After initial disagreements with the National Assembly over variant figures in its version of the 2011 budget, President Jonathan signed a N4.5 trillion 2011 budget in May. As signed, the 2011 budget is a 13.8% contraction in Federal Government (FG) spending from N5.2 trillion in 2010 and is N487 billion less that the N4.9 trillion budget passed by the National Assembly in March 2011. Of the proposed expenditure, the sum of N2.4 trillion was allocated to recurrent expenditure, N492 billion was allotted to debt servicing, N418 billion was slated for statutory transfers while N1.2 trillion was earmarked for capital expenditure.
On the revenue front, the 2011 budget projections were predicated on an oil price benchmark of US$75 per barrel ($10 more than the 2010 budget benchmark); average crude oil production of 2.3 million barrels per day (bpd); as well as Corporate Income Tax (CIT), Value Added Tax (VAT) and Customs Duty which are projected to increase, 7.8%, 7.8% and 12.5% YoY respectively to N632.8 billion, N625.24 billion and N450 billion. In all, the budget projects revenue of N3.4 trillion in 2011, which implies an estimated deficit of N1.1 trillion or 2.98% of 2010 Gross Domestic Product (GDP)[1], as compared to 6.1% in 2010 or 4.2% passed by the National Assembly. It also put the FG's spending in line with the provisions of the Fiscal Responsibility Act of 2007 (FRA) for the first time since 2007.
Capex takes back seat once again
In spite of recent criticism over the 2010 budget, the 2011 budget remains focused on stimulating consumption. While I applaud the FG’s rejection of the National Assembly’s budget and its move to cut recurrent expenditure by 17.7% YoY - as compared to the 13.1% reduction passed by the National Assembly - its decisions to make an even deeper cut of 23.1% YoY to capital expenditure - as against the 14.1% increase passed by the National Assembly - leaves much to be desired of the 2011 budget. As a result of this cut, recurrent expenditure as a component of the total spending in 2011 (53%) is even greater in the current budget than in the National Assembly’s budget (51%), which was branded “unimplementable” by the current administration. Moreover, capital expenditure as a share of total spending fell to 26% from 32% in the National Assembly’s budget (Figure 1). In fact, personnel cost as a percentage of aggregate spending has doubled between the 2008 and 2011 budgets, over the same period, the FG capital vote has declined from 33% to 26%[1].While I are support the FG’s drive to fiscal consolidation, it is common knowledge that Nigeria’s greatest need is infrastructure development which will serve as the catalyst for growth, a point which appears to be obscure to Nigeria’s fiscal administrators, who have fail see capital expenditure as the primary engine of growth.
A different approach to capex
To justify this reduction in capital expenditure, the FG noted that it intends to fund future development of critical infrastructure through involvement in Public Private Partnerships (PPP). To this end the 2011 budget provides for the creation of a N50 billion Viability Gap Fund (VGF) and a N37billion Multi-Year Tariff Order (MYTO)[1] to fund the government subsidy on its new power pricing regime. The VGF was developed with the sole purpose of providing financial enhancement for infrastructure development projects with potential to successfully deliver specific infrastructure services. The VGF and MYTO are expected to operate in tandem with the newly created Nigerian Sovereign Wealth Fund (NSF) to compensate for the cut in capital expenditure.
A plan to fail
With the limited capital budget for 2011, I am unclear about the FG’s agenda for economic development, particularly as the inability to fully address corruption within the MDAs is likely to remain the primary impediment to full budget implementation in 2011. With PPP in particular, I am concerned that N50 billion and N30 billion in funding for the VGF and MYTO, which are focused almost exclusively on the power sector, barely scratched the surface of the US$15 billion[2] in estimated funding needed annually to bridge Nigeria’s infrastructure gap. Moreover, PPP in Nigeria has historically required considerable gestation periods and suffered from a lack of human capital, particularly on the government side, needed to properly implement these policy initiatives. As such, my view is that a budget which continues bloating personnel overhead at the expense of investment in Nigeria’s economic fortunes is nothing short of a plan to fail. As such, I believe 2011 like 2010 is will be characterized by significant recurrent spending with a dismal performance in capital expenditure plans.
