2023 budget spurious, filled with unrealistic targets, say experts

• Fiscal Deficit Grows By 400 Per Cent Since Buhari’s First Appropriation
• FG Risks More Funding Crisis As Debt Marker Dries Up
• Estimates Contradict Economic Realities — Adonri
• Deficit, Debts Could Cripple Economy — ACCI

With Friday’s presentation of the 2023 Appropriation Bill, President Muhammadu Buhari may have set the tone for another unrewarding yearly ritual that ends up draining public finances and adds nothing significant to the economy.

This is because, according to finance experts, for the umpteenth time, the Appropriation Bill has been filled with spurious assumptions and unrealistic targets.

President Buhari had, on Friday, presented a spending proposal of N20.52 trillion to the National Assembly for consideration, describing the appropriation as a ‘Budget of Fiscal Consolidation and Transition.’

The spending outlays is stuffed with a deficit of 10.78 trillion or 52.5 per cent of the total expenditure, an amount the President said would be funded with new borrowing, privatisation proceeds and “drawdowns on bilateral and multilateral loans secured for specific development projects/programmes.”

But, experts have dismissed the document as another painful reflection of the unrealistic and wild ambition that has defined the national economic management in recent years.

Interestingly, the eighth and last budget in the life of President Buhari-led government is coming barely eight months to the end of the administration. And with the implementation of the 2022 budget expected to run into next year, much of the execution of the proposed appropriation would be passed to the next administration, which is due on May 29, 2023. David Adonri, an economist and investment banker, told The Guardian yesterday that the budget is not fit for purpose and would certainly be reviewed for amendment by the next national administration. He insisted that the extremely expansionary budget proposal is a mismatch with the current economic reality, which tends toward contraction.

Both the International Monetary Fund (IMF) and the World Bank have downgraded growth prospects amid rising headwinds and rising interest rates across the globe. Nigeria has seen the benchmark interest rate rise from 11.5 per cent to 15.5 per cent since May as the Central Bank of Nigeria (CBN) struggles to rein in inflation and stem possible massive fund outflow due to monetary normalisation in the United States and other advanced economies.

The elevated interest rates mean a higher cost of borrowing, both domestic and external. Already, the Federal Government sovereign bond yields have increased by over 100 per cent this year with the 10-year bond averaging 13 per cent. While all governments are facing a cut-throat cost of borrowing, Nigeria’s rising risks have added to the country’s burden.

The Guardian had reported that the country was gradually inching towards a financial ‘blockade’ at the international financial market, as its working relationship with international development and funding partners, including the World Bank and the IMF, deteriorated to its worst level in recent years.

The reality comes with dire consequences for the prospect of raising cheap funds. Already, the yields of Nigeria’s Eurobond have increased significantly, from an average of 6.5 per cent at the start of the year to about 13 per cent this month.

Several external factors such as the global hike in interest rates and high inflation rate have significant impacts on the cost of borrowing from the global market. But Nigeria, specifically, is wallowing in a web of self-inflicted missteps with some experts arguing that its rising risks and deteriorating sovereign rating would have contributed to the sudden sharp rise in the country’s already under-priced bonds.

Recently, JP Morgan, an American leading investment bank, delisted Nigeria from the class of emerging market sovereign recommendations that investors should be ‘overweight’ in. “Nigeria’s fiscal woes amid a worsening global risks backdrop have raised market concerns despite a positive oil environment,” the bank said while it upgraded Serbia and Uzbekistan for their low risks.

The imitation’s decision is interpreted as a grave red light with negative implications on the country’s investment outlook and credit worthiness. Other credit rating agencies, including Fitch Ratings, have raised countless questions about the country’s competitiveness while calling for reforms, suggestions often rebuffed by the government.

The rising blockade at the international market coupled with elevated interest rates, Adonri said, would make funding the 2023 budget a Herculean task. “Looking at the deficit is mind-boggling. It is unthinkable that the deficit is higher than that of this year’s budget considering that the economy is stretched. What is the basis of stretching the deficit? This means the budget lacks merit and rationality.

“It means borrowing will increase, which means the budget funding will be extremely expensive and almost unaffordable considering the high-interest rate. This means the cost of servicing will be higher. Perhaps, we will be talking about debt to a revenue ratio of 200 per cent,” the economist said.

The executive intended to fund 82 per cent of the deficit or N8.8 trillion from fresh borrowing and the balance from elusive privatisation proceeds and drawbacks from existing commitments from multilateral and bilateral institutions. The inclusion of “privatisation proceeds” as a funding option smacks the sincerity of the purpose of the budget execution and whether the government itself does not also think of the document as a mean rite.

The Abuja Chamber of Commerce and Industry (ACCI) also noted that the 2023 budget would be challenged by high deficit and huge debt overhang.

ACCI, in its initial reaction to the budget estimates, underscored what it termed, “worrisome issues of debt threat and attendant consequence on the economy.”

The Director-General of ACCI, Ms. Victoria Akai, who responded on behalf of the chamber, said, “We are worried about the high budget deficit. A deficit of N10.78 trillion is quite high and debt servicing of over six trillion naira is worrisome. ”

She, however, commended the President for sustaining the budgetary cycle of budget presentation every October, adding that this has gone a long way to guarantee the January to December budget cycle.

According to her, “This administration therefore deserves kudos for restoring the Federal Budget Calendar. This makes for predictability and ensures stability in business planning.

“Having said that, we are seriously worried that the high deficit and debt burden could cripple the economy. It is even more disturbing when the revenue side is explored as it is doubtful if Nigeria could meet the target of 1.6 million barrels of oil per day in view of the illegal oil bunkering ravaging oil producing states.”

Also responding Mr. Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, said the budget deficit of over N10 trillion is significantly higher than the N4.1 trillion projected in the National Development Plan 2021-2025.

