The proposed 2018 budget, will it consolidate?

The President, on November 7th, presented a record high budget proposal of N8.612 trillion to the National Assembly for the 2018 fiscal year. The proposal, tagged the budget of consolidation, is an increase of about 18percent over the 2017 budget. The budget was premised on oil price of $45 per barrel, oil output of 2.3mn barrels per day, GDP growth of 3.5percent, exchange rate of N305/US$ and inflation rate of 12.4percent.

The government expects to retain N6.61 trillion in revenue, made up of N2.44 trillion from oil receipts, and N4.17 trillion from non-oil. The budget deficit of N2.01 trillion is to be financed through new borrowings of N1.699 trillion, and the balance of N306 billion funded from the proceeds of privatization of some non-oil assets. In total, about N2.65 trillion is allocated to capital expenditure, while N5.96 trillion is proposed for recurrent expenditure, making it a split of 30.8percent/69.2percent between the capital and recurrent expenditures respectively.

Are the budget assumptions realistic? In my opinion, most of the assumptions are unlikely to be realised. Although the oil price of $45 per barrel seems reasonable, the volume of 2.3 million barrels a day is highly unlikely, particularly in a pre-election year. The permutations for the 2019 elections have already commenced, with the rhetoric expected to get louder in the coming year. Unfortunately, disruption to oil production is a customary tool for negotiation, so I’d expect oil production to average between 1.9-2 million barrels per day. This will leave the oil revenue short by about 15percent and increase the deficit by about N366 billion.

The proposed non-oil revenue target is also highly optimistic, and will most certainly be missed. For one, the GDP growth estimate of 3.5percent is not realistic. In 2017, we have averaged a year-to-date GDP growth of 0.4percent, with the non-oil GDP contracting by 0.76percent in the third quarter of the year. This suggests an underlying weakness in activity still persists, and I haven’t seen any indication that this is about to change. The oil sector basically carried the weight of activity in the third quarter of the year, expanding by 25.89percent to bring the overall GDP to a positive growth of 1.4percent.

The oil sector is presently accelerating on the back of favourable base effect which will be absent next year. Even the agriculture sector that has supposedly enjoyed the patronage of this administration is not reflecting that in its output, with the third quarter growth slower by 1.47 percentage points when compared to the 4.53percent growth recorded in the corresponding period of 2016. This is curious indeed. Also, given that to meet its non-oil revenue target, the receipts for 2018 will have to grow by close to 100percent of the estimated actual in 2017, leaves one wondering how that projection was arrived at in the first place.

The government, in the spirit of the yuletide season continues to be the exchange rate Santa Claus, proposing N305/US$ for the 2018 budget, when the more indicative rate of around N360/US$ reflected by the I&E and parallel markets would have earned the fiscal purse an additional N400 billion, give or take, from oil receipts alone. The inflation estimate of 12.4percent is also wishful, as the dynamics of the cost of the basket components, particularly food, appear to be changing significantly. The jury is still out on what is driving commodity prices in Nigeria, more so, in a period when the purse of most households is still challenged. If it isn’t domestic demand driven, can it be the competition from international demand engendered by the country’s commodities export drive in the absence of self-sufficiency? This is plausible.

The proposed 2018 budget has all the trappings and failings of the previous budgets. In my opinion, a good place to start the next budget is from the actual of the outgoing fiscal year. If the actual performance of the outgoing year’s budget is put into consideration, juxtaposing both will clearly show the conspicuous weaknesses of the 2018 budget, and better reflect the true position of our fiscal ratios. If as at the time of the presentation of the 2018 budget proposal, only 6.6percent of the 2017 budget has been released for capital projects, then maybe we should be more realistic and show that just 10percent of the budget will be released for capital projects. We are all aware that only allocations to the recurrent expenditure never miss its beat year in year out. If we are also realistic about our revenue and deficit expectations, then we will clearly see that our debt service to revenue ratio will be closer to 60percent, and not the 30percent currently being bandied. This budget is in bad taste, and the only things I see it consolidating are the inefficiencies and opacity of governance.

Olugbenga A. Olufeagba