2018 budget deficit and debt service gains

The 2018 Federal Government budget has just been signed into law on 20th June 2018 amidst controversies between the Presidency and the National Assembly on issues such as the budget cycle and insertion of new projects among others. As the records indicate, the budget was presented to the National Assembly on the 7th of November 2017; passed on May 16, 2018 and transmitted to the Presidency on May 25, 2018. As things stand currently, the Executive is calling for a re-adjustment of the already signed budget. The controversies surrounding the submission and passage of the budget between the two arms of government appear somewhat worrisome. First, the issues raised by the Presidency and the response by the National Assembly tend to suggest that there’s the need for harmony, rapprochement and pursuit of common national interest by both sides. The issue of budget cycle dissonance may not be as simple as implied by the Executive given the seemingly convincing response by the National Assembly in this regard. The appropriate legislations need to be put in place to avoid a perennial distortion of the budget cycle which definitely affects project implementation and the overall budget performance.

Despite these controversies, the 2018 budget, according to the President, is structured to consolidate on the achievements of the 2016 and 2017 budget and thus enhance the 2017-2020 Economic Recovery and Growth Plan, ERGP. According to the government, the budget represents less than 10% of aggregate yearly expenditures in the economy. Overall, the total size of the 2018 federal budget stands at N9.12 trillion made up of N2.87 trillion for capital expenditure, N3.51 trillion for non-debt recurrent expenditure and N2.01 trillion for debt service. In real terms, this is higher than the value of the 2017 budget by 22.6%.

The expected revenue to finance the budget barely exceed N7 trillion with N2.99 trillion expected from the oil sector being the major revenue source of financing the budget. All other financing sources include independent revenue from government agencies (N847 billion), sale of oil assets (N710 billion), companies income tax (N658.55 billion) and many others including a paltry N1.17 billion expected from minerals and mining. This thus leads to a budget deficit of about N1.95 trillion in 2018. The financing plan of this budget, as articulated in the budget document is three-fold. First, the sum of N1.64 trillion of borrowing, made up of N793 billion domestic debt and N849 billion foreign debt will be a major source of financing the deficit. Second, is proceeds of privatisation to the tune of about N306 billion and then finally, the sale of other government assets to the tune of about N5 billion.

The issue of revenue shortfall appears really worrisome, as acknowledged by government in the budget document. Government will thus pursue some of the key reform initiatives of the ERGP to boost revenue, namely the upward review of tariffs and tax rates where appropriate and the use of new information and communication technologies to improve revenue collection. One obvious acknowledgement, in all these, is that the oil sector is still dominant in the Nigerian economy. The recent increase in government revenues is simply due to the improvement in the international price of crude oil, which currently stands at about $73 per barrel. If efforts at diversifying the economy do not yield the desired results quickly enough, then Nigerians will have to resort to fervent prayers for some continual and sustained increase in the price of oil, at least in the short to medium term. Overall, government needs to accelerate its economic diversification programmes.

On the expenditure side, a lot has to be done to enhance efficiency. These include the review of cost-to-income ratio of government-owned enterprises and the restructuring of government equity in Joint Venture (JV) oil assets. One major area of concern is the timing and volume of release of funds by the Ministry of Finance to fund capital projects. Merely stating that so much money has been released for capital projects is too simplistic. If funds for capital expenditure are released, for which projects are they released and at what stage of completion and in which locations? That would aid project monitoring, even by interested members of the general public. For example the statement in the President’s speech that a total sum of N1.5 trillion was released in the 2017 budget for implementation of capital projects did not help much and the Minister of Budget and Planning should have provided some more specific details in this regard.

Due to revenue shortfall, the much-celebrated 30% of total expenditure set for capital projects in the 2016 and 2017 budgets was hardly attained. Actual spending has generally been in the region of about 50% of the budget provision in the past two budgets. For example, the actual capital spending in 2016 and 2017 respectively were N1.2 trillion and N1.54 trillion as against the budget values of N1.8 trillion and N2.17 trillion. This raises a serious concern about the use of borrowings for financing the budget when physical infrastructure is not improving in the same proportion as the growth of the borrowings. There is thus the fear that the 2018 budget on which N2.86 trillion was budgeted for capital expenditures may likely suffer the same fate, with borrowings increasing and capital formation not equally increasing. If budget deficits must be supported, it has to lead to increased capital formation in the economy, which will provide a basis for the repayment of the loan by future generations. While the capital expenditure has underperformed, the recurrent expenditure has exceeded budget targets in the past two years. The impact of all these on the overall economy is not reassuring.

The budget deficit issue really calls attention to another critical issue relating to the future of the Nigerian economy – the growing public debt profile of the country. According to the Debt Management Office (DMO), Nigeria’s total debt has increased by about 90% in almost three years from about N12.6 trillion in December 2015 to about N22.71 trillion as at March 2018. A worrisome issue here is that a good proportion of the spending tends to fund consumption such as the subsidising of petroleum products. This is worrisome, particularly when government has not come out clearly to officially acknowledge the existence of fuel subsidy. If the Nigerian National Petroleum Corporation (NNPC) is paying for the subsidy, then its remittance to the Federation Account would be below par, thus further exacerbating the trend of budget deficits. For now, the DMO figure indicates that total public debt prior to the 2018 budget stood at about N21.17 trillion. With the N1.95 trillion budget deficit of the 2018 budget, total debt will stand at N23.17 trillion and debt servicing is also likely to increase beyond the N2 trillion provision in the budget. Given the challenges in revenue generation as well as the increasing debt profile, the debt-to-revenue ratio may also likely deteriorate. The only lifeline is the continuous increase in oil prices.

Finally, there is need for prudence by the agents of government, to make the best of the budget deficit and the growing debt profile, particularly in this election year when expenditure on social mobilisation and other consumption-related activities may overheat the economy. Borrowing needs to be properly managed, particularly as increased domestic borrowing by government crowds out the private sector in the market for credit as well as jerks up interest rates, which will work against the fortunes of the industrial sector. There is the need for the government to ensure that the fiscal and monetary authorities work together to manage the aftermath of the deficit in maintaining price stability, reasonable interest rates and sustainable economic growth.