat­egy be­gan in earnest in 2016, when the bud­get for that year in­creased by 38.7%, from N4.9 tril­lion in 2015 to N6.8 tril­lion. It was thought that the huge jump would fore­stall a likely re­ces­sion that year. But, alas, the econ­omy con­tracted by 1.59% in 2016, the worst eco­nomic per­for­mance in two-and-half decades.

The 2017 and 2018 bud­gets were aimed at fos­ter­ing eco­nomic re­cov­ery and strength­en­ing growth. But their per­for­mances have been un­der­whelm­ing. Ac­tual growth in 2017 was 0.8%, whereas 2.5% was pro­jected in the bud­get. The GDP is set to grow at be­low 2% in 2018, as against 3.5% pro­jected. With eco­nomic growth well be­low the rate of pop­u­la­tion growth of circa 3%, GDP per capita has been fall­ing.

Even at the most ba­sic of its prom­ises, Buhari’s fis­cal strat­egy has spec­tac­u­larly failed. With the 2018 bud­get, the fis­cal year was sup­posed to have re­verted to Jan­uary to De­cem­ber. But this year’s bud­get was signed into law in June. As at Oc­to­ber end­ing, the ap­pro­pri­a­tion bill for 2019 has yet to be pre­sented to the Na­tional Assem­bly. There­fore, the 2019 bud­get will be set for pass­ing only months af­ter the gen­eral elec­tions in Fe­bru­ary.

The hu­mon­gous N10.2 tril­lion bor­row­ing of the last three years to June 30th, 2018 was sup­pos­edly chan­nelled to­wards in­fra­struc­ture de­vel­op­ment. This was ex­pected to “re­flate” the econ­omy and cre­ate jobs. To its credit, the cur­rent ad­min­is­tra­tion com­pleted the Abuja–Kaduna rail project it in­her­ited from the pre­vi­ous ad­min­is­tra­tion. How­ever, sev­eral old and new projects re­main un­com­pleted. The fed­eral roads, in­clud­ing those con­nect­ing the eco­nomic ar­ter­ies of the coun­try, es­pe­cially the Apapa–Wharf Road and the La­gos–Ibadan Ex­press­way, have re­mained in de­plorable con­di­tions.

With the econ­omy deep in un­der­per­for­mance, the un­em­ploy­ment rate jumped from 13.3% in Q2 2016 to 18.8% in Q3 2017. Youth un­em­ploy­ment had reached an all-time high of 33.1% in the third quar­ter of 2017.

So, if the last three years of ex­pan­sion­ary bud­get­ing have been dis­mal for jobs, eco­nomic growth and in­fras­truc­tural de­vel­op­ment, what are we to ex­pect from the con­trac­tionary bud­get of 2019? Would the Buhari ad­min­is­tra­tion achieve more with less bud­get?

The likely good side ef­fect of the con­trac­tionary 2019 bud­get is that it will slow the growth of both the pub­lic debt and in­fla­tion than oth­er­wise would have been the case. Af­ter 18 con­sec­u­tive months of mod­er­a­tion since Fe­bru­ary 2017, in­fla­tion rose to 11.23% in Au­gust and 11.28% in Septem­ber.

Be­yond this, the gov­ern­ment may have tac­itly ad­mit­ted that its ex­pan­sion­ary fis­cal strat­egy is un­sus­tain­able. As I have ar­gued for two years, the regime has failed to demon­strate the com­pe­tence and unity to de­liver the am­bi­tions of its fis­cal pol­icy. A num­ber of eco­nomic pun­dits have more re­cently ex­pressed con­cerns over the coun­try’s debt sus­tain­abil­ity. The IMF has said that Nige­ria faces a debt cri­sis, with 63% of gov­ern­ment rev­enue to be soaked up by debt ser­vice in 2018. This is con­trary to the in­sis­tence of the fis­cal au­thor­i­ties that Nige­ria’s debt level, which cur­rently stands at about 21.3% of GDP, sup­ports even more bor­row­ing.

The im­me­di­ate fu­ture of the Nige­rian econ­omy now ap­pears quite fright­ful. For a num­ber of rea­sons, it is be­lieved that the world econ­omy is set to de­cel­er­ate to­wards a re­ces­sion by 2020. China’s GDP growth rate is slow­ing; it grew at 7.3% in Q3 2018, the depth of its eco­nomic growth since the last fi­nan­cial cri­sis. The clev­er­ly­chore­ographed U.S. eco­nomic growth, which hit 4.1% in Q2, cooled to 3.5% in Q3, and will likely slow fur­ther next year. Added to these is the toll that Brexit and its un­cer­tain­ties will take on global growth. In any case, some economists, in­clud­ing Nouriel Roubini who pre­dicted the last fi­nan­cial cri­sis, have be­gun to say the end of the cur­rent growth cy­cle is near.

The risk of a next global eco­nomic down­turn for Nige­ria is that the price of crude oil will tum­ble. This next time, a pre­cip­i­tated fall in oil prices would be from around $80 per bar­rel, not from $110 in 2014. This sug­gests the depth of the im­pend­ing oil-price crash may be lower than the last time.

Nige­ria faced the last oil price crash with al­most no fis­cal sav­ings but with mod­er­ate eco­nomic growth and a de­cent level of for­eign re­serves. The coun­try would face the prob­a­ble next oil price slump from a weaker po­si­tion and with less re­silience, given the still-low fis­cal sav­ings, dis­mal eco­nomic growth, high un­em­ploy­ment and high pub­lic debt.

Even with­out the prob­a­ble ad­verse global eco­nomic con­di­tions and oil price slump, Nige­ria faces a dire eco­nomic fu­ture with ‘Buhari­nomics’ that has now gone awry. We have bor­rowed our way not out of re­ces­sion but into deeper eco­nomic woes.

The Nige­rian econ­omy is in need of a cat­a­lyst for per­for­mance, even with­out the worst-case sce­nario. There is nowhere else to look for this than to as­pire for a more com­pe­tent eco­nomic man­age­ment team for the coun­try.

+234 802 343 9098 [email protected]­nan­cial­nige­ Twit­ter: @JSAk­in­tunde

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