• Cautions against abuse of fiscal space to borrow
• Oil price may fall to $20 as OPEC ditches quotas
Omololu Ogunmade, Damilola Oyedele, James Emejo and Jemima Bolokor in Abuja
The federal government has earmarked N500 billion for the implementation of its social
security scheme for unemployed young graduates under the 2016-2017 Medium Term
Expenditure Framework (MTEF) and Fiscal Policy Strategy (FPS) submitted to the
National Assembly on Tuesday.
The N500 billion projection comprises the amount to be spent on the government’s
school feeding initiative as well as conditional cash transfers of N5,000 to “the most
vulnerable persons in the society”.
According to the MTEF, the scheme, which will commence in collaboration with state
governments, will start as a pilot, following which the federal government will later seek
the support of donor agencies.
“The federal government will collaborate with state governments to institute well-
structured social welfare intervention programmes such as school feeding programme
initiatives, conditional cash transfers to the most vulnerable and post-NYSC grant.
“N500 billion has been provisioned in the 2016 budget as social investment for these
programmes.
“These interventions will start as a pilot scheme and work towards securing the support
of donor agencies and our development partners in order to minimise potential risks,”
the document stated.
The federal government also explained that in the future, a broader social welfare
scheme would be created to cater for the larger population which it said would include
the poorest and most vulnerable Nigerians “upon evidence of children’s enrolment in
school and evidence of immunisation”.
In order to legalise the scheme, a bill seeking to provide a framework for a social
security scheme passed through the first reading in the Senate last week.
However, the government only provided N63.29 billion as fuel subsidy in 2016,
compared to the N42.20 billion budgeted in the 2015 fiscal year but failed to make a
provision for emergency subsidy as was the case in the 2015 budget when N217 billion
was provided for emergency petrol subsidy.
The government also made no allocation for kerosene subsidy, but budgeted another
N150 billion as arrears for fuel subsidy claims carried over from 2015.
The government has spent N402 billion on subsidy in 2015. This amount was part of
the N522 billion recently approved by the National Assembly in a supplementary budget
sent by President Muhammadu Buhari.
It put the Niger Delta Development Commission (NDDC) share of the Excess Crude
Account in the Subsidy Reinvestment Programme (SURE-P) in 2016 at N241.5 billion.
It also retained the Amnesty Programme in the Niger Delta with a projection of N20
billion, down from N63.2 billion spent in 2015.
The document also contained the report of N350.3 billion as projected recoveries by
the federal government as misappropriated funds.
The breakdown of the recoveries showed that the government is projecting N137.90
billion from strategic alliance contracts entered into by the Nigerian Petroleum
Development Company (NPDC) and some oil firms; another N162.43 billion from the
Nigerian National Petroleum Corporation (NNPC) and Central Bank of Nigeria (CBN)
while the balance of N50 billion is expected from other misappropriated funds.
It also projected a reduction in the National Assembly budget from N120 billion this year
to N115 billion in 2016.
The federal government also projected N1.2 trillion in 2016 as domestic borrowing and
N635 billion as foreign borrowing.
Domestic borrowings were however reduced to N1 trillion and N1.080 trillion in 2017
and 2018 while N416.82 billion and N433.650 billion was projected as foreign
borrowings for 2017 and 2018 respectively.
The government also plans to spend N1.307 trillion for domestic debt service
obligations and N54.48 billion to service foreign debt.
The document further puts the country’s debt relative to its gross domestic product
(GDP) at 12 per cent, adding that the figure is one of the lowest in the world. It adds
that “the government will ensure additional borrowing is kept within prudent limits and
channelled towards infrastructure”.
According to the document, the N6.077 trillion budget with a revenue target of N3.82
trillion, projects a deficit of N2.22 trillion or 2.16 per cent of GDP, and projects that
recurrent expenditure will drop from 84 per cent in this year’s budget to 70 per cent in
2016 while capital expenditure of 16 per cent in the 2015 budget was raised to 30 per
cent in 2016.
The revenue target of N3.82 trillion shows that value added tax (VAT) in 2016 will
contribute N67.7 billion from the N67.5 billion projected in 2015.
The government is also projecting an average growth rate in 2016 of 4.37 per cent and
expects this to increase by 10 per cent year-on-year through 2017 to 4.61 per cent in
2018.
The government also said it would continue to prune the size of its ministries,
departments and agencies (MDAs) without compromising efficiency, just as it ruled out
the possibility of increasing salaries and allowances of workers as well as pensions and
other benefits in the next fiscal year.
