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BUDGET 2006 – THE REALITY BEHIND THE FIGURES
BY: LLES LEBA (Email: llesleba@hotmail.com)
Weblink: http://groups.msn.com/RATIONALPERSPECTIVES
President Olusegun Obasanjo’s presentation of the 2006 budget to the National Assembly last Tuesday was ‘rudely’ punctuated by the outburst of Alhaji Nadabo of the House of Representatives. The grouse of the Honorable Member was the poor record of implementation of earlier budgets which had similarly been launched with much pomp and fanfare as the elixir to our ailing economy and beacons of hope for our impoverished masses! The President must be commended for acting out of character and maintaining appropriate Presidential decorum in the face of Alhaji Nadabo’s blatant provocation! However, inspite of the unparliamentary nature of the interruption of the Honourable member, some Nigerians have suggested that the President was in order to ignore the interjection but advise that Mr. President should recognize the truth in the unsolicited contribution to the budget presentation. The truth is that most Nigerians outside the executive corridors of power now see Mr. President’s annual budget presentation to parliament as a mere ritual or thriller which is not backed by subsequent meaningful achievement or positive impact on the lives of the masses!
The over 70% Nigerians who currently languish under the shackles of abject poverty inspite of the promises of five earlier budgets of the current administration would agree with Nadabo’s observation. In this event, Mr. President would be well advised not to throw out this kernel of truth with the unparliamentary style of Nadabo’s criticism especially ensconced as Mr. President is in a field of fawning sycophants! The blinkers should fall off the vision of Mr. President so that he can see Alhaji Nadabo’s criticism as that of a true friend of the Presidency and of the people of Nigeria.
In the same vein, the following comments on the content of the 2006 budget should not be seen as an attempt to disparage the noble efforts of the current administration but an attempt to broaden our understanding of the nature of some of our economic problems and proffer solutions to reconcile the contradiction between the welfarist objectives of government and the actual adverse results of current economic and monetary policies.
This piece is not a blanket evaluation of all components of the budget speech. In deference to space and time constraints, our comments would relate to the following subsidies: revenue projections, petrol subsidies, VAT, debt and debt servicing, liquidity management, exchange rate determination, and finally, interest rates and inflation.
If it is possible to ascribe a specific feature to the 2006 budget, it will have to be a conscious and transparent attempt to lay all the cards face up for appropriate appraisal and scrutiny. This is a clear testimony to the integrity of the budget team even though they may have been misguided in their evaluation of the Nigerian economic predicament.
REVENUE PROJECTIONS – 2005/2006
The actual revenue collected in 2005 fell by about N230bn from the projected value of about N1.63 trillion as technical problems in crude oil production led to a daily output of 2.4m barrels per day from the earlier budget projection of 2.76 million barrels per day.
In addition, a subsidy of about N292bn became necessary to keep a lid on the domestic pump price of fuel when crude oil prices exceeded $50/barrel for most of the year against the $30/barrel on which the projected revenue had been based. Although the President indicated a fall of about N230bn from projected revenue, the truth, however, is that the higher than budget crude oil price of over $50/barrel netted the handsome sum of about $11 billion which amount was sterilized with marginal interest earnings, if any, as part of the nation’s foreign reserves in 2005!
Mr. President indicated that 2005 budget implementation rate (with an extended implementation time to March 2006) would exceed 85% for the downward reviewed amount of N1.4 trillion. In actual fact, the budget implementation rate would probably be less than 70% if we adopt the original aggregate budget expenditure of N1.8 trillion for this year!
What most analysts find worrisome in this scenario is the wisdom in building up a huge foreign reserve while we decry inadequacy of funds for full budget implementation to significantly improve the living standard of our masses in the areas of health, education, water, transportation, etc, etc.
PETROL SUBSIDIES
Mr. President’s ‘no shaking’ stand on the merits of deregulating the downstream sector of the oil industry is well known; however, deregulation as a concept appears to have been placed in a remote cooler in the current budget. The 2006 budget speech confirmed a subsidy of N292bn to NNPC to cushion the impact of high petroleum prices on the lives of Nigerians! In this event, NNPC would remain the sole importer of refined petroleum products for the foreseeable future and those investors who have government approval to build refineries may find it commercially wise to stay action for now! Thus our hopes and dreams for the salutary benefits of deregulation of the downstream sector may never materialize in the next two years.
The promoters of this administration will quickly congratulate the President for hearing the cries of the masses and bending over backwards to reintroduce subsidy in petroleum pricing inspite of his avowed aversion. However, serious minded analysts suggest that the President has been sold a dummy in the recourse to subsidy! These analysts argue that there is nothing wrong or unworkable with deregulation, but maintain that the dilemma in which we find ourselves whenever crude oil prices rise in the international market is the result of the obtuse current CBN procedure of infusing the nation’s foreign exchange earnings into the economy.
A climate of rising international crude oil prices should be good news as we would, as a nation earn more export revenue and our foreign reserve profile should be on the upbeat; in this event, we would acquire an increasing amount of dollars, which receipts, would improve our import cover appropriately and lead to significant improvement in the value of our domestic currency ‘the Naira’. Thus, rising crude oil prices will bring about a stronger naira and a stronger naira will translate into cheaper domestic pump prices for fuel! An example may drive home the point; thus, if crude oil prices doubled from $30/barrel to $60/barrel as they did in the last two years, this would mean that we would double our dollar earnings accordingly for the same output; such a doubling of our reserve of dollars should improve the value of our currency vis-à-vis the dollar significantly by an amount of up to 50%, and not marginally as is currently the case if the value of our imports remain relatively stagnant! Thus, if the naira consolidates to about N65=$1 as a result of increasing reserves, this would translate to a barrel of crude oil costing $60 x 65 = N3,900; the same as the existing price of $30 x 130 = N3,900/barrel. In other words, if tested commercial principles apply, increase in crude oil prices will translate to a commensurately stronger naira and this will stabilize the domestic pump price of fuel. However, if the naira rate improves disproportionately to the increase in crude oil prices as a result of, say, a fall in the value of imports, then pump prices of petrol will actually fall rather than rise! Deregulation would thrive in this scenario and we would have absolved ourselves of the heresy of praying for a reduction in international crude oil prices!
The issue of subsidizing domestic fuel costs will not arise and the government can, in fact, collect VAT and sales taxes on petrol prices instead of paying out money! Meanwhile, a stronger naira will make the smuggling of petrol through our porous borders less commercially viable as it would automatically increase the cost of such adventures!
Next week, we will examine additional issues relating to the 2006 budget!
SAVE THE NAIRA, SAVE NIGERIANS!
