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Why 2017 budget can’t end recession

By Odilim Enwegbara

First, let me tell Mr. President right away that if he hopes to grow the economy out of recession in 2017, this budget is not the one to do it. This is because it is not only not expansionary, it is not pro-investment, pro-growth, and pro-jobs. As a result, it is not enough to be expected to perform such magic.

Like most recessions, if this recession is not a product of a sudden accident, why this rush in sending this economy to the emergency ward? That is why, like every recessionary economy, this economy too is in urgent need of serious restructuring along with some unconventional policy reforms. This is the only way we too should be able to permanently put ours on a healthy and sustainable growth path. Why the recovery is yet to begin is because President Buhari is yet to bring together those gifted Nigerian economic surgeons who have the pro-expansionary fiscal and monetary measures specialization needed in performing this inevitable economic diversification.

That is recognized from Nigeria’s budget to GDP ratio, which compared to its peer economies is the lowest. It is the lowest because our tax to GDP ratio has remained over the years the lowest among the peer economies. And our tax to GDP is so low because no serious measures have been made all these years to move away from oil as government’s major revenue source.

Take one of our peer economies, South Africa for example. In its June 2016 which ends in May 2017 (since South Africa runs June-May fiscal year) South Africa budgeted $143.966bn (with fiscal deficit of 3.2%) against Nigeria’s $23.928bn (with fiscal deficit of 2.18%) in 2017. South African Revenue Services (SARS) collected R1.0699 trillion in taxes) $76.421 billion, representing 27.26% of $280.367 billion GDP. This is against Nigeria’s (N1.373 trillion non-oil revenues) $4.502 billion representing 1.08% of $415.080 billion GDP. From this, South Africa’s budget is 53.08% with tax revenues, whereas Nigeria’s is funded with 18.81% tax revenues.

EXCHANGE RATE

A look at the proposed 2017 budget’s N7.298tn against 2016’s N6.077tn seems higher in size. But, then, taking N305 per dollar and over 20% expected inflation average into consideration against 2016’s N197 per dollar and 16% inflation average, it becomes certain that 2017 budget is smaller. It becomes far less expansionary than the 2016 with N2.24tn capital budget at N305 per dollar is only $7.344bn against N1.8tn capital spending at 197 per dollar is $9.137bn.

In the meantime a whopping sum of N1.66 trillion is spent on debt service, which is ironically over 95% domestic debt. What economic sense does it make that a country facing $350bn infrastructure deficit is okay with 11.73% debt to GDP ratio (Federal Government: domestic 9.02% and external portion at 2.71%), whereas its peer economies such as South Africa, with its low infrastructure deficits has as high as 44.0% debt to GDP ratio (domestic 4.70% and external 39.30%)?

No doubt, that the 2017 budget’s N2.36tn deficit which has N1.067tn (46%) external borrowing is a welcome development, if government should not put embargo on domestic borrowing, at least, one would have expected the external borrowing in 2017 to be as high 70%. At least that would have reduced our presently unsustainable debt service which in 2017 alone is put at N1.66 trillion.

The question that arises becomes: why, not minding that external borrowing is cheaper and concessionary, government prefers domestic borrowing which is not only costly to service and short-term based but also crowds out real sector firms from the debt market? The only reason this has been going on is because of the fact that top fiscal and monetary policy makers along with those in charge of DMO, have been conniving with their local bank counterparts to use bloated domestic borrowing to defraud the country trillions of naira.  That explains why Nigeria’s N10.606 trillion domestic debt stock costs N3.628 trillion between 2013 and 2016 to service, while our $11.261bn external debt, costs N214 billion to service during the same period.

President Muhammadu Buhari presenting the 2017 Budget before a joint session of the National Assembly on Wednesday, December 14, 2016.

TAX POLICY

Another question is why is it that government is reluctant to fully exploit all the tax possibilities (including VAT), which would have drastically increased its revenue stream? The only reason top government officials along with our so-called economic policy experts and bankers are fiercely opposed to government increasing all non-oil revenues, particularly taxes, is because should government increase its revenues, that would amount to reducing its domestic borrowing to finance deficit as a result of shortfalls on government revenues. Limiting its domestic borrowing would mean putting banks and other domestic lenders out of their highly lucrative business of lending to government at cutthroat interest rates.

That is why they are not ready to allow anyone who could advise government to properly review its current borrowing policies to either get closer to the corridors of power or be allowed to be heard. It is equally the reason these enemies of Nigeria are fiercely against the repayment of our domestic debt, including adopting quantitative easing (printing enough naira to buy back our all domestic debts. Shouldn’t by using quantitative easing we could easily pay off our huge domestic debts, and by so doing, save trillions of naira, including the N1.66tn to be spent in 2017 budget on debt service; money if channelled into infrastructure spending should reduce our infrastructure deficit?