The government also explained the rationale behind the implementation of treasury
single account (TSA), saying: “Multiplicity of government accounts had made it difficult
to have an accurate picture of public financial resources.”
It added that it would pursue macro-economic policies and a sector growth strategy
that would achieve fiscal stability and improve non-oil sector competitiveness.
The government also said its fiscal policy would support a low interest rate regime as
well as low inflation through strict adherence to target levels of the fiscal deficit, adding
that fiscal incentives would encourage industrial and manufacturing sectors and attract
new domestic and foreign investments.
Meanwhile, the World Bank yesterday expressed concern over the impact of the huge
cost of fuel subsidies on the Nigerian economy in the face of the economic slowdown
and dwindling oil revenue, adding that the subsidy bill was likely to rise over time
irrespective of whether oil prices remained low or rebound.
World Bank lead economist, Mr. John Litwack, who said the country spent $35 billion
on fuel subsidy between 2010 and 2014, argued that the benefits of subsidy in Nigeria
appeared quite limited amid high costs.
He added that fuel subsidy obligations in 2015 were expected to account for 18 per
cent of all oil revenue or the equivalent of 25 per cent of the federal budget. He said
the sharp decline in oil prices called for a major fiscal adjustment to lower oil revenue.
According to him, the benefits of petrol subsidy had become less evident, given that
the price of oil is lower while enforcement at the pump had weakened.
Litwack said reports of widespread subsidy fraud are costly to the reputation of the
government while price distortions encourage overconsumption of fuel.
Speaking in Abuja during the launch of the third edition of Nigerian Economic Report
(NER) produced by the bank’s country office, Litwack added that the subsidy scheme
appeared to have only benefitted fuel importers and the rich rather than the citizenry.
The NER report assessed the cost and benefits of fuel subsidy against the current
prospects for oil prices and revenue, and posited that the scheme had modest benefits
for majority of Nigerians at a rather high cost.
He said: “There is a strong tendency for the cost of the fuel subsidy to increase over
time as increasing domestic demand for petrol outpaces growth in oil output or
revenues.”
The report stated that the payment of $35 billion in fuel subsidy between 2010 and
2014 partly accounted for why the country could not build its fiscal reserves including
the Excess Crude Account (ECA) which could have shielded it from the recent oil price
shock.
Furthermore, Litwack warned of consequences of the decision by the fiscal authorities
to hold on to the exchange rate rather than allow the naira to depreciate.
He said the reluctance to devalue the currency could be counterproductive in the long
run.
He further cautioned the federal and state governments not to abuse the fiscal space to
borrow in view of the country’s low debt to GDP ratio.
He said: “The reason there is pressure on the exchange rate is one, there is a lot of
speculative movement on the exchange rate. Some people expect there is going to be
a devaluation.
“Secondly, there are fundamentals: if there is an imbalance of payments or more money
leaving the country than coming in because of the trade imbalance or credit crunch,
then that’s another reason why there is a pressure on the exchange rate.”
He acknowledged that the fiscal and monetary authorities would prefer to do what they
can to address speculative demand.
“But when fundamentals move, trying to hold on to the exchange rate in the end can be
counterproductive; you could end up losing a lot of reserves. That’s the kind of area
any country including Nigeria needs to be focused on,” he added.
Responding to questions from the media, the World Bank economist said: “It’s quite
natural that when oil prices are declining, the expectations about oil prices are much
lower, it is quite natural that the naira should depreciate because oil price is a major
fundamental for Nigeria in terms of its external balance. It’s a natural phenomenon, so if
you try to counteract it, it can be counterproductive.”
Although he commended the central bank for some of the policy initiatives to reduce
pressure on the naira, he said holding on to the exchange rate could backfire.
According to him, “The logic of why the Central Bank of Nigeria is doing this is clear but
I think there’s also a cost to this kind of extensive policy and Nigeria should consider
this seriously.
“It certainly has a negative effect on the general attitude of investors towards Nigeria if
this kind of regulation can change very quickly to alter profitability and that’s a one big
cost.
“Another cost, as I mentioned, is a budgetary crisis. If the Federation Account is now
getting N240 for every one oil dollar, there will be a lot more money for spending,
rather than at N197.
“The depreciation of the naira can benefit budgets in situations like this and one can
take the Russian Federation which is also an oil dependent country, they have also
experienced a big oil shock, and they also have much slower growth, even recession.
“But they don’t have a budgetary crisis per se because the currency depreciated very
strongly along with the decline in oil prices.
“It’s also the case that sometimes, markets know better than the officials whether there
is potential for import substitution, for example, a weaker exchange rate gives the
market opportunity to identify exactly where import substitution might be profitable.
