Economy: Nigerians to the Slaughter Slab?
'The Ministry of Finance may seek parliamentary approval to alter key 2010 budget assumptions to better reflect global energy prices and the country's crude oil output. The former Minister of State for Finance, Mr. Remi Babalola disclosed this in Abuja on Thursday. 'The Minister had raised the alarm earlier this month that government revenues, mostly from oil sales were not enough to fund this year's expansionary spending plans and could force Federal Government to use its entire windfall oil savings.'
Above is an excerpt from a report titled 'FG May Alter Key 2010 Budget Assumptions'in Friday 28/5/2010 edition of the Punch Newspaper. As innocuous as Babalola's disclosure may seem, the reality of its import is that Nigerians, as earlier predicted in this column, will be confronted with very tough times this year. Indeed, the 2010 N4.6 trillion budget was predicated on three vital assumptions; i.e. global oil price average of $67/barrel, crude oil production output of 2.35 million barrels/day and an exchange rate of N150 to U.S. $1.
The 2010 budget recognized ab initio that even if all three assumptions were valid, government would still require additional borrowing of about N1500bn to supplement revenue receipts, particularly from oil, even if such increase to the federal debt burden implied that creditors (particularly commercial banks) would earn about N500bn as interest charges for lending to government; never mind that this is the same sectoral group that benefited from Central Bank's cash injections of over N600bn last year!!
Thus, even though international average crude price has remained over the budget benchmark of $67/barrel for most of the year, the crude output projection of 2.3 barrels/day became unrealizable because of disruptions to export in spite of the Amnesty Programme for Niger Delta Militants.
Nonetheless, some analysts would hold that the revenue shortfall may be exaggerated; such analysts maintain that even if production shortfalls existed, the attendant loss of revenue would have been largely compensated by the price of crude oil which remained above benchmark for most of this year, and indeed hovered around $80/barrel for over 30 days between April and May. The resultant net income position can be easily ascertained in an economy with responsible regulatory operators, but in an environment where CBN and NNPC revenue and output indices have never been satisfactorily reconciled, it would be near impossible to determine the actual revenue shortfall; indeed, neither Ministry of Finance nor Budget Office has been forthcoming on this issue. What is, however, clear is government's intention to adjust the assumptions on which 2010 budget was constructed, so that revenue expectations from crude export will be reduced.
The question, however, is how do we determine an appropriate lower crude price benchmark and output when actual value of projected budget shortfall has not been clearly calculated or defined? What is stopping Finance Ministry from tabulating output and revenue figures for January - May, and also publishing its reviewed projection for the rest of the year?
It is unlikely that government will willingly portray its revenue calculations from such a transparent vista, but what is clear is government's unhidden agenda to raise more money to cover the sum of N4.6 trillion expenditure in 2010 budget! In serious and focused economies, operators would not only seek for other revenue opportunities when confronted with invalid revenue assumptions, they would also seek ways of reducing waste, and would reprioritize some items in both recurrent and capital budgets. Thus, for example, UK Parliamentarians recently agreed to a 5% pay cut to reduce the value of their projected budget deficit and thereby reduce, even if minimally, cost of borrowing and any increase in Uk's national debt burden.
The Nigerian case is in sharp contrast to the UK response; for example, there is no attempt to curtail the heavy overheads and operational expenses of government at any level. Indeed, quarterly allowances for members of House of Reps are being considered for upward review from N27.2m per quarter to N42m (see ThisDay, 24/5/2010, pg 1 - re: Jumbo Pay) Abuja Airport Road is being 'expanded' with over N250bn, while the airport runway itself will be upgraded with almost N50bn after a downward review from about N60bn. Meanwhile, education and health enjoy less budget allocations than the Abuja runway and Airport Road!
A close scrutiny of budget implementations in the National Assembly and the MDAs would reveal serial budget duplications, which are never reconciled; indeed, the value of unspent budget often exceed the 'spent' or 'implemented' components even where the social need for full implementation is glaring and dire! The public is often fed with the usual menu that unspent budget components have been consolidated with each incoming year's budget. Regrettably, this position becomes untenable when 50% of most budgets remain unspent while fresh provisions are made 100% for the same projects in the New Year's budget!
Furthermore, there are reports, according to Olusegun Aganga, the Finance Minister, that some Ministries, Departments and Agencies of government have refused or are unable to account for over 80% of their independently generated revenue as required under Section 80 of the 1999 Constitution and Section 22 of the Fiscal Reasonability Act 2007. Indeed, the Speaker of the House, Mr. Dimeji Bankole had last month in Abeokuta, Ogun State stated that'N3trn generated by the MDAs in the last five years was not remitted to the federation account' (see Punch, pg 17, 14/5/2010 - 'Unremitted Fund: FG to Audit Revenue Collection Agencies).
