BUDGETS: Deficits with benchmark surpluses: Profligacy or sabotage? – by Henry Boyo
The debate on the appropriate crude oil price benchmark for the 2013 budget has lately attracted numerous interests in the National Assembly as well as the media. The government’s Economic Management Team has stoutly defended the adoption of $75/barrel as proposed benchmark for crude oil sales. Indeed, the Finance Minister and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, and Governor of the Central Bank of Nigeria, Lamido Sanusi, have insisted that the economy will be ‘hurt’ if the budget benchmark is pitched above $75/barrel. Conversely, the National Assembly is in insistent that $75/barrel is unduly conservative, and have instead, recommended $78 – $80/barrel and a crude output benchmark of 2.53 million barrels per day.
The Executive’s insistence on $75/barrel is obviously predicated on fear that a higher budget benchmark, if realised, will instigate an unhealthy cash surplus. Such increasing excess liquidity, it is argued, will fuel inflation with the inevitable ultimate burden of a bloating government debt arising from the extremely high cost of CBN’s sale of treasury bills to reduce the systemic excess cash. In essence, higher crude price/output benchmark, if realised, will expectedly swell government revenue and reduce or totally eliminate the possibility of budget deficit. The EMT appears worried that such fortuitous increase in actual revenue will result in a cash surfeit, when CBN substitutes naira allocations for the dollar income; the resultant liquidity flush would further fuel the already destabilising double-digit inflation rate in the system and deepen poverty nationwide.
In order to avert such inflationary threat, the CBN would be forced to continue its excess cash reduction process by traditionally crowding out the real sector from bank credits with its mouth-watering double-digit interest rates for government’s risk-free borrowings for funds, which are inevitably kept idle in vaults or other similar accounting records!
Regrettably, in spite of decades’ long burden of excess liquidity and CBN’s debt-inducing reflex cash mop-ups, inflation has remained largely untamed at between 10 and 15 per cent!
The substance of the lawmakers’ argument, however, is simply that it does not make economic sense to deliberately understate crude price and output benchmarks, and create deceptive ‘ghost’ deficits for fear of excess liquidity and inflation.
The National Assembly maintains that such deliberate understatements of benchmarks have encouraged the enactment of huge annual deficits of over N500bn in federal budgets in recent years. According to the 2013 budget proposal, it would require over N590bn (about 13 per cent of total expenditure; highest sectoral allocation) just to service (not repay) over N6tn government debts primarily incurred for the purpose of addressing ‘ghost’ deficits induced by understatement of budget benchmarks!
Curiously, however, actual crude prices and outputs have rarely fallen below budget benchmarks in so many years. Indeed, 2012 crude oil price and output have significantly exceeded the budget benchmarks of $72/barrel and 2.48 million barrels/day. In reality, crude oil prices have hovered between 90 and $115/barrel, while the Minister of Petroleum Resources has often gleefully reported outputs in excess of budget benchmarks. Inexplicably, in spite of these fortuitous benign revenue inflows, President Goodluck Jonathan still alluded to a whooping deficit of N744bn in his review of the existing 2012 budget.
Instructively, about N700bn has already been borrowed by the Debt Management Office through its high-yielding (15 – 17 per cent) bond sales this year, presumably to cover the 2012 ‘ghost’ deficit. It is amazing that the additional revenue brought about by higher than benchmark crude and output receipts was never harnessed to offset the serial deficits over the years. Inexplicably, benchmark surplus revenue were first warehoused with little or no attendant yield, in an unconstitutional so-called excess crude account; subsequently, a part of these funds was designated as part of another illegal account called ‘Sovereign Wealth Fund’. In spite of the billions of dollars shared from these accounts this year, over $15bn still stands as credit balance.
Over the years, the main beneficiaries, of course, of such oppressive government borrowings are the commercial banks (which have also been the major beneficiaries of government bailouts and other supportive, sometimes anti-people policies), and those other international investors, who naturally find the bonanza of double-digit returns on their purchases of Nigerian government Treasury Bills and bonds more rewarding than the relatively ‘miserly’ returns for such risk-free investments in competitive economies elsewhere!
Inexplicably, the DMO (read as Debt Creation Office), which is responsible for putting a sustainable debt management and repayment structure in place, has apparently not shown such degree of responsibility. In this event, President Jonathan’s 2013 budget proposal includes N100bn sinking fund annually for the eventual repayment of over N6tn direct government debt. Interestingly, at this rate of repayment, the debt may ultimately be liquidated in about 60 years from now by the next generation. It may take longer, if the trillions of naira borrowed by the Assets Management Company of Nigeria are also factored in.
Paradoxically, of course, such a level of debt would have been avoided in the first place, if less conservative crude benchmarks were adopted for revenue projections in our annual budgets; the illusion of bourgeoning revenue surplus would also have been averted.
Alternatively, the debts would have been avoided if the ghost deficits induced by understatement of crude benchmarks were ultimately funded from actual surpluses above conservative revenue projections. It smacks of fiscal rascality to have consumed these surpluses and still borrow at atrocious rates of interest to offset the ‘ghost’ deficits.
Incidentally, if budget benchmarks ultimately turn out to be overstated, such that actual revenue fell below projections, the credit market would still be available, anyway, to accommodate any necessary borrowing to cover the shortfall!
Indeed, with our creditworthiness well bolstered by huge oil and gas reserves as well as substantial mineral deposits and huge demand base, it is inappropriate to incur sovereign debt at such oppressive cost. So, ultimately, apart from funding the vast profitability of the banks and other speculative domestic and foreign investors, there is no discernible advantage for understating budget crude oil benchmarks.
In recognition of the reality of the above analysis, one may be tempted to see the fervent pleas of members of government’s economic team for understated budget benchmark as insincere and unpatriotic.
Sadly, we may, once again, be confronted with the choice of whether or not to promptly erase the huge avoidable debt overhang by dipping into our reserves to avert the oppressive burden of heavy debt service charges.
Henry Boyo, via Punch
