July 27, 2020

N6.4trn ERGP expenditure fails to meet set targets


A map of Nigeria

New development plan to start from scratch

By Emeka Aaneto, Business Editor, Yinka Kolawole and Emmanuel Elebeke


As the federal government gets set to replace the Economic Recovery and Growth Plan (ERGP) with a new economic plan, the Nigerian Economic Sustainability Plan (NESP), reports from both government sources and private sector assessment have indicated massive failures in the ERGP across almost all the target points.


Financial Vanguard learnt that rather than build on the expected gains as originally envisaged in the plan, the Ministry of Finance has been forced to totally trash the plan as the results of the efforts made as well as estimated N6.4 trillion capital expenditure outlay in its three years life did not yield any strong gain to build upon.


ERGP is a medium term plan set for 2017 to 2020, developed to restore Nigeria’s economic growth at the backdrop of the negative growth recorded in 2016 when the economy formally went into recession.


The process started with the development of the Strategic Implementation Plan (SIP) for the 2016 “Budget of Change” as a short-term intervention. The ERGP was built on the SIP,    just as NESP was expected to have been built on the ERGP.

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But according to a senior official of the Finance Ministry, “the failures of ERGP provided no ground upon which to build anything as earlier planned and coupled with the unexpected emergence of Coronavirus (COVID-19) pandemic which ultimately buried whatever  could have been salvaged in the plan, the government was forced to draw-up the new plan from the scratch.


The Minister of State for Budget, Prince Clement Agba, while speaking on the new plan explained that the new national development plan had become necessary following the winding down of the ERGP this year. He emphasised the need for a replacement in view of the realities on ground.


The ERGP envisaged that by 2020, the administration would have achieved five key broad outcomes, namely: a stable macroeconomic environment, agricultural transformation and food security, sufficiency in energy (power and petroleum products), improved transportation infrastructure and industrialization focusing on small and medium scale enterprises.


It also outlined bold initiatives such as ramping up oil production to 2.5mbpd by 2020, privatizing selected public enterprises/assets, and revamping local refineries to reduce petroleum product imports by 60 percent before end 2018.


Restoring growth

To restore growth in the macroeconomic stability and economic diversification the ERGP targeted annual average real GDP growth rate of 4.62% between 2017 and 2020, as well as bring the inflation rate to  a single digit of 9.9% by year end 2020.


Recent data from the Ministry of Finance shows the disparity between the projected macroeconomic variables and the actual figures.  The best GDP result was in 2019 with 2.27%. But this indicated less than half of the target was met.


By 2020 the actual figure regressed to 1.87% Q1’20), and with the impact of COVID-19, analysts as well as the federal government and the World Bank have projected that the economy would slid back into recession, at levels worse than the situation which had led to ERGP.


Forecasts by the FG, the World Bank and the analysts see 2020 GDP at -4%, -5% and -5.5% respectively, as against -1.54% recorded in the 2016 recession that led to ERGP.


The other key macroeconomic variable that is now under pressure is the inflation. Against the ERGP targeted single digit inflation rate of 9.9% the inflation rate as at year end 2019 was 11.98% majorly attributed to increase in food prices which manifested through the closure of the border in August 2019.


But, as at last month, the figure had gone up to 12.56 percent, also showing a steady Month-on-Month (MoM) rise for a ten consecutive month (since September 2019).


Forecasting into the year end, analysts at PFI Capital Plc, a Lagos based investment house, stated: “We project the 2020 inflation rate to average 12.84% with the rate crossing 13% mark in year-end 2020 (31.3% higher than the projected inflation rate for year end 2020).”


A major part of the ERGP expectations include major change in the trajectories of the oil industry performance across upstream (output and price expectations) and mid-stream in terms of local refining to eliminate importation and hence save foreign exchange.


In spite of all efforts in the petroleum sector, the target of reducing petroleum products to about 30% of local consumption by 2018 failed woefully, as current reports from the Nigerian National Petroleum Corporation, NNPC, indicated that about 90% of local petroleum products consumption is imported.


Speaking of some positive developments in the oil industry targets of the ERGP, analysts at PFI Capital said, “Although daily crude oil production has increased compared to the 2016 levels, it is still low when compared to the 2019 projections. We ascribe the growth in oil production to fewer militant activities in the Niger-Delta as well as the OPEC waiver of oil production cut for Nigeria in the wake of Economic recession in 2016.


“In terms of oil production benchmark, the ERGP was able to pass this test as the 2019 oil price benchmark as stated in the budget ($60/barrel) was 20% greater than the $50/barrel projected in the ERGP and 57.89% greater than the 2016 benchmark.