According to him, “With public debt already hovering at over N40 trillion in addition to CBN overdraft of over N20 trillion, the total debt stock is likely to exceed N70 trillion by the end of 2023.

“The trend is disturbing in terms of sustainability given that the budget deficit will be financed mainly by borrowing, which exceeds the amount budgeted for capital expenditure.

“Effectively, this is an indication that a lot of borrowing will be channeled towards debt service and recurrent expenditure contrary to the provisions of the Fiscal Responsibility Act.”

Dr. Ayo Teriba had told The Guardian that the Buhari administration has, unfortunately, ignored advice that it should convert the country’s many non-performing assets to cash like many other countries have done to fund budget shortfall rather than the fixation on borrowing.

Last year, the government pegged N205.12 billion as budget support from privatization exercise but closed the year without realising a kobo from the source, according to the budget implementation document sourced from the Budget Office yesterday.

From the first fiscal appropriation prepared by the Buhari administration, tagged ‘Budget of Change’ till the eighth and last currently in the National Assembly, the sale of a public asset has featured as a funding line item. But since 2016 when N5.92 trillion was realised from privatisation proceeds, the source has recorded zero net revenue with the government relying 100 per cent on debt funding.

As the government goes all out for debt financing, the documented and publicly declared national debt has ballooned from a little above N12 trillion recorded as of June 30, 2015, a month into Buhari’s administration, to N42.8 trillion as of the middle of this year.

Of this, the FG’s obligation stood at N35.7 trillion in June. Recall that The Guardian has reported that, the central government’s total debts and contingent liabilities have hit N60.9 trillion even as the figure could balloon to near N65 trillion before the end of the year, as the administration scrambles for any available funds to survive the current financial squeeze before its expiration in May, next year.

The figure reported does not include undocumented contingent liabilities to university lecturers, public school teachers and other public employees to whom the government is indebted. It also excludes other pending financial liabilities to non-lending bilateral and multilateral institutions .

The FG’s N35.7 trillion debt as at June does not include the Central Bank’s lingering overdrafts estimated at N20 trillion plus at the last count. Besides, the government’s “contingent liabilities” to different institutions and projects stood at N4.6 trillion at the close of last year. The figure is projected to reach N4.98 trillion at the end of the year and jump by as much as 50 per cent to N7.52 trillion next year when the current administration will leave office.

Items and organisations on the contingent liability list are Nigeria Mortgage Refinance Company Plc, Nigeria Ports Authority – Lekki Deep Seaport, pension arrears, NNPC – AKK Gas Pipeline Project among others.

While the international debt market may have shut its door against Nigeria for now owing to unaffordable cost and high sovereign risk, experts have suggested that the spike in local money market opens a window for the government to mop up the fund. But the funds will not come cheap as commercial banks have been compelled to pay 4.65 per cent interest (or 30 per cent of MPR) on savings deposits.

With a shrinking economy, cut-throat borrowing costs and other challenges affecting the real sector, analysts have suggested that the government will now pile more on banks’ liquidity through debt instruments.

Dr. Muda Yusuf, an economist and private sector advocate, had warned of the dire consequence of increasing crowing-out of the private sector players, saying it would further weaken the productive sector and increase unemployment.

More debts mean more burden of servicing, and international development partners recently called on developed countries to be wary of the economic cost of spending a larger proportion of their incomes servicing debts. Indeed, Nigeria is already bearing the brunt of excessive cost debt servicing, with Buhari calling on world leaders to consider debt cancellation for developing countries at a recent United Nations General Assembly.

Effectively, the FG’s debt to revenue trumped 100 per cent for the first time in the first four months of the year. The government earned N1.63 trillion but spent N1.94 trillion on debt service. The four-month fiscal deficit was N3.09 trillion or 190 per cent of revenue, the highest in memorable history.

There is no doubt that FG’s deficit is on death throes even as revenue stalls. Last year, the actual deficit was N6.44 trillion, which was 525 per cent above N1.03 trillion recorded in the first year of the full financial circle of Buhari’s administration (2016).

Historically, fiscal deficits of the government have exceeded the budget estimates. The figure grew from N1.03 trillion to N1.3 trillion, which was about 30 per cent expansion, in 2017. It jumped to N1.9 trillion the following almost doubled in 2019 when the deficit, excluding project-tied loans, was N3.26 trillion.

Understandingly, the figure rose to N5.6 trillion in 2020, with revenues buckling under COVID-19 disruption and came close to N6.5 trillion last year. All along, the fiscal deficits, much of which were blocked with CBN’s overdrafts, exceeded budgetary estimates as revenue performances have not reached 100 per cent in recent years.

Interestingly, experts back the government’s ability to meet its revenue targets as contained in next year’s proposed budget. For instance, the 1.69 million barrel per day (mbd) crude production benchmark is already being seen as unrealistic. With oil theft emerging a major concern to operators and government, Nigeria’s production has stalled at a little above one million mbd in recent months with the country falling short of OPEC allocations.

With this and many other parameters considered as unrealistic, many analysts said the deficicit, which is already above the permisable limit set by the Fiscal Responsibility Act (FRA), would exceed the N10.78 trillion mark.

Except the proposal is reasonably altered by the National Assemly, the fresh borrowing and drawbacks from facilities from international partners could push the FG’s liabilities to over N70 trillion or much more by next year.

Still, the 2023-2025 Medium-Term Expenditure Framework and Fiscal Stability Paper (MTEF/FSP) expects the government’s contingent liabilities to some local institutions and partners, which was N4.6 trillion last year, to reach about N7.5 trillion next year.

At N10.78 trillion, the outgoing administration would have increased the fiscal deficit by 946.6 per cent compared to where it started in 2016. That would have happened in a space of eight years.