2007 BUDGET: KEY ASSUMPTIONS 18122006

The public and media evaluation of our nation’s annual budget has become traditionally fixated on the quantum of sectoral allocations; this habit, inspite of the recurring bitter lessons of hindsight after so much votes have been allocated to one sector or the other over the past twenty years, and yet, today, all public infrastructure are in decay and social welfare schemes are practically moribund.

Let us simply recognize that the estimated federal revenue for the year 2007 is N1.8 trillion while the estimated expenditure is N2.3 trillion. According to President Obasanjo, “the (N500bn) deficit will be financed from the sales of government properties (expected revenue from this source not yet specified) and domestic borrowings!  Everyone with the discipline of managing a limited personal income or family budget will most certainly reject any advice that a shortfall in their current account be covered with borrowing from the bank at a cost of up to 17% rather than drawing from their 10% interest earning savings deposits in the same bank!  

Nigerians should be concerned that at a time that we are giving away up to $7bn unsolicited, uncollateralized and time-unlimited loans to some Nigerian banks at less than 4% interest, our government is borrowing from the same banks at up to 17%!  So, inspite of our embarrassingly increasing reserves over the last three years or so, our borrowings from these banks will gallop to over N2,000 billion according to the budget projections of 2007 and the banks will earn a revenue of N265bn as payment for debt service alone!  Note that this does not yet include payment of principal!  Compare this with highest sectoral allocation of N191bn for the multifaceted content of the Ministry of Works.

Indeed, on consolidation of the other sum of N61bn allocated for debts owed to overseas creditors, we would have spent almost 15% of the projected expenditure of N2.3tn on just debt servicing with nothing to show for our debts!  Nonetheless, Mr. President predicated the implementation of next year’s budget on the following assumptions:

The projected crude oil price of $40/barrel is certainly cautiously conservative especially with current level of over $60/barrel and the prospects of cuts in production by OPEC in early 2007 and the continuing unrest in the Middle East and threats to production in the Niger Delta.  In any case, we may expect fall in outputs to be compensated for by sympathetic price rises in the crude oil market; for example, although our output projections of 2.4m barrels/day were never met, revenue projections were still exceeded, what with oil prices touching $80/barrel for a while early this year.  

If, however, oil price remains at N60/barrel and production output is sustained at 2.5m barrels/day, the CBN will again be shoring up an extra $20/barrel on top of its projected earnings of $40/barrel; thus, an additional income of $50m/day (or about $20bn/annum) will raise the excess crude account to over $60bn; but, with the minimal impact on human capacity development, we may describe this as the cold comfort of a sick and malnourished miser’s worship of his gold coins!  

The 2007 budget projections of a 2.5% appreciation of the naira to N126 from N129 in 2006 appears to be misguided in the light of the foregoing.  Our dollar reserves have doubled inspite of over $12bn dollars paid to the Paris Club to improve our credibility and indications are that our reserves will top $60bn in 2007 so that we would have enough to fund all our imports at current rates for the next 3-4 years, even if we do not earn a single dollar henceforth.

Indeed, our exchange rate was a healthier $80=$1 at a time when our barely $4bn reserves could only cover our import bills for less than five months and our pariah status in the Comity of Nations during the Abacha regime hindered foreign investment.  South Africa, our brother country in Sub Saharan Africa, currently parades a mere $20bn external reserves, which can cover her imports for about five months and yet, the S/African rand exchanges for about R7=$1!  Meanwhile, the dollar, the currency in which our reserves are denominated has fallen against the euro by over 20% in the last two years.  

Thus, with a naira appreciation of a mere 2.5%, it means that Nigerian consumers and industrialists will have to pay more naira for whatever they buy from E.U. countries like France, Germany, Italy, and the UK.  Our monetary authorities have often extolled the virtues of a weak naira and indeed the NEEDS programme projected the further devaluation of the naira to over N180=$1.  The campaign pitch of these government officials is that a weak naira will stimulate non-oil export and reduce our dependence on crude oil, but the truth is that the naira has depreciated from 70k to $1 to over N130 to $1 in the past 20 years and yet, we have not witnessed any significant improvement in the non-oil export; in fact our industries have been incapacitated by a weak naira, decrepit infrastructure and persistent inflation.

The US federal reserve (the equivalent of our own central bank) and indeed, the monetary authorities of progressive economies world wide would throw their industries, financial markets, and social welfare in turmoil if the inflation rate in these countries exceeded 3%! Thus, any nation’s budget that targets an inflation rate of 9% as the 2007 budget does, must be ready for eventual stagnation as purchasing power diminishes and reduces demand with adverse consequences for industrial output and consequently employment and insecurity.  Thus, it is unlikely that the projected growth of 10% in GDP (i.e. an aggregation of all goods and services produced within the economy in one year) can be achieved let alone sustained in the climate of 9% inflation.

Indeed, the prospect of keeping a lid on inflation must be very daunting in 2007, as we can expect a spending blitz in an election year at all levels of government, besides, the expectation of a 25% general wage increase and the removal of a substantial chunk of subsidy on petrol prices are all  potential flashpoints for inflation.  The reality of increased naira allocations as more of our bulging reserves are first changed into naira before payment to the bank accounts of the three tiers of government will also expand money supply significantly without collateral productivity and consequently sustain an unhealthy rate and climate of inflation.

Surprisingly, no projection was made for interest rate level in the budget speech, but there is no doubt that with the prospect of severe excess liquidity, single digit interest rate that is supportive of industrial and commercial expansion will be virtually impossible next year.  In addition to the above challenges, the bogey of budget implementation is another millstone that will choke infrastructural and human capacity development in 2007.  Even with substantial carryover from 2005, only 80% of capital budget implementation will be achieved this year; the year 2007 may not be different.