Fiscal Folly

 Last week, the Senate passed the 2011 budget to the tune of N4.972 trillion (US$32 billion), increasing the Federal Government’s (FG) spending by 18% over the President’s initial proposal three months ago. In its current form, the 2011 budget represents a 4.4% contraction in total FG spending from N5.2 trillion 2010, however it is a far cry from the President’s initial reduction of 18% to N4.2 trillion. In his comments after the passing the 2011 budget, Senate President David Mark noted that while the 2011 budget was being processed by the National Assembly the Presidency presented a request for an additional N312 billion in funding to be  added to the previous budget to account for errors in estimates for Ministries, Departments and Agencies (MDAs).

Of the proposed aggregate expenditure of N4.97 trillion, the sum of N4.03 trillion is being allocated to spending in Ministries, Departments and Agencies (MDAs), N445 billion is slated for debt service, while N497 billion is earmarked for statutory transfers. Of the total amount set aside for spending by MDA’s, N1.56 trillion is earmarked for capital expenditure while N2.47 trillion is targeted at recurrent expenditure, same as in the proposed budget. On a positive note, the revised budget provides for a 14% increase in capital expenditure YoY as compared to the 27% reduction proposed by the President. As such, the revised budget implies an increase in capital expenditure as a percentage of entire expenditure to 31.8% from 26.3% in 2010.

On the revenue front, the budget revenue projections were predicated on the following key assumptions;

· Oil price benchmark of US$75 per barrel, revised upwards from US$65 per barrel proposed by the President.

· Crude oil production of 2.35 million bpd, 50,000 bpd higher than the President’s budgeted production assumption of 2.3 million bpd.

· Corporate Income Tax (CIT), Value Added Tax (VAT) and Customs Duty projected to increase, 7.8%, 7.8% and 12.5% Y-on-Y respectively to N632.8 billion, N625.24 billion and N450 billion.

For me, the key take away from the budget is the government continued focus on consumption, in spite of recent criticism and promises of greater fiscal responsibly. Though I applaud the Senate for its N560 billion increase of the capital expenditure budget, my view remains that the government is bloating personnel costs and overheads in a budget that should be focused on boosting investment in the long-run competitiveness of Nigeria’s economy. Alarmingly, as part of its budget review, the Senate increased transfers to the National Assembly by 115% to N233 billion. Clearly, the long term implications of extensive growth in non-infrastructure related expenditure appear to be lost on Nigeria’s fiscal administrators.

Overall, I estimate a budget deficit of ~N1.87 trillion, down 13.4% from 2010 but 36% higher than the President’s proposal of ~N1.39 trillion and exceeding the 3% deficit target set under the 2007 Fiscal Responsibility Act for the second straight fiscal year. Although the senate raised the crude oil benchmark to USS75 per barrel, the FG also expects to raise independent revenue from signature bonuses on the sale of oil blocks and on the sale of assets such as the privatization of some aspects of the PHCN, which is already at an advanced stage. I believe the senate’s assumptions on the FG’s ability to increase its funding though privatization and sale of assets may be optimistic at best given the FG’s antecedents. Notably, at H1’10 only N42.4 billion of N300 billion in independent revenue budgeted had been realized.

In my view, the increase in the deficit to ~N1.78 trillion is puzzling when viewed in the context of the FG’s reduction in proposed borrowing for 2011 to N835 billion. I see few alternatives to making up the “unfunded” ~N1 trillion portion of the deficits. Perhaps the FG will give consideration to funding a significant portion of its deficit via dollar denominated debt as domestic borrowing rates are likely to rise going forward and its strengthened balance sheet may temper international borrowing cost especially with rising crude oil prices, increasing crude oil production and growing dollar reserves. However, the expansion still detracts from the signals it has been attempting to send the domestic bond markets about its new inclination towards fiscal consolidation and will likely remove the support bond prices have enjoyed so far this year. I expect to see renewed softness in both primary and secondary bond markets going forward.

Mandela Toyo