By NKIRUKA NNOROM
Mr. Johnson Chukwu, is the Managing Director/CEO, Cowry Assets Management Limited, an Investment Bank and key player in the capital market with specialisation in Oil and Gas, Bonds and Equity and other financial instruments. In this interview with Financial Vanguard, Chukwu stated that reduction in recurrent expenditure will take a gradual process, maintaining that cutting down on people’s salaries without rationalisation of agencies of government with overlapping functions will be difficult.
What is your take on the 2013 budget being debated by the National Assembly and the federal government and how detailed do you think the 2013 budget is in relation to that of 2012?
Well, I will I say that the budget is quite detailed enough and it is in tandem with the medium term expenditure framework of the country, and it actually recognises the peculiarities and needs for the economy to grow, while at the same time maintaining some level of fiscal stability. If you look at the budget, you see a revenue growth of 39 percent and expenditure of about five percent. That shows that the government revenue is actually growing faster than the federal government expenditure.
You also saw the structure of the recurrent expenditure to capital expenditure now moving towards a higher level of capital expenditure. We are moving from a capital expenditure of about 28.7 percent to 31.3 percent capital expenditure as against recurrent expenditure of the country. We are also seeing a reduction in borrowing from N744 billion to N727 billion for the 2013 budget. If you look at the revenue side, you see that revenue is actually predicated on oil benchmark of 25 dollars, oil production of 2.53 million barrels per day.
If you compare that to about 2.48 million barrels per day which was the benchmark for 2012, that gives us a marginal increase in terms of production volume. If you also compare it with 75 dollar per barrel to the 82 dollars we had for 2012, which was also a marginal increase. So, if you look at the revenue projection, one will say that the projections are quite conservative, but quite realistic. If you look at the structure on which bulk of the capital expenditure is based, you see some improvement. So, give and take, I think the budget looks reasonably well designed.
Looking at the allocation to some of the basic sectors, do you think the implementation will deliver the needed development in the country?
Well, you have to look at the budget in terms of changes in value chain of some of the sectors of the economy. Take for instance, the agricultural and power sector, you see the agricultural sector has moved away from a government driven, fertilizer distribution system to a private sector business oriented value chain. So, that simply means that the amount of money that will go into government funding of agriculture also will be reduced because the private sector actually taken the role that government used to play and is actually playing it effectively.
So, you don’t expect the government to really throw in so much money into the agricultural sector; what they have really done is to redefine and redesign the value chain and make it private sector driven. If you look at the power sector which has a budget of about N78 billion, you also recognise that come the end of October, both the distribution companies and generation companies would have been sold to the private sector. So, further investment from federal
government to that sector will largely be restricted to the transmission grids, so you are not going to see a lot of government resources being thrown into that sector, what government is going to do is to drive those sectors through policies and regulations.
The same thing apply to a lot of other sectors that are actually major drain in the public resources but if you look at those social infrastructure, which is what the government should do, what we call common good or public good, you see that their share of the budget is quiet substantial. If you look at education, education has the highest share of the budget. I think about four hundred and eighty something billion naira followed by the Armed Forces and the Police which is security. Between the Armed Forces and the Police we have about N670 billion. You find out that those are the public goods which the government wants to invest in.
If you look at the educational sector, we have a huge young population and you see the complaint of the quality of education. I think what the government wants to do is to strengthen the quality of instruction within the educational system and also strengthen the level of infrastructure in the tertiary institutions, so that Nigerian graduates will begin to compete with their contemporaries in other countries. It does not make sense for Nigerians to be sending their children to Ghana to go to higher institution.
So, I think the federal government wants to actually turn around the educational sector if you judge that based on the amount that was voted for the educational sector. The other major thing is the financial sector, of course, that cannot be understated. Like I said, these are social infrastructures, social services that the government is putting more resources into. Those sectors that can be successfully driven by the private sector the government is slowing down or reducing the amount of vote going into those sectors. So, if you ask me, I will say in terms of allocation, the budget makes a reasonable sense.
So for you the allocation made to the agricultural sector is good enough?
Yes, that is why I said that the value chain has completely changed. In the past the government will purchase fertilizer and distribute, that alone the government is concerned will never get to the farmers. Now the management has changed to the private sector operators; government is rather encouraging commercial agriculture through the commercial agriculture credit scheme. Government is encouraging small holder farmers through electronic distribution of fertilizer, so the government does not necessarily need to buy or subsidize those products and supply free to the farmers because eventually , those products will not get to the farmers they are subsidizing it for.
So the amount of money we needed to put in driving agriculture has drastically been reduced because of the fact that the agricultural production are now being driven by the private sector operators unlike what used to happen in the past, and that is why the amount of vote is sufficient. We also need to also recognise that there have been a lot of changes in terms of the environmental factors over the past couples of weeks, particularly due to heavy rain and flooding in some part of the country, which may adversely affect agricultural production.
