File: Buhari during the 2016 budget presentation to the National Assembly.
By Omoh Gabriel
When the Managing Director of the International Monetary Fund, IMF, Christine Lagarde came to have a chat with Nigeria’s economic managers and policy makers, she warned that Nigeria should watch the rising debt profile of the country. Christine Lagarde is not against borrowing but borrowing for consumption. She must have been briefed on the 2016 draft budget expenditure and income profile of the country.
The 2016 draft budget seeks to spend N6.08 trillion, an increase of about 20 per cent from last year. It is based on an oil price of $38 per barrel. The expected revenue projection is N3.86 trillion resulting in a more than double deficit of N2.22 trillion, or 2.16 per cent of the overall, 14 per cent debt to GDP ratio. Looking at the draft budget, it has failed the litmus test of a good budget. The government based the revenue it intends to earn from oil on a crude oil price of $38 per barrel and estimated that the country will produce on the average 2.2 million barrels per day.
Since the draft budget was sent to the National Assembly events have overtaken the estimates and assumptions on which the draft budget is based. As at last week, crude oil price sank further to $27 per barrel. Indications are that the projected revenue from oil will not be realisable. The International Energy Agency has predicted that the current low price of crude will bottom out at $20 per barrel. Other crude oil market experts foresee the price going as low as $10 per barrel. If these scenarios are taken into account, about 50 per cent of revenue projection from oil will certainly not be realised given the fact that production and the volume sold are achievable as projected in the draft budget.
There are no indications of any immediate relief from this cul-de-sac the nation’s finances are in at the moment. The IMF’s latest World Economic Outlook (WEO) has again trimmed its forecast for world output growth in 2016, from 3.6 per cent to 3.4 per cent. The principal losers for 2016 are the US, 2.6 per cent from 2.8 per cent, Brazil projected to a contraction of -3.5 per cent from -1.0 per cent and Russia to -1.0 per cent from -0.4 per cent. India continues to enjoy the highest forecast growth both this year and next. The projections for China are again unchanged.
The WEO has also trimmed its growth forecast for Nigeria for this year from 4.3 per cent to 4.1 per cent. For 2017, it has penciled in 4.2 per cent. The commodity forecasts do not make great reading for Nigerian policymakers. Average non-fuel commodity prices are projected to fall again this year, by -9.5 per cent year-on-year, before staging a modest 0.4 per cent recovery in 2017.
Besides the gloomy outlook in the international marketplace for the nation, the volume that Nigeria could produce and sell in the open market is currently under threat. The resumption of militancy in the Niger-Delta portends a grave danger for the 2016 budget. If the Federal Government carries out its tough stance on the issue, it will result in full scale hostility and the militants may as usual return to the trenches and sabotage oil production.
Already attacks on pipelines have cost around N470 million a day in lost gas and electricity. The attacks in the southern oil-producing Niger Delta region followed years of relative calm after a 2009 amnesty halted a spate of attacks on oil installations and kidnappings of expatriate workers. Last Wednesday, NNPC said it had shut two of its four refineries due to crude supply problems following the attacks. This was followed by Ministry of Power, Works and Housing statement saying the pipeline vandals caused losses in gas sales and, as a result of the impact on gas-fired power stations, electricity shortages.
The sabotaged pipeline, which contributes to the Escravos Lagos Pipeline System, has led to a loss of 160 million standard cubic feet per day (mmscfd) of gas, which ministry spokesman, Hakeem Bello said equated to a daily cost of about $400,000. “This is in addition to losses to be incurred daily from affected power generation. The pipelines are being actively monitored for further attacks or other unforeseen impacts,” he added.
As if this is not bad enough the lifting of sanction on Iran oil has put another spanner in the works of the 2016 budget. South Africa and other traditional allies of Iran that were picking Nigeria crude have indicated that they will now be buying from Iran. Already India and other Asian countries to which Nigeria prospected for market share when America ditched Nigeria oil, are buying from elsewhere. It is a double jeopardy for the 2016 budget that all of these are happening. If the price gets too low and the volume produced or sold fall below the draft budget benchmark, where is the government going to source money from to finance the budget if passed by the National Assembly as presented? Borrowing, of course.
Another lapse in the 2016 draft budget is the provision that recovered funds from political thieves will be used to finance the budget. What the government did not say is how soon will the loots from these political thieves be recovered to meet the financing target of the budget? How much has the government recovered so far that it is optimistic it will use the fund to finance the budget? What magic wand has the presidency to secure court conviction and order to realise this? What about those who have their loots abroad? Is the government going to compel foreign courts to give judgment in its favour to get the loots back within a record time?
Nigerians must come to terms with the fact that in 2016, the Federal Government, if it has to implement the budget to its letter, will have to borrow and borrow again and again. Here is where the comment by the IMF Managing Director comes handy. It will be an economic suicide for government to borrow to pay the salary of its civil servants. Borrowing to build roads, railways and other socio-economic amenities is justifiable as long as it will enhance the economy. But borrowing to pay salaries of civil servants will put the nation on a debt cliff it will not be able to get out of in a short time.
The draft budget contains a deficit that will be plugged with N1.84 trillion of borrowing, N900 billion from international debt markets, with domestic borrowing of N984 billion. Oil sales will provide N820 billion, less than the N1.45 trillion projected for non-oil revenues such as corporate taxes and customs duties. The Debt Management Office and the Central Bank of Nigeria will be hard pressed this year to raise money for the Federal Government to run the affairs of the country.
The real fear now is that this government may resort to financing its activities through Ways and Means. If this happens and it is not within the regulated limit, the economy will suffer hyperinflation, then stagflation will follow and that will be it. The big question is who will stop this government from carrying out its plan? No one will stand in the way. If this is what change portends for Nigeria, 2016 being APC’s first federal budget, then nothing cheering is coming from Mr. President’s team.