SAM DIALA examines the humongous 2018 budget of N8.612 trillion and argues that, notwithstanding the post-recession status of the economy, the huge fiscal proposal appears more of audacious optimism in a haze of uncertainty as the key factors of production to drive the implementation have not recorded commensurate improvement.
If approved, the 2018 fiscal proposal now undergoing legislative process at the National Assembly, will hit the records as Nigeria’s largest budget ever – N8.612 trillion (N8,612,236,953,214). This is 16 per cent higher than the 2017 budget of N7.441 trillion; and almost equivalent to Nigeria’s seven years budgets in the past (1999 – 2005) put together.
Going by the recent National Bureau of Statistics (NBS) demographic report that Nigeria’s current estimated population stands at 193,392,517; the 2018 proposed budget, if shared, will make every Nigerian N44,533 richer at a time. This is N6,056, or 16.15 per cent, over the N37,477 each citizen would have received if the 2017 budget of N7,441,175,486,757 was shared among same number of Nigerians.
An outstanding feature of the 2018 budget is indeed its hugeness: Virtually every key element of the estimate is huge – in volume (8.612 trillion), recurrent expenditure N3.494 trillion (as against N2.24 trillion in 2017), deficit N2.005 trillion (though lower than N2.3 trillion in 2017), debt servicing N2.04 trillion (compared to N1.66 trillion for 2017). Coming when the 2017 budget is said to be less than 30 per cent implemented, this creates additional challenge of delineating the performance boundaries of the two budgets, to establish their real impact.
The 2018 budget estimate is also huge in ambition and optimism which most likely, pushed government into adopting the humongous non-oil revenue proposal of N4.2 trillion, compared to N1.37 trillion in 2017 – representing 40 per cent increase. This is the peak of optimism that defines the document. It also creates a paradox that seems to obscure economic realities underlying the macroeconomic environment, because the operating environment has not fundamentally changed for the better. It is the highest non-oil revenue proposal since crude became the nation’s cash cow. Non-oil revenue budget was N2.96 trillion in 2016 and N1.68 trillion in 2015.
What are the sources of the N4.2 trillion non-oil revenue budget? How sustainable are they? How did they perform in the (recent) past? What macroeconomic fundamentals justify its realities? What factors of production have changed, or will change in commensurate proportion to provide the basis for Nigeria to realise projected non-oil revenue that is above recurrent vote? Will the huge deficit of N2 trillion support the realisation of this size of non-oil revenue target?
Prevailing macroeconomic fundamentals do not suggest that 2018 budget will radically transform Nigeria’s socio-economic status any time soon. A major reason for this position is that the country’s rate of recovery is slower than its accelerated consumption rate. Furthermore, while the nation’spopulation grows at about three per cent per annum, the gross domestic product (GDP) is currently at 1.6 per cent. If, as is predicted by experts that Nigeria’s economy will grow at two per cent in 2018, it becomes even clearer that achieving a non-oil revenue of N4.2 trillion this year is a far, tall order, because, as the IMF predicted last October, the growth would remain subdued due to population growth of 2.9 per cent.
The budget contains the same issues that have dithered economic development in the past. Without addressing these issues, the “Budget of Consolidation” as President Muhammadu Buhari calls it, will turn out to be what it really is: “Budget of Experimentation,” because the 2016/2017 budget implementation created several issues that contradicted their objectives. For instance, capital vote of N2.24 trillion or 30.7 per cent of the budget had not been implemented up to 50 per cent as at end of 2017. The portions said to have been released, were later reported to have no cash-backing.
Last October, minister of Finance, Kemi Adeosun lamented that “meeting the backlogs of the 2016 budget and inability to access foreign loans are major impediments to funding of capital projects in the 2017 budget.” National Assembly members also observed that several items in the proposed 2018 budgets of the ministries, departments and agencies, MDAs, were either repetitions or “endless projects” that keep featuring every year. So, what is being consolidated?
Furthermore, there is little to show that 2018 budget veered off the traditional consumption pattern we are known for. Nigeria is heavily public-sector dependent; virtually every bit of development is tied to government – employment, infrastructure, policy, education and the likes. Private sector contribution to national development is minimal. The three “ICE” factors in economic development – Investment, Consumption and Export, are lagging or virtually non-existent. Because, government is the largest employer of labour, productivity is extremely low, waste is high and the private sector which drives development in advanced economies is comatose here.
