AMID a bearish economy and dark clouds of recession on the horizon, the 2021 N13.08 trillion-draft budget unfolded by the President, Major-General Muhammadu Buhari (retd.), sets the ambitious target of reflating the economy. Tagged ‘Budget of Economic Recovery and Resilience’, it however offers no radical departure from the weak budgeting practices of the past, relying largely as usual, on oil and gas revenues, borrowings and is top heavy on recurrent expenditure. With hefty deficits, debts and shaky revenue assumptions, the government will need to demonstrate uncommon fiscal discipline and bold measures to realize and exceed revenue and infrastructure targets to save the economy from a worse slump in the coming year.
The economy is in a bad shape and the regime appears to have run out of ideas. Having contracted by -6.1 per cent in Q2 2020, official figures for Q3 are expected to confirm further GDP contraction, thus tipping the country into another recession as Buhari acknowledged. The GDP is forecast by the IMF to shrink by -4.2 per cent by year-end. Inflation hit 13.22 per cent in August, said the National Bureau of Statistics, the highest in 29 months; and unemployment at 27.1 per cent; 34.9 per cent among the youth aged 15-34. Exports are down, agriculture, employer of almost 50 per cent of the labour force, is depressed by insecurity and floods along with poor infrastructure – headlined by power shortages, shabby roads and social services. The combination of declining revenues since mid-2014, poor economic management and the COVID-19-induced global recession has rendered the economy more fragile. With this, and as a component of the 2021-2023 Mid-Term Expenditure Framework and Fiscal Strategy, the 2021 budget ought to be crucial to recovery; instead, it looks rather bleak.
On the positive side, the early presentation, a departure from the past, offers hope of early passage and a return to the January-December spending cycle. The increase in the capital vote to N3.85 trillion, 29.43 per cent of total compared to N2.47 trillion (23.02 per cent in 2020), a 43 per cent rise, though far short of the 40 per cent prescribed in a bill now before the National Assembly, is welcome. So is the plan to produce a tax expenditure statement as stipulated in the Fiscal Responsibility Act.
But the budget is fraught, laden with self-inflicted landmines. First, the basic assumptions: the 1.86 million barrels daily crude production that includes 300,000-plus of condensate, as well as oil price of $40 per barrel, though consistent with current levels, leaves the country at the mercy of a volatile market at a time of global turmoil. More uncertain is the N379 per $1 anchor; the parallel market rate that is a more realistic reflection of value is N450-N462 and this is restrained by infusions of dollars by the Central Bank of Nigeria in the market, drawing from shrinking foreign reserves that stood at $35.7 billion mid-September.
This defence of the naira is also threatened by increasing pressure from the World Bank/IMF leveraging on a promised $3.25 billion lifeline. Inflation rate assumption of 11.95 per cent appears unrealistic in view of the current 13.22 per cent rate, poor harvest and hiked energy prices. The 3.0 per cent projected GDP growth rate clashes with the modest 1.7 per cent forecast by the IMF.
But these pale compared to the debt servicing outlay of N3.12 trillion and deficit of N5.2 trillion. Dangerously, the debt-to-GDP ratio at 18.2 per cent has climbed above the threshold set by the FRA while Fitch, the rating agency, projects the debt-to-revenue ratio to rise dramatically from the 99 per cent recorded in Q1. The planned N4.8 trillion in new borrowings are expected to be higher given the gap in aggregate available revenue of N7.88 trillion and the over N8 trillion projected.
While the budget plans to complete ongoing capital projects, raising funding for works, transportation, agriculture, health and education, the critical tonic needed to open up the economy, downsize the cost of governance and maximize revenue sources are absent. It is scandalous that even making allowance for a new wage bill, the government has failed to cap personnel costs that will take N3.76 trillion or 28.75 per cent of total spending that, together with debt servicing, will drain 52.6 per cent or N6.88 trillion. It continues the lazy, wasteful and corruption-driven “envelope” system where sums are simply pasted on previous years’ sum-heads, instead of the more scientific, cost-saving “zero” budgeting that is based on needs and available resources.
That only N205.15 billion (less than $1 billion at current exchange rate) is expected from privatization proceeds, demonstrates that the regime has failed to log on to the imperative of opening up the economy through a transparent privatization programme to sell its refineries, steel and other non-performing oil and gas assets. It should also open up the railways, ports and airports for foreign and local investment.
We need to facilitate the transition to a more diversified economy. For instance, the Norwegian fiscal policy framework insulates the budget from fluctuations in oil and gas revenues. The state’s net cash flow from petroleum activities is transferred in full to the Government Pension Fund Global, in addition to the investment returns from the Fund itself. Therefore, improving taxation and revenue collection should be a priority. Efficient tax collection will raise the meagre 6.1 per cent tax-to-GDP ratio and could bring additional N14 trillion according to Bode Agusto, a former federal budget adviser. The cost of governance needs to be slashed drastically, beginning with reducing the size of the Presidential Air Fleet, the travels and recurring spending on luxury vehicles by officials. Buhari should lead by example.
At N31.01 trillion, debt is rising exponentially with little to show. While debt cannot be totally avoided, it should be targeted at key infrastructure that will boost production, jobs, income and help diversify exports. To avoid taking external loans, the Egyptian government raised $8.5 billion in bonds from its citizens to build a new channel in the Suez Canal, completed it in one year and is projected to bring $5.8 billion annually to the economy. Ethiopia’s $4.8 billion Grand Renaissance Dam is being financed by government bonds and private donors.
Government spending can create jobs and it should. Funds should be directed toward a variety of specific job-creation efforts, especially in view of the explosive youth unemployment crisis. It is argued that even when economic times are bleak, there are doable steps that a government can take that make a difference to get the economy back on a path of growth and job creation.