Saturday, 13 February 2016

2016 budget: How not to borrow

By Dr. Ahmed Adamu

Dr. Ahmed Adamu
Nigeria’s 2016 budget christened budget of change is critical to the country’s real economic transition and it is the framework that will define the real change citizens of the country have long clamoured for.

There is no better time to get the economic policies and direction right than now, and that is why the President needs to be well informed.

The Nigerian people have unprecedented hope on President Muhammadu Buhari to steer the country out of the woods. It does appear he is unlucky to come at a time when the price of crude oil-which Nigeria’s economy is hugely dependent- has crashed to lowest level in a decade.

The crude oil prices (hovering around $30 per barrel early this year) is still lower than the budget benchmark price of $38 per barrel, which means at this level, there is going to be around 22% reduction in the expected oil revenue.

Despite this apparent shortfall of expected oil revenue, the 2016 budget which is before the national assembly has a deficit of 36%, meaning that 36% of the money expected to finance the budget will come from borrowing.

The implication is that more than 50% of the revenue expected to fund the 2016 budget are not going to be readily available or obtainable. In other words, only N3 trillion (out of the N6.08 trillion budgeted) is likely to be available to implement the 2016 budget (without borrowing), which will come from non-oil taxes and independent revenue, and partly from the shrinking oil revenue.

Now the question is why should the government be so ambitious just to keep its political promises for now? If you are a worker, would you keep spending more than you earn? Or would you adjust to the level of your income? Sometimes, it might be good to spend more, even if it means to borrow, so as to provide and help the family members, so that they can be productive and earn more. But this has to be strategically thought out and decide when to spend more and when not to, and when to borrow and when not to.

The current Nigerian debt with World Bank’s International Development Association (IDB) stands at $11.8 billion as principal with obligation of around $6 billion (World Bank 2015). This means for this particular loan, the average ratio of the obligation is 0.51, meaning that for every $1 borrowed; $0.51 has to be paid as interest or as debt service cost. This analysis only accounts for the IDB’s credits to Nigeria. It does not account for other international and national lenders to Nigeria, which if put together, the current Nigerian debt stock (including those from states) stand at $64 billion (Debt Management Office 2015). This equals to N13 trillion.

The decision Buhari will have to make is to either reduce the spending and not to borrow, or borrow now and spend more. Each decision will have its economic effects. If he borrows now, it means there will be increase in aggregate demand and development in infrastructure necessary for economic growth. However, this will mean these spending must attract equivalent or even higher return to be able to pay back the total cost of the debt. It will mean there will be less money available for the more efficient private sector, as government has to collect money from the private sector to fund its expenditure, which the government might not be able to efficiently manage compare to the private sector.

It will also mean that the debt stock and cost of debt will increase, which may likely undermine future development, leading to future decline in government services and increased in taxes. It will make the economy fragile and independent due to external obligations.

Now, President Buhari intends to borrow $2.5 billion from World Bank, $1 billion from African Development Bank (ADB) and N984 billion internally. If he collects these debts, it means Nigeria has to fulfil the International Monetary Fund (IMF) conditions, one of which is to further devalue the country’s currency, which the president himself is not ready to do. This will further devastate the economy of course if he does so.

The Western world would at all cost collect back their oil dollars by making the poor oil rich countries devalue their currencies and granting them loans with expensive service costs. Already, Nigerians sensed this when Managing Director of the IMF, Ms Lagarde visited the country early this year.

So, I strongly disagree with respected economist Prof. Pat Utomi for suggesting that the naira should be devalued.

Our economy must pick up by itself, it needs to be strong, and investment promotion and diversification are the key priorities here. Many external spending (both private and public) must be reduced drastically; this may include reduction in unnecessary foreign scholarships and personal spending, so as to shift the currency supply curve inward. So, Mr President is perfectly right on the restrictions of foreign spending. However, we have to suffer for our failure to establish our independent economy, but scarcity brings about innovations and improvements. If the manufacturing sector is viable, cheap foreign investment due to Naira depreciation would have resort the currency market to equilibrium. Unfortunately, the manufacturing and non-oil sector is not viable in the country.

If Buhari chooses not to borrow, he will then have to reduce the spending and will reduce the interest rate, and by extension increasing investment, which will create more jobs and address the issues of unemployment and poverty. This will then create more chances for collecting taxes and independent revenues. He will then have the option of imposing proportionate tax systems, which will increase the government revenue to develop lagging infrastructure. This will not affect the future performance of governance, and will make the economy more independent and resist any external shock. It will enhance resilience, independence and productivity of the economy.

The appropriate balance has to be maintained, optimal government spending or budget deficit increases economic growth, but when it becomes constant or continues, it brings about reduction in economic growth. Nigeria had budget deficit for eight years in the last ten years, and the government was supposed to wait and see the effects and returns of the injections and provisions made so far through the government spending. If the government keep spending, the aggregate demand will continue to increase, thereby causing inflation. It will then reduce the purchasing power of the currency. It will also lead to higher interest rate which reduces investment (deficit hawks).

In my earlier piece, I advised Mr President not to borrow for the next four years at least. The easy way to go about it is to drastically reduce government spending, and reduction in the recurrent expenditures is the starting point. The recurrent expenditure constitutes 70% of the expected government spending in the 2016 budget. The involvement of private sector is critical in building the economy. We have to migrate from a government driven economy to private sector-driven economy.

The government should be responsible for policy and regulations. Most of the capital and recurrent expenditures can efficiently be delivered through private-public partnerships. The government would then concentrate on security, healthcare, and social welfare. I will advise the federal government to privatise primary and secondary schools, and government should use the savings to support parents that cannot afford to pay the regulated school fees. This will relieve the government of huge financial responsibilities and improve quality education (I will do a separate write-up on this). Private investment in non-oil sector has to be prioritised; the government cannot do it all alone. So, this is not the right time to borrow, it is time to control the spending and explore opportunities for generating revenue internally.

Ahmed Adamu, Ph.D., is a Development and Petroleum Economist and the Chairperson of the Commonwealth Youth Council (CYC).

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