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N8.9trn budget: Fears over mounting debt, low oil output

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Emeka Okoroanyanwu and Babajide Okeowo

A mid a huge infrastructure deficit estimated at about $878 billion by 2040, low revenue earning capacity and stubborn inflation, the Senate last week finally passed the 2019 budget of N8.92trillion. This amount is N86 billion higher than the N8.83 trillion presented by President Muhammadu Buhari on December 18, 2018. The passage came after months of acrimonious debate on the document  between the Red Chamber and the Executive arm of government.

The 2019 budget was predicated on the assumptions that crude oil price will not fall below $60 per barrel, that Nigeria will produce at least 2.3 million barrels of oil per day, including condensates and that the exchange rate would not fall below N305/$ while real GDP growth was estimated at 3.01 per cent and inflation rate at 9.98per cent.

Some of the key macroeconomic assumptions in the budget  include an estimated total revenue of N6.97 trillion, which is 3 per cent  lower than the 2018 estimate of N7.17 trillion.

Where the revenues will come from

The government expects the revenues to come from oil, for which about N3.73 trillion is budgeted, while non-oil revenue is estimated at N1.39 trillion. Companies income tax (CIT) is expected to bring in N799.52 billion, Value Added Tax (VAT), N229.34 billion, Customs Duties ,N302.55 billion and independent revenues, N624.58 billion.

Other revenues expected in 2019 include various recoveries of N203.38 billion, N710 billion proceeds from the restructuring of government’s equity in Joint Ventures and other sundry incomes of N104.11 billion.

The government also set aside N305 billion ($1 billion) for under-recovery by NNPC on Premium Motor Spirit in 2019.

Budget Deficit

In this year’s budget, deficit is projected to decrease to N1.86 trillion (or 1.3 per cent of GDP) in 2019 from N1.95 trillion projected for 2018.

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Expenditure

The proposed N8.83 trillion of 2019 aggregate expenditure comprises recurrent costs of N4.04 trillion; debt Service of N2.14 trillion; statutory transfers of about N492.36 billion; Sinking Fund of N120 billion which will be used to retire maturing bond to local contractors; capital expenditure of N2.031 trillion including capital supplementation but excluding the capital component of Statutory Transfers.

The government set aside the sum of N2.14 trillion for debt servicing. Of this amount, 80 per cent was to service domestic debt which accounts for about 70 per cent of the total debt.

Nigeria owed combination of local and foreign organisation more than $73 billion as at June 2018.

When the budget was presented on the floor of the National Assembly byPresident Muhammadu Buhari on December 18, 2018, it generated a lot of controversy with many seeing it as a useless document.  President of the Senate, Bukola Saraki, described it as hopeless and having nothing to offer the future of the country.

In his words, “If you look at the figures based on revenues that are coming in, there is nothing left. So, where is the future? There must be an alternative,” he said. Immediately, the Minister of Information and Culture, Lai Mohammed countered saying the All Progressives Congress, APC government led by Buhari presented the best budget the present circumstances could allow.

“It is not the practice of the Executive to exchange words with the legislative arm of government; they are independent, we are independent.But, to the best of our knowledge, we presented a budget given the circumstances of our resources this year; we feel that this budget is the best we can offer. It is left for the National Assembly to consider it” he said. And, a few days ago, the Senate finally passed the budget with many questions begging answers.

Budget looking good and bad at the same time- Stakeholder

But according to Dr.Bunmi Binitie, a public commentator, the situation currently playing out is that of a mixed feeling, if global oil price sustains its growth, Nigeria may find it easy implementing the benchmarks of the 2019 budget, however where the worry lies is in the area of our production level.

“We have prepared our budget for 2019 and benchmarked oil price in the budget at $60 per barrel with crude oil production of 2.3 million barrels per day mbpd, the global oil price hovers around $73, this development gives us some comfort in prices, but not with our production levels.Our oil production within the past few months has not really grown beyond 1.7mbpd, indicating that even if prices maintain healthy growth, the country’s limited production levels would still remain an issue for concern. We produced 1.733mbd of oil in December; 1.731mbd in January; and 1,741mbd in February, indicating just about 10,000 barrels a day difference between January and February 2019 production. Even if the Egina FPSO comes on stream with 200,000bd of oil, it could at best push our oil production to about 1.9mbd, but not the 2.3mbd we have benchmarked in our budget.

Financing the budget is still an issue- Expert

Financing the budget has also been a recurring issue amongst experts who are worried to no end over the continued spate of the deficit in the budget which has pushed the country into financing the budget from borrowings.

According to investigations by The Nigerian Xpress, Nigeria’s budget deficit according to the Federal Government’s Medium Term Expenditure Framework 2019 – 2021 stands at about N2.59 trillion in 2019. Furthermore, the Buhari Administration will be on track to incur a total budget deficit of a whopping N12.8 trillion in 4 years which is worrisome. According to data obtained from the budget office and the National Bureau of Statistics, NBS, since the administration took over in 2015, Nigeria has witnessed an unprecedented drop in fiscal revenues as the country grappled with an oil-induced crushing recession.