If it is called domestic debt because when a government is overwhelmed with domestic debt service, the indebted government should print the same local currency it borrowed the money in to settle it, why is that when it comes to ours, government is reluctant to adopt the same measure, first adopted by President Abraham Lincoln in 1864, when he directed his treasury secretary, Mr. Portland Chase to print $480 million greenback to repay the country’s domestic debt accumulated as a result of the 1861-1865 US Civil War?

 

INFLATION

The false use of inflation alarm — insisting that government should not ever adopt quantitative easing — coming from the same local debt holders (mostly banks) and their top government counterparts (mostly CBN, finance ministry and DMO) should have reminded us that there is no way the same beneficiaries of the trillions we spent on domestic debt service should allow government to pay off the debt. There is no doubt that serious inflation is bad for an economy. But then, there are two types of inflation—healthy and unhealthy types of inflation. Healthy inflation is one caused by economic expansion and modernization as a result of diversification that warrants massive public spending.

Ours, unfortunately, is stagflation — unusually stagnation and inflation taking place side-by-side. Why stagflation is because we are over 95% import dependent, importing virtually all we consume. But, by increasing the cost of borrowing and not addressing infrastructure deficit, we are actually increasing inflation by not reducing key interest rate, and by government’s domestic borrowing that put pressure on the local debt market. If we are sincere about reducing inflation, we should have been reducing the very high cost of doing business which prices local producers and manufacturers out of market by making their goods and services not competitive.

 

GOVT DEPTS WITHOUT BOARD OF DIRECTORS

One other important flaw in the 2017 proposed budget is the fact that most government departments and agencies have been operating without board of directors. With this, it is most unlikely that the National Assembly will entertain their respective budgetary spending. This is because the law clearly states that the budget estimates of all government departments and agencies should pass through their respective board of directors, who should approved them before they get to the National Assembly for final scrutiny and approval.

Given that the boards of most of these departments and agencies disbanded in July 2015 by President Buhari are yet to be reconstituted, then, question the respective committees of both the Senate and the House should be asking them when they come to defend their respective budgets is: which board directors approved their budget estimates before they were submitted to the National Assembly?  The follow-up question also becomes: which board of directors will make sure that the appropriated funds in the 2017 budget are properly spent?

 

BENCHMARK

Another flaw in the 2017 proposed budget is the fact that price of oil is benchmarked at $42.50 per barrel. It is important to fully interrogate this because at a time of recession like this, all avenues to increase government revenues should be stretched as far as they can go. My insistence that benchmarking oil price at $42.50 per barrel should be increased to $50 per barrel is based on the fact that in 2017 oil price should be expected to rise as high as $65 per barrel. My reasons are obvious.

First, one reason Putin supported Trump in 2016 presidential election is for him to help reverse oil prices upward, possibly close to what it was in 2013 before the US-led west to punish Russia for invading Ukraine manipulated it down. And that Trump is signalling to do that is explained by appointing Mr. Rex Tillerson, the ExxonMobil CEO as his Secretary of State. Second, like Putin, Trump too would like to see oil prices upward for the simple reason that high oil prices is needed if his government should be able to raise the trillions of dollars to be injected into improving America’s infrastructure. It is a welcome development because if huge American infrastructure spending happens, that would result in a global economic growth.

On whether or not the finance minister is doing the right thing, my answer is that she is yet to show the kind of tax policy overhauls needed to aggressively increase government’s tax revenues to what it should be. Our tax-to-GDP ratio should have been getting close to 30%. But even the little VAT money collected, as high as 70% of the money is being diverted by both FIRS officials and the collecting businesses, mostly Chinese and India businesses operating in Nigeria that have continued to connive with the officials of the FIRS to not remit the VAT money collected.

By now, Mr. President you must have come to this painful discovery that there are two separate things—to be helped by a fellow politician to win an election and another to give the politician the position of helping you meet your campaign promises. In 1932, Mr. Big Joe, notorious New York Mafia gang leader, helped former New York governor, Mr. Franklin D. Roosevelt to win the US presidential election. But did Roosevelt bring Mr. Big to help him run the government? Never! In fact, Roosevelt did the contrary. To make sure that Mr. Big Joe never stood in the way of his government including demanding ransom, Roosevelt wasted no time in putting Mr. Big Joe behind bars. So with that he could freely focus on the business of fixing America’s depressive economy.

What we have had so far is that, in an effort to show appreciation to those who helped him win the 2015 presidential election, our goodhearted President has handed some serious decision-making government offices to those who helped him become president. There is nothing wrong with rewarding those who stood by you at a time of difficulty. But let that not include handing knocked engine car to a non-mechanic. If that happens, both the person being rewarded and you trying to reward him will lose. This is because without the mechanic, any other person trying to fix the car will only be doing trial and error work. In the meantime, the passengers are stranded, including seriously sick passengers who joined the car hoping to get to the hospital.

 

Enwegbara, a development economist and chairman at PADCC can be reached at  basil_enwegbara@yahoo.com

 

 

 


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