The Medium Term Expenditure Framework (METF) and Financial Strategy (FS) 2017-2020 upon which the 2017 and 2018 budgets were hinged show that the country’s recurrent expenditure has continued to grow, both the debt and non-debt portions. And this has been the bane of the country’s national development. Proposed non-debt recurrent expenditure for 2018 stands at N3.144 trillion as against N2.640 trillion in 2017, an increase of N505 billion or 20 per cent. Personnel cost for ministries, departments and agencies (MDAs) rose from 1.884 trillion in 2017 to N2.114 trillion in 2018; an increase of N23 billion or 13 per cent. This is the highest ever recorded in the nation’s budget.
Service Wide Votes (SWV) Pensions (including Presidential Amnesty Programme) ballooned to N157.49 billion in 2018 from N89.97 billion in 2017. SWV Power Sector Reform Programme (not in 2017) was introduced in 2018 with N194.33 billion. Personnel cost of 2.114 trillion is nearly 70 per cent of the non-debt recurrent expenditure of 3.144 for 2018, indicating that 90,000 (as reported) federal government workers consume about 70 per cent of Nigeria’s non-debt recurrent expenditure. This excludes overheads N247 billion, SWV Pensions and Consolidated Revenue Fund (CRF) Pensions of N157.49 billion and 192.63 billion respectively – all derivatives of huge personnel cost and over-bloated bureaucracy.
Aggregate expenditure for personnel cost, SWV pensions and CRF pensions is N2.6 trillion for 2018 as against 2.38 trillion in 2017. There is little that suggests that the government is going to trim down the capacity for consumerism. Even where a forensic staff audit revealed over 40,000 ghost workers said to have been removed from pay-roll, MDAs were said to be engaging in massive clandestine, illegal employments/replacements, thus worsening the recurrent expenditure challenge.
It is estimated that federal government owes its workers N250 billion pension arrears under the Contributory Pension Scheme (CPS) and the Defined Benefit Scheme (DBS). This is far above the SWV Pensions and Consolidated Revenue Fund (CRF) pensions of N157.49 billion, suggesting that government will continue to carry the burden of accumulated pension arrears for a long time ahead. Thus, it will remain a drainpipe on accumulated revenue gains.
Besides, government has succumbed to the pressure by organised labour to constitute a committee on (upward) review of the minimum wage. While the Nigerian Labour Congress, NLC, and Trade Union Congress, TUC, demand for a N56,000 new minimum wage, United Labour Congress of Nigeria, ULC, on its part, asks for N90,000 per month. Whatever is the outcome of the negotiations, government non-debt recurrent expenditure, especially on personnel cost, will mount.
That will consume a huge chunk of the estimated revenue boost from non-oil revenue of N4.164 trillion, which from all indications is far from being realistic and will end up worsening the deficit side of the budget. It will also lead to increased borrowing and high debt servicing as government will remain heavily-indebted for a long time. How is government going to fund the budget deficit of N2.005 trillion through foreign and domestic borrowing without crowding out the private sector already suffering from the deep injury of high operating cost? Managing director, Financial Derivatives, an advisory firm, Bismarck Rewane told our correspondent that borrowing without sufficient productive capacity to repay will create serious hardship for the people.
A recent report by BusinessDay revealed that government non-oil revenue targets have been far from being realised since 2015, signalling an indication that the proposed 2018 non-oil revenue of N4.164 trillion is likely going to be unattainable. Non-oil revenue sources are majorly company income tax (CIT), value added tax (VAT), customs and excise duties, independently generated revenue (IGR), tax amnesty, recoveries, proceeds from restructuring government’s equity in oil joint ventures and other sundry incomes.
Proceeds from IGR, CIT, restructuring of oil joint ventures (JV) and sundry income estimates constitute the bulk of the proposed N4.164 non-oil revenue budget amounting to N3.02 trillion or 72.66 per cent. Recoveries, custom and excise duties, VAT and tax amnesty are estimated to generate N1.13 trillion representing 27.2 per cent.
Assuming that the aggressive tax policy, especially through the Voluntary Assets and Income Declaration Scheme (VAIDS) policy put in place by government yields a quantum leap in revenue generation, what factors of production are in place to guarantee its sustainability and enhance wealth-creation? Has the economy elastic capacity for overstretched tax pressure without a corresponding expansion in wealth creating abilities?
The BusinessDay report also shows that from an IGR budget of about N489.3 billion revenue in 2015, only 66 per cent of the budget amount or N323.4 billion was realized. In 2016, with the introduction of Treasury Single Account (TSA), N1.5 trillion was budgeted but only N237.8 billion was realized. In 2017, about N155 billion has been realized as at third quarter from N808 billion budgeted for the year.
Furthermore, revenue from CIT is projected to be N794.7 billion in 2018 or 19 per cent of the total non-oil revenue of N4.164 trillion. “The average budgeted revenue projected from 2015 to 2017 is about N77.57 billion while the average up to third quarter of 2017 is about N445.77 billion,” the report stated; adding that average VAT revenue projection of N204.23 billion between 2015 and 2017, yielded only N102.67 billion up to third quarter of 2017. Yet VAT is expected to contribute N207.9 billion or five per cent to total expected revenue.