Incidentally, the sum of N3trn would have cleared over 75% of current total federal domestic debt of about N4000bn, if remitted as per constitutional mandate!! The NPA, for example, is noted to have remitted only N11m out of N548bn collected over the time under consideration; the Federal Customs Service has also been lately reported to have withheld over N600m from the Treasury and NNPC and CBN continue to hoard federation revenue in breach of the Constitution!
So, it is possible that a sincere and transparent appraisal can yield unanticipated substantial revenue inflows, and a prioritized and judiciously selective budget may indeed more than compensate for the revenue shortfalls that have sent shivers down the spine of government! But the likelihood is that government may not be too favourably disposed to any scrupulous consolidation of revenue shortfall from savings elsewhere; it is most likely that two easier options would be preferred. These options are increased borrowing and a further devaluation of the naira!
Indeed, with the Debt Management Office (read as Debt Creating Office) average monthly bond issue of about N50 - 60bn, without NASS approval the DMO could rake in about N400bn or more from the money market before yearend. However, in spite of the denial of our monetary authorities, such DMO forays into the market would mean that over N400bn, which banks would have advanced to the real sector to stimulate industrial growth and improve social welfare, will simply be shepherded into government coffers to feed the appetite of our treasury barons! If you do not believe this, well, you may try to account for the product of trillions of naira budgeted annually for capital and human capacity development! It should also be clear that in spite of perennial excess liquidity, credit squeeze to the real sector will continue and interest rates to industry may never fall to single digit as desired by the real sector for industrial takeoff!
The second option available to government to supplement dwindling revenue will be in the area of naira devaluation. In fact, government's body language is already indicative that a major naira devaluation is on the way! You see, with devaluation, government can still maintain its expenditure budget of N4.6trn even if crude export dollar revenue is falling. Such strategy was adopted less than two years ago, when crude prices tumbled from an all time high of $150/barrel to below $50/barrel. Prof. Soludo, the former CBN Governor proclaimed that a devaluation of the naira from about N117 to N130 was consciously and deliberately calculated to ensure that government could continue to receive bloated projected budget allocations even if dollar revenue inflow was drastically reduced!! But the truth, of course, is that full budget implementation may not even be possible as devaluation will also increase expenditure budget, particularly capital expenditure, which is largely dependent on high import content.
The tragic downside of this, of course, is the adverse impact on inflation and personal disposable income; besides, the production cost of most industries would also rise in price and made-in-Nigeria goods may become uncompetitive vis-Ã -vis smuggled or contraband substitutes; the net effects of lower personal purchasing power and increasing prices of locally produced consumer goods can only mean one thing: pain and deepening poverty in the land with failed businesses and rising unemployment!
Olusegun Aganga, the Finance Minister, is reported to have recently indicated that '… the exchange rate of N150 to US$1 was as well considered 'too low' and may have negative impact on the competitiveness of the economy! (See The Nation, pg 1, 24/5/2010 in a report titled 'Tariff on Goods Likely to Rise'). Aganga's choice of the phrase 'too low' may be ambiguous, but the comment on economic competitiveness is the same argument that has always preceded serial naira devaluations in the past 30 years. Besides, in view of the need to augment budget shortfalls in the face of dwindling dollar revenue, Aganga may not contemplate the prospect of a stronger naira in view of the current warped template for the infusion of dollar revenue into the monetary system.
Our monetary authorities have always insisted that a weaker naira is good for the economy, as it would be expected to promote Nigerian exports, but regrettably, the naira has fallen in value from stronger than N1=$1 to its present dismal N150=$1; yet, our industrial base has virtually collapsed and non-oil exports are almost non-existent!! Increasingly, Nigerians have begun to recognize that the collapse of social values, industries, education, health care delivery, etc, were all facilitated by CBN's deliberate policy that continuously casts the naira under downward pressure even when our dollar revenue increases geometrically!! Thus, further naira devaluation will lay our industries prostrate, and bring severe economic deprivation to most Nigerians. But the situation may be terminal if government's insensitivity is coupled with 100% increase in VAT and compounded by higher petrol prices that will evolve after government's avowed resolve to deregulate the oil sector without first deregulating the monopoly of the CBN in the foreign exchange market. Millions of deprived and ravaged Nigerians may silently be led ultimately to the slaughter slab!!
This article is reproduced in response to the unbridled appetite of the CBN and DMO to plunge the nation into new debt trap!
Save the Naira, Save Nigerians!
Les Leba