Additional evidence of the possibility that the road to perdition may be paved with noble intentions was provided by President Jonathan’s 2012 budget speech to the joint session of the National Assembly on Tuesday.
At first blush, the budget numbers look good. The exchange rate on which the budget is based is a clear concession to the Central Bank’s new mid-point for maintaining the naira: US$1/N155. An admission, essentially, of the demand pressure on the national currency in the year to end-December 2011, which has seen it concede value to the dollar and assisted in the erosion of the nation’s external reserves. At US$70 per barrel, the oil price benchmark is slightly more realistic than the US$75 per barrel which the government had pushed for in its amended budget for 2011. However, any of several current trends in the global economy could push oil prices (currently at about US$90 per barrel) below the oil price benchmark. Truth be told, the risks over the next twelve months are largely to the downside. Both GDP (7.2%) and inflation (9.5%) estimates are dubious but within reach.
However, the conclusion after a second reading of the budget depends on whether one agrees with the budget’s claim that “government has made significant progress in putting the finances of the nation on a sound footing and laying the foundation for rapid and sustainable economic growth”. At N2.472 trillion, government makes much of the fact that the recurrent (i.e. non-debt) component of its appropriation bill is 72% of the 2012 budget (down by 240 basis points on the 74.4% that the recurrent bit accounted for in last year’s budget numbers). Still, because recurrent spending in 2012 is 72% of a (9%) larger figure, in absolute terms, recurrent spending next year will be larger than it was last year. If extra government spending was a major contributor to domestic price pressures last year, next year’s bigger number will further straighten domestic conditions.
The problem in this regards is not just with inflation. Although, like I’d earlier said, the inflation numbers on their own do not make much sense. How does a government plan to keep inflation at 9.5% and headed towards mid- to low single digit numbers when the avowed intent is to remove fuel subsidies early next year? Expansive fiscal policy also has obvious implications for the naira’s exchange rate, and (as we saw this year, with the CBN struggling to make sense of its monetary policy stance) for the domestic cost of money.
That said, it is especially useful that the budget appreciates the role of domestic incentives in bringing about favourable market responses. Still, the planned “review of the 2008-2012 Customs and Excise Tariffs to correct identified anomalies and introduce policies that will help in the promotion of industrialisation in the country” is only as strong as the administration’s capacity to pushback against its principals’ waiver requests going forward. Ultimately, the biggest difficulty with stemming the fiscal and policy slippages/leakages associated with the waiver regime revolves round the challenge of squaring the circle created by the assertion that “beginning from the 2012 fiscal year, (the administration) will where necessary, only grant concessions or waivers on a sectoral basis” and the budget’s earlier assertion that “no waivers or concessions will be entertained for rice and wheat importation”. Granted that these two commodities are no “sectors” in the common acceptation of this latter noun, we ought to be concerned about how much of a wedge this is.
And the deficit? 2.77% of GDP in 2012. 2.96% in 2011. 2.69% as indicative benchmark in the 2012-2015 Medium Term Expenditure Framework (MTEF) (published in October). All of these against the ceiling of 3% stipulated by the Fiscal Responsibility Act. What do these numbers tell us? NOTHING! Especially when, in the recent past, they’ve been observed in the breach. Existing estimates of the budget deficit for the 12 months to end December 2011 stand as high as 6%. So the budget numbers might turn out as useful to this economy over the next 12 months, as the euro’s conversion criteria have been for the euro zone.
Of course, we will be no better for that!