At ₦7.298 trillion, the 2017 budget bill presented by President Muhammadu Buhari to the National Assembly on Wednesday, December 14, 2016 is the biggest ever put forward by any government in the country. Not just is it 20% (₦1.22 trillion) more than 2016’s ₦6.06 trillion appropriation act, the recurrent bit of it alone (at ₦5.049 trillion) is far larger than any budget approved for this country bar that for 2016.
Just about every commentator on the Nigerian economy agrees that money has got to be spent to move it out of the recession that it is in. Not a few think that the more efficient source of such funds is the private sector; whether local or non-resident. For this folk, government’s central challenge is to strengthen conditions that conduce to this inflow of private money. Whatever the merits of this position, by far the weightier counter argument is the Buhari administration’s apparent belief that government spend is the easier route out of our current economic crisis. Accordingly, the administration plans to make up the gap (at ₦2.36 trillion, this deficit represents 32.3% of the spending plan put forward by the president) between what it hopes to earn next year, and what it plans to spend by borrowing ₦1.067 trillion from outside the country, and ₦1.254 trillion domestically.
Just on the strength of the federal government’s apparent dirigiste sentiments alone, the budget makes for interesting reading.
I have heard folk fret over how realistic the budget’s assumptions are. Yet, if (still a big “if”, given the large number of moving parts in the global oil market) OPEC’s attempts at stitching up oil production next year holds, we should see oil prices firm up. And then, a budget based on an oil price benchmark of US$42.5 per barrel would not be so out of place.
However, the same cannot be said for the budget’s other assumptions. Of course, an oil production target of 2.2 million barrels per day ignores the debilitating consequence of renewed restiveness in the Niger Delta on domestic production capacity. But far more worrisome is that we nearly always fail to take into consideration the result of an uncertain legal and regulatory environment on new investments in the upstream oil sector; and the effect of the latter on effective installed capacity in the sector. My fear is that even if we were to solve the restiveness in the oil-producing region today as effectively as Alexander is famed to have tackled the difficulty posed by the Gordian knot, we would still not be able to produce 2.2 million barrels a day because we have not seen investment in new capacity in the sector, even as existing capacity is turning obsolete.
While the point about the “effective installed capacity” in the upstream sector of our oil and gas industry may be moot, not so government’s preference for an exchange rate of ₦305/US$. Apparently, this is one of the many rates at which the naira currently exchanges in the country. Unfortunately, it is the rate at a market (the Central Bank of Nigeria’s) where no foreign exchange is to be had. So, the real effective exchange rate of the naira is far lower than this. Now, the problem with this, is that while a higher exchange rate for the naira may flatter the official spending numbers, it is far more beautiful than useful.
Beyond this, though, it points to the extent of government’s alienation from the functioning of the economy. A more realistic exchange rate would have indicated government’s familiarity with the problem in that part of the economy. And we could then have continued a conversation around preferred solutions.
Still, the preferred exchange rate is not the only part of the budget where government’s head is concealed under a huge heap of sand. There are parts of the domestic echo chamber where participants swear that both fiscal and monetary policy have reached a dead-end in terms of their usefulness for bestirring the economy. The talking heads in this part of the room have thus turned their gaze towards structural reforms as a way out. One such reform is improvement in the efficacy of the public expenditure management process. Leveraging white papers like the Oronsaye Report, this would have resulted in a slimming down of government, leaving the moving parts a lot more efficient than they are currently.
Indeed, in the interregnum before President Buhari put a cabinet in place, the expectation was that he was alive to the unwieldy nature of government and was taking his time to prune ministerial appointments. The 2017 budget has as much positive vibes as the cabinet that resulted from the president’s mulling. At 30.7% of the budget, the proposed capital expenditure is simply too small to make an impact on a N94 trillion economy. That is if we ignore the capacity constraints that have made it difficult over the years to fully implement the capital budget.
So, we still have a budget that plans to spend ₦5.049 trillion on salaries and overheads. There is no point dwelling on this. There is a national consensus around how unproductive this mix is. The difficulty with government’s proposed spending mix is the excess of the fiscal deficit over the capital expenditure budget. Alarmingly, this speaks to a willingness to borrow money to finance spending on salaries and overheads.
Few plans could be more inefficient.