After 2017 Budget: What next?

Last week the National Assembly finally approved the 2017 budget, five months into the year and few days after the 2016 budget lapsed. The N7.3 trillion proposed spending plan, which was increased to N7.44 trillion by the National Assembly, is aimed at boosting spending by 21 percent this year to help Nigeria recover from its worst recession in 25 years, which saw the economy contract by 1.5 percent.

If signed into law and faithfully implemented, the budget is expected to help the economy fully recover from recession and sustain growth.

There are positive signs already emanating from the economy and the feeling that the worst may have been over. The stock market returned to a positive territory on 10 May for the first time in about 18 months. Buoyed by positive corporate earnings and the newly introduced Central Bank of Nigeria foreign exchange window for investors and exporters, the stock market has reversed a negative year to date loss of about 4.1 percent to a positive return of about 2.5 percent as at 11 May.

Foreign portfolio investors are also gradually picking interest in the Nigerian economy after being on the side lines in the last two years. Most of them are making tentative steps back into the Nigerian market through the new CBN window, and hoping to take bolder steps if there are no policy reversals.

The truth is that financial assets have never been this cheap in the country. A good number of listed companies are selling close to their book values and some at even significant discount to their book values. But first quarter results of many companies also show that the difficulties that they had in 2016 were temporary and have adapted fast to the new realities of the Nigerian economic environment. The Purchasing Managers Index (PMI) for April, as measured by both the CBN and FBNQuest, signals that manufacturers are overcoming the significant challenges they faced in 2016 as many of them have resorted to local sourcing to beat their foreign exchange challenges.

Even though many banks have significant load of impaired assets to deal with, they are also cutting down costs and raising revenues, ensuring that whatever write offs they are making is coming mainly from incremental revenues rather than from reserves or capital.

Earlier, BusinessDay analysis of 13 banks that released their first quarter results showed an average net income growth of 28.6 percent while revenues rose by 33 percent. All the banks absorbed impairment provisions from their revenues, an indication that there is no immediate risk to their capital.

So with the private sector largely overcoming the challenges in the economy with little or no help from the government, the passage of the budget and its proper implementation could act as a further boost to economic growth. Planned capital expenditure at N2.24 trillion, if fully cash backed, could significantly boost economic growth.

Unlike the 2016 budget which was plagued by revenue shortfalls, due to vandalisation of oil assets in the Niger Delta and a contracting economy that impacted negatively on non-oil revenues, revenue shortfalls in the 2017 budget is expected to be less severe.

Federal government’s engagement with communities in the Niger Delta has reduced attacks on oil assets, and crude oil production is now averaging two million barrels per day, according to the group-managing director of the NNPC, Maikanti Baru. This is closer to the 2.2 million barrels per day target in the 2017 budget. Oil prices have also averaged US$50 this year already and there is optimism that it would stay that high for the remaining part of the year.

The main risk ahead is mainly political and revolves around the uncertainty around the President’s health and how much free hand the Acting President will have in pursuing a pro-market agenda.

Nigeria’s budget of N7.44 trillion, of which a quarter will be deficit financed, represents just about five percent of the country’s GDP, not enough to deliver higher single digit growth, which the economy needs.

For example, Nigeria’s planned capital expenditure of N2.24 trillion is just about half of what it needs to spend annually on infrastructure. The about N2.24 trillion gap would have to be filled by the private sector and that can only happen with the right policy framework and policy in place that will encourage private sector investment. So, besides passing the budget, which has become an annual ritual, both the executive and the legislature must put in place the enabling policy and legislative framework to make the budget work and the private sector provide the finance gap the economy needs.