That may as well entail additional resources going in to support farmers, but the government has also said that the resources required to support or to reverse the damage done by the high level of flooding is beyond the government capability, and the government is also seeking the private sector and even international donor agencies to support in addressing the damages or losses suffered in the agricultural sector, including the housing and other sectors as a result of the flood.
I think the Dangote team said they are going to raise about N100 billion to support those who are affected by the flooding. I believe a large part of the fund will also go into helping them to restart their life, and also helping them to re-plan their course. The Minister of Agriculture has also come up to say that, they are going to distribute to them cereals that have very short life cycle and those cereals will include maize and those things that have maturity period of about six months.
So hopefully, with these initiatives I think that will moderate the impact of the flooding and that will not necessarily require so much funds from the government. Give and take, I think that is what the government is recognising that, and government has also set up committee to raise additional fund. To date, I think the government has raised up to about N17.9 billion for the affected states and communities and if the Dangote committee is able to raise up to N100 billion as they promised, I think we should have enough resources without necessarily worrying the government to come up with a supplementary budget to support agricultural production.
Some people still believe that five percent reduction in recurrent expenditure is not enough, they still believe that government should cut down on its expenditure. What is your take on that?
The way I will look at it is that the government will have to improve on infrastructure; there are infrastructural problems and structures are not erected over night. The government has said that come 2013, they will start rationalising agencies and ministries with overlapping functions. That simply means that until the rationalization is done, you cannot drastically cut off the salaries of those who are being paid. You can’t cut off their running cost; you don’t just eliminate costs that are borne by the specific structures.
So, it will take some time. You need to reverse those structures, you need to amend, and you need to eliminate those imbalances before you can see a drastic reduction in the recurrent expenditure. We have to realise that it cannot happen over night; it is a gradual process. We are moving from 28 percent capital expenditure share to 31.3 percent share. Hopefully by next year, we are going to be talking about 40 percent, or may be 38 percent or more, but a lot of other things will have to precede drastic changes in our expenditure profile and those conditions will include eliminating duplications in government agencies and ministries.
Until that one is done, we cannot just cut salaries of workers, you will not just cut power supply from ministries and departments, you will not cut off their telephone bills, their fuelling allowances/expenses and all the rest. Those things will continue to run until those ministries, agencies and departments are eliminated. So for m e, my expectation is that it will be a gradual process. Once the heads that are consuming those overheads are eliminated, the overheads will go down.
From the body language of this administration, do you forsee the government collapsing some of these agencies that have overlapping functions?
This is more of a political question, but the way I will look at it is that the government has said they will do it; it is now left for us to watch them do it. In a democratic dispensation, the government’s job is to create employment and not to drive unemployment. So, rationalizing and eliminating ministries and agencies will require the government eliminating jobs. Having said that, you will also recognize that it will be difficult decision granted that if this is done properly, and the economy stimulated to grow, those who will lose their job in government agencies will likely get better job in the private sector as long as they are competent.
If you ask me, the question should be, is the government having the will power to eliminate jobs or rationalize agencies and ministries? I will say it is left for us so see. I want to believe that having said this, that they will start that in 2013 and that we should wait till 2014 to see a manifestation in the reduction of our current expenditure. I think we should
rather give them the benefit of doubt and watch them do that.
What is your take on the argument that ensued between the National Assembly and Executive on the issue of crude oil benchmark?
My take on this is that the two sides had strong argument, but I will rather support the government against the National Assembly for certain reasons. One is that we are a monolithic economy; we export only one product and unfortunately for us, the product we export has a lot of volatility in its price. Oil price has dropped sometime in 2008 to as low as $38 US dollars from $147 dollars per barrel. We have seen oil price dropped to $10 dollars in the past; there is nothing that can stop the oil price from falling at any point in time, but beyond that, let us even agreed that the oil price do not drop.
We have two factors that make it imperative that we adopt a conservative approach in estimating the price at which we convert the oil production. One of these factors is the need to save and to build our foreign reserve. The higher our foreign reserve is the stronger our economy becomes attractive to foreign investors, the more inflow we will have, and if we address the other structural challenges of power supply and security, you will find out that with a population of about 160 million people, this country will become a natural environment and point of attraction to companies that are into the manufacturing of consumer goods.
Also, they will be encouraged to do that if we have strong foreign exchange reserve. So your foreign reserve will help us to also strengthen the value of the naira vis-a-viz other currencies. Another factor is this, because of the structure in the economy, which is such that we export products that have very low local production cost and convert the profits into local currency; the ability of our economy to absorb huge fiscal government expenditure will be highly limited.
So, the implication of this is that if we convert all oil sales to naira, as the crude price the National Assembly is taking about $80 dollar per-barrel, we may actually have to contend with the issue of inflation, because the production of those goods we tend to export are very low in terms of local cost of production. So, you will be exporting something that cost almost nothing and you are importing the proceeds and converting to the local currency, so, we have a lot of local currencies that will be pursuing few goods.