“Oil price averaged $65.49/barrel in 2019 and Ytd (29th May), it has averaged $40.59/barrel which is 21.94% less than the ERGP oil price benchmark for 2020 ($52.00/barrel) and 62.36% greater than the revised budget benchmark of $25/barrel.”


However, basing its own comments on the backdrop of the recent impact assessments of COVID-19 as well as the OPEC restrictions on oil output, the analysts at CardinalStone Finance Ltd, another Lagos based investment house, stated: “Nigeria achieved only a 52.0% compliance rate to OPEC+ agreement in May 2020 as production fell by 260kb/d MoM to 1.61mb/d.”


Nigeria had been under pressure to maximize output against the backdrop of the ERGP target as well as the need to cushion the impact of COVID-19 on its overall revenue.


But Cardinalstone analysts added, “Historical records of non-compliance and the new budget assumption of 1.8mb/d suggest that the country is unlikely to achieve 100% compliance in the coming months.

“In our view, domestic oil production is likely to average 1.55 mb/d (ex-condensates) in 2020.” ERGP had envisaged 2.5mb/d.


On the oil price expectations and challenges, they stated: “We forecast 2020 average price of Nigeria’s crude (Bonny Light) at $35/bbl as against $38.02/bbl for Brent. The implied downside to Brent reflects increasing competition for a declining consumer base.


“We recall that Nigerian blends sold for as low as $10/bbl in April (Brent April average was $27/bbl) as a flotilla of cargoes at the ports heightened concerns over insufficient storage spaces globally.


Implementation, unemployment reduction

One of the core targets of the ERGP was that with the implementation of the plan it envisaged to reduce unemployment rate from 13.9% in the third quarter of 2016 (Q3’16) to 11.23% in 2020, translating to the creation of over 15 million jobs during the plan horizon (an average of 3.7 million jobs per annum).


However, the last “Unemployment Report” of the National Bureau of Statistics, NBS, shows that by the first anniversary of the ERGP the employment situation worsened in 2018 with the Q3’18 at 23.13% and 20.17% underemployment rate, when compared to the level in 2016.


For 2019 and 2020, the research report of the PFI Capital released last week stated: “In 2019, we modeled the unemployment and underemployment rate to be 52.47% which is worse than the level in 2018 as well as the 2019 ERGP projection (29.65%). With COVID-19 induced disruptions, the unemployment and underemployment situation in the country in 2020 is therefore expected to be higher when compared to the previous rates.”


Government Revenue

Government revenue as a percentage of GDP in 2016 was 3.95%. It was projected to be 4.61% and 4.46% in 2019 and 2020 based on the ERGP. However, Financial Vanguard’s findings at the Ministry of Finance show that with government revenue of  N4.77 trillion and nominal GDP of  N144.16 trillion in 2019, FG revenue as a percentage of nominal GDP was 3.31% in 2019. Actual deficit in 2019 at  N4.62 trillion was 148.39% higher than the budgeted deficit of  N1.86 trillion, as such, even though the budgeted deficit as a percentage of GDP was -1.29%, actual deficit as a percentage of GDP was higher at -3.20%.


Economic Diversification

Economic diversification was a key target in the ERGP profile. Financial Vanguard’s findings from the NBS statistics show that about 65% of the revenue to the federation account comes from the oil sector, and the oil sector also contributes more than 70% of Nigeria’s export trade.


In the first quarter of 2020 (Q1’20), the crude oil sector accounted for 72.12% of total exports. Between Q2’17 and Q2’19, total crude oil export was  N31.65 trillion compared to agricultural total export value of  N557.66 billion, indicating a huge imbalance in favour of oil sector contribution.


Analysts view on these figures is that though the economy is diversified production wise, it is far from diversified in terms of revenue generation and earnings.


The ERGP also had an objective of increasing the contribution of Agricultural sector to the GDP by 31.25%, from  N16 trillion in 2015 to  N21 trillion in 2020.


Financial Vanguard findings in the data of the Ministry of Finance show that with a real GDP of  N71.34 trillion in full year 2019 agriculture contribution was 25.16% to the real GDP, translating to about  N17.95 trillion to total real GDP in 2019.


It was also noted that for the agricultural sector to achieve a total contribution of  N21 trillion in 2020, then it needs to grow by 17% in real terms in 2020 given the same level of total real GDP. But with the disruptive impact of COVID-19, most analysts cast doubts on this possibility.


Global competitiveness

The ERGP had envisaged building a globally competitive economy with upgrading of infrastructure.


There was no specific outcome in the Finance Ministry information available to Financial Vanguard but some analysts reports indicated that in terms of transport infrastructure, Nigeria still ranks low compared to her peers in Africa.


