The 2016 Nigerian budget: a new window of national borrowing

A new window of national borrowing
A new window of national borrowing

The federal government’s new Medium Term Expenditure Framework (MTEF) clearly demonstrates that Nigeria will shop aggressively for development seed funds both locally and internationally over the next three years. Hughes Nneike investigates what this will mean for the local economy...

MTEF is a government-produced economic document that links the short-term imperatives of macro-economic stabilisation with the medium and longer term demands on the national budget. The document, which provides an insight into the N6 trillion ($30 billion) budget, shows that with a revenue target of N3.8 trillion, the N2.2 trillion national deficit – equivalent to 2.1 per cent of GDP – must be urgently addressed.

The benchmark oil price was pegged at $38, or 28 per cent lower than the $53 used as a benchmark oil price in the 2015 budget. With the sharp decline in projected foreign exchange earnings through oil sales, most experts argue that the government must also sustain an import exclusion policy and the weekly allocation of foreign currencies.

The revenue target of N3.8 trillion shows that value added tax will contribute N67.7 billion this year, up from the N67.5 billion projected in 2015. The government is also forecasting an average economic growth rate in 2016 of 4.4 per cent and expects this to increase to 4.6 per cent by 2018.

The Niger Delta Development Commission’s share of the Excess Crude Account in 2016 has been pegged at N241.5 billion. The budget also retains the Amnesty Programme in the Niger Delta (whereby militants are disarmed and rehabilitated with a stipend, job training and a micro-credit loan) with a projection of N20 billion, down from the N63.2 billion spent in 2015. The document also lists the sum of N350.3 billion as projected recoveries by the federal government owing to misappropriated funds.

The breakdown of these recoveries shows that the government is projecting N137.9 billion from strategic alliance contracts entered into by the Nigerian Petroleum Development Company and a number of oil firms; another N162.4 billion from the Nigerian National Petroleum Corporation and the Central Bank of Nigeria; while the balance of N50 billion is expected from other, miscellaneous misappropriated funds.

It also projects a reduction in the National Assembly budget from N120 billion last year to N115 billion in 2016. The federal government also forecasts N1.2 trillion in 2016 as domestic borrowing and N635 billion as foreign borrowing. Domestic borrowings will, however, be reduced to N1 trillion and N1.08 trillion in 2017 and 2018, while N416.8 billion and N433.6 billion are projected as foreign borrowings for 2017 and 2018 respectively.

The government also plans to spend N1.3 trillion on domestic debt service obligations and N54.5 billion to service foreign debt. The document further puts the country’s debt relative to its gross domestic product at 12 per cent, adding that the figure is one of the lowest in the world.

“The government will ensure additional borrowing is kept within prudent limits and channelled towards infrastructure,” it notes. The government also explains the rationale behind the implementation of the treasury single account (TSA), commenting: “A multiplicity of government accounts has made it difficult to have an accurate picture of public financial resources.”

It adds that it will pursue macro-economic policies and a sector growth strategy designed to achieve fiscal stability and improve non-oil sector competitiveness. The government also says that its fiscal policy will support a low-interest rate regime, as well as low inflation, through strict adherence to target levels of the fiscal deficit, adding that economic incentives will encourage the industrial and manufacturing sectors and attract new domestic and foreign investment.

The MTEF is seriously silent on the source of funding for the proposed budget in 2016, especially the staggering N2.2 trillion deficit; equally, it fails to explain what the government would do if the projections therein increase or fall short of their original targets. From the spirit and letter of the document, some experts are of the opinion that the government is likely to shore up earnings from the non-oil sector and sustain the ongoing reduction of its ministries, departments and agencies.

Other arguments include the viewpoint that the government will, within the time frame of the MTEF, engage in aggressive domestic and foreign borrowing, increase VAT, sustain tighter control of foreign currency and divert subsidy savings into the social security programme.

Professor Sherifadem Tella of Olabisi Onabanjo University in Ago Iwoye, Ogun State, says that the government’s decision to focus on increasing the non-oil sector of the economy might lead to crowding out investments and over-taxation. Tella, who teaches economics, says that incremental budgeting amid dwindling revenue from crude oil makes it very difficult for the government to meet set targets in the provision of infrastructure and the creation of a sustainable social welfare scheme.

“Although the MTEF gives the government ample opportunity to adjust to the global and domestic economic challenges, some of the aims and set targets of the economic framework are unrealistic. We appreciate that the federal government has a sentimental attachment towards providing dividends of democracy, but it needs to be more conservative in budgeting,” says Tella.

According to Tella, MTEF clearly show that three things, ie making good social security provisions, bolstering non-oil revenue and external borrowing, are paramount to the federal government in meeting the objectives of the 2016 budget. He also expresses serious concern that the pressure on government to deliver on the APC campaign promises (the party of recently elected leader Muhammadu Buhari) might lead the nation back to a pre-1999 international debts scenario.

Tella argues that the budget is unrealistic in the context of the likelihood of Buhari’s government undertaking aggressive international borrowing amid global economic challenges. “Borrowing is good, but the current situation we find ourselves in, with crude oil likely to fall below $30 a barrel, is also likely to increase our burden and inability to meet debt obligations.”

He adds: “My suggestion in the face of the global economic challenges, and given the opportunities for adjustment provided in the METF, is for the federal government to aggressively prioritise and tackle those projects identified by this document and take them to their logical conclusion. This is the kind of strategy that will sustain Nigerians’ interest in the change mantra.”