How realistic are the 2017 budget assumptions?

History was made on October 4 2016 when the Senate President, Bukola Saraki, acknowledged receiving from President Buhari the 2017-2019 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) for consideration and approval by the National Assembly. Although the submission date this year still fell short of the deadline required by the Fiscal Responsibility Act (FSA) 2007, the Minister of Budget and National Planning and his team deserve commendation for getting the document out much earlier than the situation last year when the MTEF/FSP 2016-2018 was forwarded in December 2015. As mandated by Section 11 of the FRA 2007, the MTEF/FSP which provide the basis for annual budget planning is expected to be submitted to the National Assembly by the President ‘’not later than four months before commencement of the next financial year’’.

The MTEF/FSP 2017-2019 projects an aggregate expenditure of about N6.86 trillion for 2017 fiscal year, as against the N6.06 trillion provided for in the 2016 Appropriation Act, with the federal government retained revenue estimated at N4.17 trillion for 2017. These estimates and their underlying assumptions have since received the nod of the Federal Executive Council. As our Lawmakers begin deliberations on the working document for the 2017 budget, the level of reliability that could be placed on the estimates will depend very much on whether or not the underlying assumptions are considered realistic.

The new MTEF uses an oil price benchmark of $42.50 per barrel higher than the $38 per barrel for 2016. Against the backdrop of the recent deal by OPEC member countries to cut output with a view to pushing up prices which have ranged between $40 and $50 per barrel in recent time, oil price of $42.50 per barrel seems realistic. Besides, not a few reputable international organizations are upbeat about oil price performance in 2017. For example, the US Energy Information Administration (EIA) forecasts ‘crude oil prices to average $52/b in 2017’. Similarly, Goldman Sachs is optimistic that that the ‘OPEC output deal could add $10 to crude prices’.

However, government oil receipt is a function of not only the international oil price but also domestic oil output. The new MTEF retains the 2.2 million barrels per day production of crude oil used for 2016 budget in spite of the fact that this year has been characterized by adverse output variances owing chiefly to militant activities in the Niger Delta region. The output forecast is therefore based on the assumption that government will tackle the challenges of vandalism and oil theft to reduce their negative impact on production.

The government is targeting a real GDP growth of 3.02 per cent in 2017 lower than the target of 4.37 per cent for 2016 fiscal year. The economic recession following two consecutive negative GDP growth rates of 0.36 per cent and 2.06 per cent in the first and second quarters of 2016 respectively made nonsense of the 2016 growth target. The International Monetary Fund recently cut its 2017 economic growth forecast for Nigeria owing to ‘temporary disruptions to oil production, foreign-currency shortages due to a fall in crude receipts, lower power generation and weak investor confidence’. According to the Fund’s World Economic Outlook Report, Nigeria’s economy would contract by 1.7 per cent this year and expand by just 0.6 per cent in 2017. However, the World Bank expects economic growth to rise to 3.5 per cent in 2017 down from an earlier estimate of 5.3 per cent.

By and large, whether the target GDP growth for 2017 will materialize will depend on the extent to which oil revenue target is met. Much as non-oil GDP growth is expected to have a significant impact on overall economic growth, virtually every sector of the economy is in a sense powered by oil revenue not least because the government and not the private sector is on the driving seat. Improvements in infrastructure and power, major growth drivers, can only come about when the government earns sufficient foreign exchange to invest in these critical areas. Unfortunately, oil receipts account for over 90 per cent of government revenue and this narrative is not one that lends to change in the near term.

The 2017- 2019 MTEF projects an average exchange rate of N290 to the US dollar as against the N197 in 2016. With no end in sight to speculative attacks on the naira coupled with the persistent calls by the World Bank, IMF and the European Union for reforms in the economy especially in the forex market, a euphemism for naira devaluation, an exchange rate of N290 to the US dollar appears unrealistic. According to recent reports, the European Union is advising Nigeria to devalue the naira while the World Bank is making the issue of economic reforms a condition for granting any facility to Nigeria.

The IMF is currently dangling a zero-interest loan carrot for ‘soft infrastructure’ to Nigeria and other low income countries that are ready to toe the IMF suggested reform path. If the country falls for this bait, the consequence on the value of the naira will not be palatable- at least in the near term. Be that as it may, the use of N290 to the dollar is not without its merit. Adopting a higher exchange rate in search of the true value of the naira, which is somewhere between the interbank rate and the parallel market rate, will signal an intention to devalue the naira in 2017 by the monetary authority thereby exposing the economy to all manner of vulnerabilities.

The new MTEF puts headline inflation forecast at 12.92 percent in 2017. This looks unrealistic. Headline inflation accelerated to 17.6 per cent in August from 9.6 in January 2016 according to the National Bureau of Statistics. The key drivers of the inflationary pressure namely electricity shortages and weak infrastructure will take some time to fix. What is more, the pass-on effect of strong forex demand will continue to be felt on prices of commodities. A recent report by Trading Economics lends credence to this assertion. In it, ‘inflation rate in Nigeria is expected to be 21.50 percent by the end of Q4 2016 and stand at 20.60 per cent by end of Q3 of 2017’.

All said, it is vital to recognize that a budget is principally a financial plan which is based on certain assumptions governed by the principle of conservatism. In view of the structural defects in the Nigerian economy, the baseline assumptions contained in the new MTEF with respect to the 2017 budget are tied to the oil revenue target. While the $42.5 per barrel oil price benchmark may be considered conservative, the 2.2 million barrels per day oil output target, although ambitious given present realities, may have been influenced by the desire to protect the country’s OPEC oil quota.

Therefore, the oil revenue parameters seem justified. By extension, oil revenue targets are attainable but this largely depends on how the government tackles the challenge of militancy in the Niger Delta. The dialogue option, as opposed to the use of force, holds a lot of promise. The ball is now in the court of the National Assembly to expedite action on the consideration and approval of the MTEF/FSP 2017-2019 to enable the Executive arm conclude the Appropriation Bill. In view of the ugly experience of the 2016 budget process, the least Nigerians expect from all the key actors is a quick conclusion of the stages of formulation, passage and signing into law of the 2017 budget proposals.

Uche Uwaleke, a Fellow of ICAN, is an Associate Professor of Finance and Head of Banking & Finance Department at Nasarawa State University Keffi.