Realistic review of 2020 budget
The euphoria surrounding the easy passage of the 2020 Federal Government budget appears to have been significantly diminished by the effects of the COVID-19 pandemic on the economy. The 2020 budget, which focused primarily on fiscal consolidation, investment in critical infrastructure, incentivising private sector investment and the enhancement of social investment programmes has seemingly been torn to shreds by the COVID-19 pandemic. The threat of this pandemic to the global economy is real, as it has seriously disrupted the functioning of all economies across the globe starting from China where the pandemic began its deadly trip.
As a consequence of the pandemic on the global economy, the crude oil markets have literally crashed with crude oil prices falling by more than 60% of its value before the onset of the pandemic. Nigeria is mainly affected since crude oil export is its main foreign exchange earner.
The use of $57 per barrel as the benchmark in projecting revenue from oil in the budget has rendered many of the estimates in the document ineffective with the recent turn of events. The 2020 budget which was accompanied by a Finance Bill had increased the value added tax from 5% to 7.5%, among others and had an estimated total aggregate spending plan of N10.59 trillion with a deficit of N1.8 trillion. In the approved document, the total government revenue was estimated at N8.155 trillion with oil revenue estimated at N2.64 trillion, non-oil revenue at N1.81 trillion and other revenues at N3.7 trillion.
With all these, the total budget size was planned to be higher than the 2019 comparative estimate of N7.594 trillion inclusive of the government-owned enterprises. With the unwelcome effect of the pandemic on the economy, the bulk of these estimates are currently unrealisable. With the fall in both local and foreign trade volumes as well as decreased economic activity in the country currently, it is even difficult to realise the targets expected from value added tax and customs duties.
Following from these, there has been a serious pressure on the exchange rate and inflation also worsening and trending up. Serious doubts exist whether the budget deficit of N1.8 trillion can be financed either from local or foreign sources given the drying out of funds globally. With all these tales of woe, one wonders whether it is still possible for the country to make the debt service payments of N2.7 trillion, as proposed in the 2020 budget. What of the various uncompleted capital projects across the country? What of the effects on the state governments who rely on dwindling funds from the monthly Federal Accounts Allocation Committee to run their state budgets? These are some of so many other questions in this regard begging for answers.
It is thus no surprise that the Minister of Finance, Mrs Zainab Ahmed recently announced the desire of government to slash the 2020 budget by N1.5 trillion to address the matters arising from the corona virus pandemic. These budgetary challenges were exacerbated by the lack of buyers for Nigeria’s crude oil with over 50 cargoes of oil unsold the other day, which represent about 70% of the country’s total oil exports. Against this background, the reported slashing of the official selling price of the country’s crude oil by about $5 per barrel shows that the times are tough for Nigeria.
Though the logic behind this magic figure of N1.5 trillion appears suspect, some deductions can be made from the minister’s briefing. One deduction is that government has realised that except something drastic is done and that soon, the economy could collapse under its watch. The fears of the Minister of State for Petroleum, Mr. Timipre Sylva that the Nigerian economy is not in the best of shape due to COVID-19 and that oil prices are falling daily is instructive in this regard as well as the recent fears by Godwin Emefiele, the CBN governor, that the unfavourable global developments could lead to recession.
In finding a solution to this problem, the first adjustment government made to the budget involves the adoption of $30 as the new benchmark oil price in the budget instead of $57 per barrel. This appears questionable as oil prices are currently in the region of less than $20 per barrel. It is hoped that the oil market will recover soon from the pandemic; else this new benchmark price may also become unrealisable. Second, government banned new employment in the ministries, departments and agencies MDAs as well as reduced projected customs duties due to anticipated fall in trade volumes. Other major adjustments to the budget include the cut in capital expenditures by 20%, cut in recurrent expenditures by 25% and suspension of funding of upstream projects by the Nigerian National Petroleum Corporation (NNPC). Whether these are sufficient to make budget functional will depend on how soon this pandemic goes away.
In support of the efforts to ameliorate the effects of the coronavirus pandemic on the economy, other strategies have been put in place by government. These are commendable. For instance, the Central Bank of Nigeria established a N1.1 trillion intervention fund to rejuvenate domestic production and general economic activity while the government also established an economic sustainability committee under the headship of the Vice President, Professor Yemi Osinbajo to develop a sustainability plan to reposition the economy and grow the non-oil sector. The committee is also expected to develop palliatives for the citizenry suffering from the effects of the pandemic. Whether these various efforts would make the desired impact is another question begging for answers.
There is need for more concerted efforts to restructure the 2020 budget to a format that can be practical, realisable and functional with minimum waste. Government needs to drastically reduce the cost of governance. It is gratifying that the finance minister this week hinted at the expediency of cutting agencies of government to reduce cost of governance. The projected economic growth rate of 2.93% for 2020 appears difficult to realise currently, particularly with the current state of economic lockdown across the country. This is even a far cry from the 7% projected in the Economic Recovery and Growth Plan (ERGP).
The takeaway from all these is that though this is a global crisis, a large part of it is caused by the country’s mediocrity in economic management over the years. What is needed now is the production of a revised document that would minimise waste and provide a basis for efficiency in the country’s economic governance and at least address the basic needs of the society. This involves returning the country to the path of sustained economic growth as the country cannot afford to run into another round of economic recession.
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