Economic Update

The government has unveiled an ambitious draft of its 2013 budget, which it says will reduce the state deficit while still shifting spending to support growth – a tricky balance at the best of times.

Released on August 8, the draft budget seeks to both raise expenditure levels to stimulate economic growth and job creation, while at the same time reallocating spending to multiplier sectors.

The budget projects a deficit of 2.17% of GDP, down from the 2.85% set out for 2012. In total, the government expects revenue to be $24.3bn, with expenditure forecast at $30.7bn. Overall, state spending in 2013 will increase by 5%, with many of the additional funds being directed to capital works projects, which will rise from 28.53% of total outlays this year to 31.34% in 2013, according to Ngozi Okonjo-Iweala, the minister of finance.

“The focus of the federal government’s proposals is that the budget should make a practical impact on the areas that matter most to the Nigerian people: jobs, power supply, roads, rail, other infrastructure and agriculture,” Okonjo-Iweala told a press conference after revealing the budget’s details. “The 2013 budget proposal is anchored on the key goal of achieving fiscal consolidation with growth and job creation.”

The minister said that core to the budget were the objectives of improving aggregate revenue receipts, optimising expenditure and keeping the fiscal deficit at a reasonable level. “The proposals for the 2013 budget are based on a rigorous review of the performance of the global economy with regard to negative economic developments around the world, which have the potential to negatively impact the country’s economy,” she stated.

The largest contributor of Nigeria’s economy is the oil industry, which provides the state with around 80% of its revenue. The government has factored in an increase in output for 2013, as well as a higher selling rate to underpin its deficit-reducing budget. Officials have based projections on production of 2.53m barrels per day (bpd), 500,000 bpd up on the current rate, and on a benchmark price of $75, compared to the $72 used for the 2012 budget estimates.

Some analysts have expressed concerns that the government may have erred on the side of optimism with some of its figures, suggesting that the oil sector may struggle to meet its production targets, with theft that drains off up to 150,000 barrels of oil daily and regional unrest combining to pose a real threat. Price fluctuations on the international market could also undercut revenue projections, particularly if major importers of Nigerian oil see their economies move into recession.

One measure not included in the draft budget was that of lifting subsidies on fuel, a move repeatedly called for by agencies such as the IMF, which said in a report issued at the end of July that price support for petrol was costing about 4% of GDP. However, an attempt to roll back the subsidy at the beginning of the year resulted in violent protests, leading the government to rebuild its pricing scheme.

One of those in favour of removing the subsidy is Lamido Sanusi, the governor of Nigeria’s central bank, who said the price support was draining away money that could be better spent in promoting economic development.

“My position has always been clear, the subsidy is not sustainable,” Sanusi told Reuters news agency at the beginning of August. Sanusi did acknowledge, however, that ending the subsidy would not be easy. “There are serious political obstacles in removing it totally.”

Sanusi also warned that Nigeria may struggle to hit its targets of higher oil production, which would weaken the government’s revenue estimates. Combined with slowing growth and stubbornly high inflation, which was running at just under 13% in June, meant that the government needed to exercise fiscal discipline and a degree of caution if it was to achieve its goals, he said.

While there may be some scepticism over the budget’s optimistic figures, Nigeria’s economy is still set to expand by between 6% and 7%, according to Ministry of Finance estimates, a figure most economies would welcome.