2018 budget proposals, facts behind the figures
The key parameters and assumptions adopted for the 2018 budget of consolidation as set out in the 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper include crude oil price benchmark of US$45 per barrel, oil production estimate of 2.3 million barrels per day, exchange rate of N305/US$, inflation rate of 12.4 percent and real GDP growth of 3.5 percent. Based on these assumptions and macroeconomic framework, total revenue of N6.607 trillion is projected to fund aggregate expenditure of N8.612 trillion resulting in a deficit of N2.005 trillion (or 1.77 percent of GDP) to be financed mainly by domestic and external borrowing.
As the National Assembly gets set to consider the budget proposals presented by President Muhammadu Buhari, an appreciation of the facts behind the figures will help facilitate early passage of the budget and avoid the kind of delay that characterized the 2017 budget. It will be recalled that during the consideration of the 2017 budget proposals, the Legislators had jerked up the oil price benchmark proposed by the Executive arm from US$42.5 per barrel to US$44.5 per barrel, an action which took a great deal of time to get the buy-in of the Executive.
This time around, the National Assembly will also be faced with the option of increasing the reference oil price above the proposed US$45 per dollar. The arguments in favour of an increase appear strong and persuasive and on this score, the lawmakers will most likely get the support of the State Governors for obvious reason: an increase will translate to more money for Constituency projects and increased allocations to States and Local governments. Also, a higher oil price benchmark will narrow the budget deficit and reduce the size of the borrowing required to finance the deficit.
These arguments are reinforced by the favourable oil price forecasts by reputable international energy agencies such as the US Energy Information Administration which has forecast Brent spot prices to average US$56 per barrel in 2018. Similarly, the World Bank expects oil prices to reach an average of US$60 per barrel in 2018 from US$55 per barrel this year, a reflection of upward pressure on prices from steadily growing demand, output cut agreements among oil exporters expected to run till March 2018 and supply outages among major exporters like Libya, Nigeria and Venezuela.
However, the fact remains that the international crude oil market is very volatile and so the outlook for oil price remains highly uncertain. Neither the International Energy Agencies nor the World Bank foresaw the sudden crash of crude oil price from over US$100 per barrel sometime in 2014 to below US$30 per barrel only a few months after. The rise in US stockpiles remains a big threat to upward potential of prices. Data from the Energy Information Administration indicate that United States crude inventories surged by 2.24 million barrels in the week ending November 3 2017, the highest in more than three decades. The global investment bank, JP Morgan, expects U.S. shale production to continue growing through this year and into next year and so has slashed its price projection for Brent crude from US$55.50 to US$45 per barrel. Only recently, Goldman Sachs cut its Brent price forecast for this year to US$55.39 per barrel from its previous estimate of US$56.76 per barrel after predicting the return of oil glut at the expiration of the OPEC/Non-OPEC deal.
In recognition of this fact, major oil exporters are towing the cautious path. Bloomberg reports that despite the seeming rebound in oil price, Russia, one of the world’s biggest energy exporters, has adopted a conservative oil price of US$40 per barrel for the country’s 2017- 2019 national expenditure plans because ‘’the Finance Ministry and the Central Bank of Russia want to be ready for and protect themselves against the worst-case scenario”. So, with respect to the oil price, the proposed US$45 per barrel should be retained for, as the saying goes, ‘it is better to be conservative and be surprised on the upside than too optimistic and end up disappointed’.
Regarding oil output projection in the 2018 budget proposal, the option of adopting a lower output target presents itself not least because crude oil production has been far below projections in recent times. The two previous annual budgets (2016 budget and the 2017 budget) used 2.2 million barrels per day that was hardly met. As disclosed in the 2018-2020 MTEF, ‘average oil production fell from 2.04mbpd in February 2016 to 1.52mbpd in August 2016 before rising to 2.2mbpd by June 2017’ largely on account of crude oil theft and pipeline leakages due to vandalism which had a negative impact on government revenues from the oil sector.
Nevertheless, it is pertinent to recognize that the oil output target of 2.3 million barrels per day must have been advised considering the fact that one of our own, Mohammad Sanusi Barkindo, is the current Secretary General of the Organization of the Petroleum Exporting Countries. Nigeria is currently enjoying exemptions from the OPEC/Non-OPEC oil output cut and so adopting a lower oil output may jeopardize the country’s chances in future negotiations with the other oil producing nations.
What is more, it is a fact that crude oil production shut-ins resulting from vandalism of oil facilities have been on the decline. For instance, the 2018-2020 MTEF disclosed that ‘there were 94 pipeline vandalized points in April 2017 compared to the corresponding period of April 2016 which recorded 214 cases’. Further reduction in attacks in oil facilities resulting in oil output disruptions is expected especially in the light of the ‘carrots’ contained in the 2018 budget proposals such as the increase in the capital provision for the Ministry of Niger Delta and the Niger Delta Development Commission, the Ogoni Clean-Up project, the Amnesty programme as well as the provision for the critical East-West Road. These, alongside progress on the passage of the Petroleum Industry Bill and government’s increased engagement with militants and stakeholders in oil producing communities, will ensure improved stability in the region, reduce uncertainties and promote new private sector investments in the oil sector. Recent reports say a group known as the Niger Delta Avengers has suspended its plan to renew attacks on the nation’s oil installations in the oil-rich region. This is cheering news in support of the oil production estimate in the 2018 budget proposal.
Another budget parameter that will offer a temptation for alteration is the exchange rate of N305 to one US dollar considering that a higher and ‘more realistic exchange rate’ will translate into more money for the three tiers of government. But this would be a dangerous adventure for the economy. Adopting a higher exchange rate would signal government’s intention to devalue the naira, promote speculative attacks on the naira, trigger inflation, complicate monetary policy and forex management for the CBN as well as mess up current efforts at economic recovery. Therefore, an exchange rate of N305/US$ should be retained as it is consistent with the government’s Economic Recovery and Growth Plan. Besides, it is a fact that the Central Bank of Nigeria has restored stability to the foreign exchange market (especially since the introduction of the Investor and Exporter foreign exchange window in April 2017), on the back of rising external reserves (US$34billion as of 30th of October, 2017) sufficient to finance several months of imports.
Also considered realistic is the inflation target of 12.4 per cent given the fact that headline inflation has been trending downwards since February 2017 (down from 18.72 per cent in January 2017 to 15.91 per cent in October) due, in part, to improved liquidity in the forex market and stability in exchange rate. New investments in infrastructure and agriculture as contained in the 2018 budget will further moderate inflationary pressure.
Considering that the country only returned to economic growth of 0.55 per cent (revised to 0.72 per cent) in the second quarter of 2017 after five consecutive quarters of negative growth in output, the GDP target of 3.5 per cent for 2018 appear ambitious. But this is nothing to worry about as it is perhaps the only assumption that has no fundamental effect on the budget figures. Just like the GDP target for 2017 that was later revised downwards from 2.5 per cent to 1.5 per cent, nothing stops the government from doing so in the course of implementing the 2018 budget. The innocuous impact of the real GDP target on the 2018 revenue and expenditure estimates should warrant its retention.
Equipped with these facts therefore, the National Assembly is advised to commence immediately the interrogation of the 2018 budget proposals in order to ensure its early passage.
Uche Uwaleke, a chartered banker, stockbroker and Fellow of ICAN, is an Associate Professor of Finance and the Head of Banking & Finance, Department at Nasarawa State University Keffi.
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