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How reduced budget deficit will challenge the economy – Henry Boyo

In successful economies, budgets are usually laid before the respective national parliaments many months before the commencement of the New Year to provide the lawmakers with adequate time to assess and interpret the potential impact of the proposed budget.  The legislature’s judgment would invariably also be guided by evidence of actual implementation of the outgoing year’s budget, in order to ensure transparency and also avoid duplication in expenditures in the new budget under consideration.

However, since the advent of civil rule in Nigeria, the Federal executive has routinely presented the budget to the legislature between November and December each year; such late submission delayed budget approval until well into the first, and sometimes even the second quarter of the year for which the budget was designed.  It was, therefore, a welcome departure from tradition when the National Assembly received the 2013 budget proposals from the President in early October 2012.  The early submission allowed the legislature to effectively sharpen its oversight functions on a host of government ministries and agencies, and in the process, uncover huge shortfalls between approved budget sums and actual implementation in 2012.  Indeed, some critics maintain that the legislative oversight inspection and fact-finding visits could not have been thorough considering the hundreds of government agencies that needed to be examined within the very limited time available.  Critics have always blamed poor budget implementations on the late passage of budgets.  However, the evidence of large unspent funds in the coffers of government agencies nationwide at the end of each year may not corroborate this observation.

Incidentally, the Minister of Finance and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, had promised, at the beginning of her tenure, to ensure that budgets were promptly laid before the National Assembly, to allow the Legislature and the Executive adequate time to consult and agree on Mr. President’s budget proposals.  In reality, if our annual budgets are based on a rolling three to five year medium term framework, it should be possible to lay the Appropriation Bill before the National Assembly in August/September each year.  Nonetheless, we commend Okonjo-Iweala for the earlier-than-usual budget presentation.  Indeed, if the Appropriation bill receives President Goodluck Jonathan’s assent in the next week or so, late presentation would not be a valid reason for failure to fully implement the 2013 budget.

However, it seems Nigerians may have placed too much faith on the impact of comprehensive budget implementation.  After all, the total capital budget of about N1.7tn is equal to just about $9bn, an amount that is grossly inadequate when compared with the speculated requirement of over $100bn just for provision of adequate power nationwide.  Indeed Okonjo-Iweala had also promised to gradually reduce recurrent expenditure ratio below 70 per cent in steps of between one and two per cent annually!  In this event, however, analysts have observed that it would take between 10 and 20 years to raise capital expenditure above 50 per cent of the total spending.  These analysts contend that such snail speed adjustment is not in consonance with the realities of our severe infrastructural deprivations.  It is argued that our infrastructural predicament requires a surgical procedure with a battle-axe rather than a thin-edged razor blade.  Nonetheless, critics also insist that early assent to the 2013 Appropriation Bill is no guarantee for full budget implementation.

Fortunately, the adoption of a crude oil price benchmark of $79 per barrel instead of the Executive’s insistence on $75 per barrel would mean a daily accretion of about $10m (i.e. $3.6bn annually) to budgeted revenue.  Thus, the earlier projected 2013 budget deficit of almost a trillion naira would fall by over N550bn with the higher benchmark.  The additional $4 per barrel would consequently also reduce the need for additional government borrowing to finance the proposed trillion naira deficit, which evolved from the initial deliberate understatement of crude oil price benchmark.  Indeed, with prevailing interest rates of between 15 per cent and 17 per cent for government borrowings, we would also avert liability for additional debt service charges of over N75bn if crude oil benchmark had remained at $75 per barrel as per the Executive’s proposals.  These huge savings are undoubtedly positive outcomes as our debt burden will fall by over N550bn in 2013!

Then again, they say,  “All that glitters is not gold”. The additional $4 per barrel has an ugly flip side;  the resultant increase in total dollar revenue of over $3.6bn would paradoxically create severe challenges in the economy as the substitution of naira allocations for the increased dollar revenue will exacerbate the spectre of surplus cash (excess liquidity) when over N550bn is lodged into the bank accounts of beneficiaries of the federation pool this year.  This huge cash inflow into the vaults of commercial banks will sustain additional liquidity and increase credit capacity of the banks by over N5tn.  In such event, the Central Bank of Nigeria would ‘altruistically’ step in to deepen the ‘racket’ of mopping up excess liquidity with greater vigor.  Consequently, the CBN would be induced to borrow hundreds of billions of naira it does not need, while paying interest of between 10 per cent and 15 per cent for the joy of just warehousing idle public funds and sequestering the funds from a credit-starved real sector.  The profits of commercial banks and other investors in government securities will ultimately become bloated by an additional sum of over N100bn with such government borrowings.  Thus, the increased dollar revenue stimulated by higher crude benchmark will, ultimately, also deepen our debt burden inexplicably.

We may deduce from the above that our economy appears severely challenged by the prospect of increasing dollar revenue.  Paradoxically, increasing dollar revenue will inevitably impel the CBN’s creation of additional naira, which will ultimately result in the albatross of excess liquidity or surplus cash in the system;  as if on cue the CBN will step in to contain the prevailing ‘surplus cash’ with increased government borrowings at suicidal rates of interests!  The CBN’s response will also crowd out the real sector from available credit in the market, and the resultant high cost of borrowing will further precipitate inflation, industrial contraction and increasing rate of unemployment.

However, the hydra-headed dilemma of increasing dollar revenue and increasing debt and the paradox of increasing wealth and deepening poverty will only be satisfactorily resolved when the CBN ceases substituting naira allocations for distributable dollar-derived revenue.  The above analysis should answer any question regarding the social prospects of the impact of the 2013 budget.

 

Henry Boyo (lesleba@lesleba.com)

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