“It is clear why the central bank has adopted the policies and adopted what it’s trying to
accomplish, but I think that seriously needs to be weighed against the cost and
seriously considered in Nigeria.”
Litwack admitted that though the bank was not in a position to force recommendations
on the government on both fuel subsidy and exchange rate issues, it nevertheless had a
compelling obligation to put the facts on the table.
The NER report showed that the fuel subsidy burden could grow steadily from 18 per
cent of oil revenue to 35 per cent by 2018, while distributions to budgets fall to 29 per
cent.
In its short term assessment, it noted that the outlook for the country remained difficult
due to expected low oil prices, arguing that even if oil prices recovered, government oil
revenue should continue to decline in the medium-term relative to the size of the
Nigerian economy, further necessitating critical fiscal adjustment.
The report said investors are willing to bring considerable investment into the country if
they received credible signals from the new administration of commitment to policy
directions and regulations consistent with strong private sector growth.
It further assessed Nigeria’s natural gas sector and called for a regulatory framework to
boost the sector.
But with the federal government setting a 2016 budget oil benchmark of $38 a barrel,
current forecasts show that oil prices could fall as low as $20 per barrel next year, as
the Organisation of Petroleum Exporting Countries’ (OPEC) decision to abandon a formal
production quota exacerbates a bulging supply glut, reported Reuters yesterday.
Speaking as the price of a barrel of Brent crude, the benchmark international contract,
slipped 5.2 per cent to $40.75 in New York, the lowest since February 2009, Ole
Hansen, head of commodity strategy at Saxo Bank, said it was “difficult to rule out
anything”.
“We could see a short-lived phase of all-out panic, which could trigger a free fall
situation,” he said. “With no signs of non-OPEC producers, such as US and Russia,
cutting back, the near-term outlook for oil remains very challenging indeed.”
A meeting of the OPEC cartel in Vienna broke up on Friday with no agreement between
members on output levels.
The price of crude has already plunged nearly by 64 per cent since June 2014, when a
barrel of Brent cost $114, after Saudi Arabia opted to pump at near-record levels to
maintain market share while putting pressure on producers in North America.
Hansen said that downward pressure on crude oil prices would intensify in the first
three months of 2016 because of increased output from Iran and a seasonal rise in US
stockpiles.
Goldman Sachs also warned that OPEC’s inconclusive meeting could trigger further falls,
to as low as $20 per barrel, and said that prices were now likely to remain “lower for
longer”.
There was disagreement between OPEC’s 13 members on how to accommodate the
extra Iranian oil expected to flood the market when Western sanctions over the
country’s nuclear programme are lifted, probably in the first or second quarter of next
year.
Iran has refused to consider reining back its production until it reaches its pre-sanctions
level of four million barrels per day. Saudi Arabia has no plans to curb its own
production without cooperation from Iran, Iraq and others.
“The market is taking on board the fact that Saudi Arabia’s production strategy is long
term and they are simply not going to cut,” Michael Wittner, an oil analyst at Société
Générale in New York, said.
OPEC’s present output is 31.5 million barrels per day — one third of the world’s oil and
well above its previous official quota of 30 million barrels.
The group acknowledged that there was little it could do to shore up the market as
long as non-OPEC producers continued to pump at near-record levels.
Emmanuel Ibe Kachikwu, Nigeria’s Minister of State for Petroleum and President of
OPEC, said that the group was in “wait and watch” mode until its next meeting, in June.
Uncertainty about Iran’s production was a driver for the decision not to make changes,
he said.
Oil has not traded at its present levels since the collapse of Lehman Brothers in 2008
sent financial markets into a tailspin. The latest price fall came as the European Union
said yesterday that it was dropping an investigation into alleged oil price manipulation
during the financial crisis by groups, including Shell and BP.
Figures to be published this week by the International Energy Agency (IEA) are likely to
point to a swelling global glut of oil, which already stands at about three billion barrels.
HIGHLIGHTS OF 2016 BUDGET
• FG to spend N6.077tn, projects revenue of N3.82tn
• Budget deficit raised to N2.22tn or 2.16% of GDP
• Recurrent expenditure slashed to 70%
• Capital spending raised to 30%
• To borrow N1.8tn
• Projects recoveries of N350bn misappropriated funds
• To spend N63.3bn on petrol subsidy and N150bn carried over from 2015
• Scraps subsidy on kerosene
• Pegs oil benchmark at $38/bl, exchange rate at N198/$
• Projects GDP growth rate of 4.37%
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