They indicated that based on the World Economic Forum (WEF) Global      Competiveness Index (GCI), Nigeria had a GCI score of 31.6 points in transport infrastructure in 2019 compared to Egypt which had a score of 59.1 points, South Africa with a score of 58.7 points, Kenya with a score of 47.2 points, Algeria with a score of 43.4 points and Ghana with a score of 32.7 points.


They also highlighted that while infrastructural stock as a percentage of GDP is 35% for Nigeria, it is 87% in South Africa, 47% in Brazil, 58% in India, and 76% in China.


The National Integrated Infrastructural Master Plan puts Nigeria’s infrastructural investment needs to $3 trillion over the next 30 years, translating to $100 billion to be spent on infrastructure annually. There is no financial projections in the Ministry of Finance indicating a likelihood that such amount could be raised by the country in any foreseeable future.


Analysts, stakeholders’ conclusions

In its review of the ERGP performance, the analysts at PFI Capital stated: “Although the current situation is not near the projections of ERGP, we however believe that the country has recorded improvements in some segments when compared to the levels in 2016. One of such is in the area of ease of doing business which we believe the PEBEC (Presidential Enabling Business Environment Committee) is doing a good job if the global rankings are to go by. “We also highlight that the country needs to improve in terms of job creation and fast-tracking infrastructural development which in our view have a great impact on improving the revenue generation of the government.


“With COVID-19 ravaging the global economy, we expect a set-back in the achievement of the objectives of the ERGP and project the macroeconomic variables to suffer a set back from their levels in 2019.”


President of National Association of Small and Medium Enterprises (NASME), Prince Degun Agboade, noted that the ERGP initiative is a demonstration of    government’s renewed recognition of the importance of SMEs to economic development, but lamented that implementation has been less than desired.


He stated: “There are specific aspects of the ERGP that addresses the concerns for SMEs. Government has put in good efforts to promote SMEs growth but we are not yet there.


“There are some initiatives government has put in place such as the MSMEs business clinics under the office of the Vice President. So, government has woken up with some initiatives and part of it is already yielding fruits such as the registration of companies.


“But as regards financing, not much has been achieved because government has a lot of windows for MSMEs that has not been opened. There is a provision of N250 billion intervention fund under the plan, but there has been no disbursement of the fund to SMEs.


“Broadly speaking, government’s efforts in nurturing SMEs have started well but much still needs to be done in the area of implementation.


“For instance, we have Executive Order 4, which was primarily directed at SMEs in the area of procurement. This requires that anything agencies are buying, they should first consider MSMEs, but we have not seen any execution in that order.”


Also commenting, Dr. Femi Egbesola, National President, Association of Small Business Owners of Nigeria (ASBON), said as good as the ERGP initiative was, it has not had any meaningful impact on small businesses because they were not carried along in the formulation and implementation of the plan.


He stated: “ERGP is expected to develop the SME sector to a point of reducing drastically, our over dependence on crude oil and foreign products.


“Very unfortunately, the narrative hasn’t really changed because the growth of the SME sector still remains stunted. Nigerians’ taste for foreign products still remains high due to the inability of local ones to favourably compete with the imported.


“SMEs are not at the optimum of their capacity yet.    This is largely due to government’s inability to address the real needs and challenges facing SMEs in Nigeria.


“The question is how many small businesses in the past five years have been able to cross the line from small to medium or from medium to large businesses? Can you mention names of new businesses that are growing so exponentially this past half a decade?


“The answer is in the negative. The ERGP is expected to stimulate this kind of growth but the otherwise is the case.


“Very honestly, the initiative is a wonderful model with quite a number of positive achievements but the implementation lacks the inclusion of the real drivers of the policy and this accounts for the low curves.


“Major stakeholders in the small and medium business ecospace aren’t engaged enough in the actualization of this plan.


“Our business needs are in great variant with other parts of the world. So, if we just copy and paste any policy without actively involving those who wears the shoes and knows where it pinches, it just wouldn’t achieve it’s best result. This ERGP is a case in question.”


Commenting on the replacement of the ERGP, a former CBN Deputy Governor and Development Economist, Obidiah Mailafia, stated: “It is an excellent idea to have thought of replacing the ERGP with a new development plan because ERG is running to an end and we need a successor to it.


We are taking a 2050 horizon and then broken down  to  five years. It  must be very comprehensive plan, involving not only macro-economy but key sectors of the economy, industrialization, economic transformation and even regional and urban planning which is often neglected.


“We need a more rigorous approach to economic policy making and economic policy management. We need more creativity because the macro-economic policy has failed. We need a stimulus package and rigorous implementation and we must give careful consideration to the human capital aspect.”