23

Mar

AN UNUSUAL AUSTERITY BUDGET FOR 2016- 04012016

2016-01-04

AN UNUSUAL AUSTERITY BUDGET FOR 2016
BY HENRY BOYO

The APC's mantra of positive change in governance notwithstanding, the Medium Term Expenditure Framework 2016-2018 (MTEF), on which the 2016 Budget is predicated, unfortunately, reached the National Assembly on 8th December 2015 rather than at least 4 months before the New Accounting year, as constitutionally required. This late submission invariably denied legislators enough time to thoroughly evaluate the direction and workability of the MTEF before the related 2016 budget was laid before Parliament on the 22nd of December 2015. 

Regrettably, flagrant violations of the constitutional provisions of our Budgeting process, are often discountenanced and the extended delay in enacting Budget 2016, for example, may never attract any sanction or condemnation as deterrent.

Nonetheless, the provision of N1.8Tn or 30 percent of total expenditure for Capital projects may appear commendable in a total budget of N6.08Tn. Instructively, however, if the present dollar demand pressure persists and the Naira inevitably suffers significant devaluation, successful implementation of the 2016 capital budget will obviously become seriously challenged and will require additional funding; furthermore, if the National Assembly responsibly conducts a thorough budget evaluation and debate, the actualisation of the socially impactful capital budget will become scuttled as implementation may not commence until after the budget becomes law, possibly in April 2016.

Evidently, Nigerians would be more comfortable if capital votes are dedicated to specific and viable projects which can be readily identified and monitored up to completion. It would also be reassuring if the current capital budget was consolidated after a thorough inventory and evaluation of on-going projects, to determine which could be quickly completed for public use rather than left to decay and waste as is often the case with successive governments after each election.

Nonetheless, budgets traditionally serve as unambiguous statements of expectations and intentions, and responsible budget preparation should therefore be guided by a clear recognition of realistic potentials and foreseable limitations. Thus, when potential income sources seem bountiful in any year, the related budget could appropriately reflect increased public spending; conversely, apparent imminent challenges to revenue expectations will advise an austere budget with more restrictive spending estimates and a requirement for more judicious application of funds in any proposed expenditure plan. 
Incidentally, in public administration, austerity is defined as " a state of reduced spending and increased frugality"; thus, governments adopt austerity measures to reduce expenditures and shrink growing budget deficits, so as to avoid unnecessary debt accumulation.

Alarmingly, the current crash in the price of crude oil, our major income source for over 50 years, has inevitably also threatened our income expectations in 2016.  The responsible path for nations in such dire straits would be to cut down on unnecessary things and live with minimum comfort until the 'lean times' pass over.

Conversely, misguided and self serving administrations may sustain or increase consumption, despite imminent revenue shortfalls, by borrowing; obviously, if such loans are dedicated directly to creating critical infrastructure which will significantly enhance mass social welfare, such debt accumulation may infact be recommended, particularly if the cost of borrowing remains within best practice levels below 5 percent, for such risk free sovereign loans.

If, however, budget deficits are funded with loans bearing oppressive double digit interest rates, and if the proceeds of such loans are then applied directly to 'non productive' recurrent consumption, then such a spending plan will be perceived as profligate and reckless, particularly if such borrowings further compound an already oppressive debt service provision beyond the current clearly worrisome N1.36Tn or 35 percent of the total projected generated revenue of N3.86Tn in 2016.
It is equally disturbing that despite the expected significant revenue shortfall, Buhari, notwithstanding, increased recurrent expenditure from N3.97Tn in 2015 to N4.28Tn in 2016; in this event, about N2Trillion fresh loans would now be required, with possibly double digit interest rates, to fund the increased recurrent consumption, as well as the exceptional capital budget of N1.8Tn, and to also service existing national debts which are currently in excess of N12 Trillion ($60bn), that is, if the indebtedness of CBN open market operations is excluded.

It is clearly inexplicable that government recurrent expenditure should spike in a predictably austere economic climate; it is equally worrisome that despite media reports of due process in public procurement and steady progress in eliminating thousands of ghost workers from government's payroll and the implementation of other similar programs which are intended to plug leakages and reduce wastage by previous administrations, the size of recurrent expenditure has continued to rise!

Ironically, despite his well attested frugal administrative style, President Buhari has unexpectedly, also pumped up the recurrent budget from N3.97Tn in 2015 to N4.28Tn in 2016. The downside of this expanded spending spree is that the additional borrowing will certainly increase government activity in the capital market, so that the real sector will invariably continue to be outbidded and crowded out from access to cheap loans. Obviously, such outcome does not augur well for industrial and inclusive economic growth or job creation in any country. Inexplicably, the banks who will become the prime beneficiaries of increased government borrowing, will ironically also be funded by the usual surplus liquidity persistently instigated by CBN's subsisting obtuse monetary management.

Worse still, government will farcically need to borrow Trillions of Naira while CBN simultaneously sits comfortably on Trillions of idle cash mopped up with inappropriately high interest rate to reduce systemic liquidity.

Incidentally, some experts have suggested that a weak economy requires a huge dose of public spending to stimulate consumer demand and spur investments which will create increasing job opportunities. Indeed, this may be so in an economy that is starved of liquidity; the Nigerian economy, however, is already persistently awash with excess liquidity, which ironically still constitutes the greatest challenge to CBN's ability to establish productive price stability that would successfully drive growth. Thus, in a cash surfeit economy such as ours, the projected increased expenditure will ironically simply fuel inflation well above 10 percent and reduce the purchasing power of every income earner in 2016 and deepen social poverty.

Nonetheless, if the adopted budget benchmark of $38/barrel is compared with market forecast by experts that crude price will recede well below $30/barrel, the 2016 revenue projections and borrowing plans will seem to be clearly against the grain of responsible governance. Indeed, if the dismal revenue forecast materalise, the already irresponsible projected humongous deficit of N2.2Tn may alarmingly remain open ended and will invariably require more borrowing to fund additional shortfalls, particularly when government tax revenue will invariably be constrained by high cost of funds to the real sector, and  the lower economic activity caused by the exclusion of official dollar supply to some businesses as well as the niggling multiple business taxes and levies that companies endure.

Furthermore, the absence of any provision for fuel subsidy is obviously Buhari's gamble that crude price will remain at the present lowly level. Evidently, however, if the Naira exchange rate further depreciates significantly for whatever reason, the pump price of fuel will also spiral and make fresh provision for subsidy unavoidable. In such event, any subsidy payment may ultimately be funded with still more borrowing despite the attendant oppressive interest rates which will worsen our national debt burden.

Regrettably, if recurrent expenditure further increases despite the dim revenue prospects between 2016-2018, increasingly, oppressive debt accumulation may continue unrestrained with severe adverse social and economic consequences and poverty will inevitably also deepen nationwide. In such event, we would have gleefully walked back into a more disenabling debt trap than the odius version existed in 2006.

SAVE THE NAIRA,SAVE NIGERIANS!