What infrastructural reforms will take place full-swing in 2018 to add fillip to the productive capacity of the economy during the period? Increasing tax pressure on weak economic agents is antithetical to growth. Moreover, the infrastructural base that enhances economic activities and contributes hugely to growth in advanced economies is lacking in the domestic environment. An over-stretched firm for tax compliance, also battling over epileptic infrastructure that impacts negatively on its output capacity, is not a boost to the economy.
“Our business environment is still hostile, despite the ‘Ease of Doing Business,’ enthusiastically introduced by government mid-2017,” said director-general, Lagos Chamber of Commerce and Industry, LCCI, Muda Yusuf. Doing business at the Lagos sea ports, the main viable ports in the country for instance, remains a nightmare. Ship owners have indicated their intention to introduce extra charges this year because of the “extraordinary difficulties” in operating in Nigerian sea ports which are notorious for being the most expensive in the world.
A Lagos-based clearing agent, Adiole Magnus, said that clearing charges have tripled since 2015, without enhanced infrastructure at the wharfs. Access roads are in the most terrible condition; importers spend days if not weeks accessing and exiting the ports. Items for export spend over a month at the wharf. Being an import-dependent economy, how optimal will our sea ports function to generate quantum leap in revenue without killing the productive forces of the economy. Is this not a paradox,?” Magnus asked.
Another pointer to the headwind direction of the 2018 budget is the fact that unemployment rate continues to worsen. Recent report by the NBS showed that four million Nigerians became unemployed in the third quarter of 2017, contributing to the 19 per cent rise in unemployment rate from 14 per cent recorded in the previous quarter. This will impact negatively on the productive capacity of the economy by way of non-payment of taxes, negative contribution to gross domestic product (GDP) and waste. “You cannot grow the economy without growing jobs”, said Mike Duke, a labour economist.
The recent news of increased power generation of 7,000 MW is nothing to cheer about. At that rate, there is no way we could expect tangible increase in productivity, especially in domestic capacity utilization to support the ambitious N4.613 trillion non-oil revenue. The Manufacturing Association of Nigeria (MAN) and the Association of Small Business Owners of Nigeria, ASBON, continue to lament the deep injury inflected on their members by Nigeria’s lingering epileptic power supply.
There is little doubt that funding the 2018 deficit will further crowd out the private sector. In recent times, government has intensified domestic borrowing through treasury bills and bonds. These debt instruments are aggressively patronised by the deposit money banks which invest massively in them because of the mouth-watering returns of up to 18 per cent per annum, coupled with its low risks. Notwithstanding banks’ boasting of sponsoring the SME sector, reports show that the lenders prefer investment in T-bills and bonds to SMEs because of the inherent high risk elements in small businesses. There is little to show that the SMEs will fair batter in 2018. In fact, it is likely to be one of the worst years for the private sector because of high cost of funds.
Aside lack of access to fund, double-digit inflation rate of 15.9 per cent is still high, resonating in high cost of operations coupled with multiple taxation, insecurity, high wage demand, high cost of clearing goods, poor road network and high cost of fuel. There are also fears that government may not continue to absorb the subsidy of N26.40 per litre on imported petrol which is beginning to weigh on it. Industry experts predict that the nationwide fuel scarcity experienced during the Yelutde is a pointer that the fuel subsidy sticks out like a sore-thumb in governance.
The full impact of behind-the-scene devaluation of the naira in June 2016 when the Central Bank of Nigeria, CBN, introduced the flexible foreign exchange system, deepened by the creation of multi-window forex channels, contributed majorly in stabilizing the devalued naira. Many firms returned to the capital market last year to raise funds in the primary market to offset debts and adjust to the 45 per cent devaluation of the naira to remain in business.
Notwithstanding the ambitious huge non-oil revenue target, oil is retaking its prime position as the country’s major revenue earner, thereby returning the economy to the volatility regime. This dangerous trend has been highlighted by the World Bank and the International Monetary Fund (IMF). It is the reason for the downgrading of the country’s economy by the international rating agencies.
The truth is that the country is gradually returning to oil-driven economy because the factors of production to support the size of non-oil revenue projected in the 2018 budget are not in place; and may not be in place for any time soon. The boost in the country’s equities market is portfolio-investment-induced. Such “hot monies” do not guarantee sustainable growth. Therefore, irrespective of the “improvements” observers are seeing in the economy, the 2018 proposed budget will deliver; but certainly not in 2018.
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