Between 2015 and 2017, the government has earned a total revenue of about N8.8 trillion compared to a budgeted revenue of N12.3 trillion representing a shortfall of about 3.5 trillion or 29 per cent. The dismal performance, particularly in 2017 where actual revenue was N2.6 trillion compared to a budget of N5 trillion ballooned the budget deficit to about N3.8 trillion, the highest so far.In order to plug this gaping hole, the country has resolved to borrowing, which according to many industry’s experts say calls for concern.

In the words of Mr. Gabriel Idahosa, the Vice President of the Lagos Chambers of Commerce and Industry, LCCI, while borrowing may not be a problem, the real problem lies in the ability to repay.

“What the government has been doing is to base the budget significantly on debts rather than revenue, the revenue capacity of the budget is at about 30 to 40 percent, so a lot of the budget is predicated on borrowing, so as long as you keep borrowing, you are going to have your debt profile going up higher and higher which translates to having to borrow more and more’

‘The government might be saying that our debt position relative to the Gross Domestic Product, GDP is not much to worry about at this time. The international benchmark for debt equity is about 40 percent, if you are at less than 40 percent, then you have room to borrow more. This is why the government is saying that they have enough room to borrow, but that presumes that they are also able to generate enough revenue to meet the debt repayment obligation. The real concern for Nigeria is not that the debt to equity ratio is high but the fact that we do not generate enough revenue to meet the repayment obligation of those debts significantly. As long as continue to maintain the level of our current revenue generation as it is, then our capacity to repay will be going down” he said.

Acting Director General of the Securities and Exchange Commission, Mrs Mary Uduak said recently in Lagos that the only solution to tackling the country’s infrastructural deficiency is by investing in the Green Bond.

 According to her, “The future holds opportunities for renewable energy, energy efficiency, infrastructure, food, agriculture and the task ahead is to ensure funds are channeled to green projects with multiple socio-merits,” Uduk said.

She said there must be more domestic participation in green bonds investment for Nigeria to claw its way out of deficit in infrastructure, power and energy, transportation and eliminating environmental degradation, noting that annual budgets may not solve the problem.

Similarly, the Managing Director of Kairos Capital, Sam Chidoka said Nigeria’s debt sustainability is precarious.

“One fact that Nigeria has always looked at is our debt to GDP ratio which is in and around 20 per cent and still looks good, but one thing which should worry us as a country is the debt to revenue. In terms of debt to revenue, we are not doing too well. In the situation that we are using 63 percent of our revenue servicing debts, this is precarious. The challenges are numerous, firstly, we have a revenue challenge, we are not making enough money, and we need to fix that. Secondly, we have an infrastructural gap that needs to be funded and of course, our ballooning debt situation” he said.

On his part, Professor SheriffdeenTella, a senior lecturer in the Department of Economics, Olabisi Onabanjo University, Ogun State, said a highly dependable government should run a balanced budget and avoid borrowing.

He noted that borrowing, in itself is not a bad economic strategy, but the purpose for which the borrowing is deployed is what mattered the most.

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“I’m not worried about borrowing because debt is leverage but it depends on what the loan is used for. It must be used for productive purposes and not to finance recurrent expenditure. Oil prices are just beginning to bounce back and so I see the borrowing as a last resort to prevent the total collapse of the economy since we had a serious revenue shortfall. When you have a decline in revenue, you have to resort to borrowing,” he added

Rising populations poses fresh challenges on a non-existent infrastructure

As if the worries surrounding the budget was not enough, The United Nations Population Fund (UNFPA) a few days ago dropped another bombshell stating that Nigeria’s population currently stands at an all-time high of 201 million, representing an increase of 5.1 million from the 195.9 million it said the country had in October last year. This, experts say will further stretch the infrastructure deficit in the country which is not being addressed by the budget.

According to Chidoka, the current budget will not be able to finance the infrastructural deficit in the country unless the country looks at the way of Public Private Partnership, PPP and concessioning to bridge the huge infrastructural deficit in the country.

‘In the past, the government has really not been able to finance infrastructure from the budget, this is why you find a lot of projects not being financed. The budget does not really have the capacity to finance those capital projects, so we either have to borrow to finance them or we look towards Public-Private Partnerships. Expecting that we are going to finance a significant infrastructure from the budget was something that was not sustainable, there was no basis for us to expect it to happen because the size of infrastructure deficit that we have is far beyond what our annual budget can expect to meet, we need to look towards PPP to finance our infrastructure deficit” he said.

On his part, Akinwunmi Ayo Akinwunmi, Head of Research, FSDH Merchant Bank, posited that the gap between population growth and economic growth will lead to increased poverty in the country, adding that it was, however, not a hopeless situation as the economy can grow by five percent given the right policy.

“The gap increases poverty in the country. However, the Nigerian economy has the capacity to grow by over five percent with appropriate infrastructure in place. In addition, policies that will increase education funding should reduce early marriage, keep youth, particularly young girls in school, and help keep population growth under check,” he said.

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