The N3.1trn ($21bn) budget represents a slight spending increase over 2008, but in light of falling income from oil – which currently accounts for 80% of total government revenue and 90% of export earnings – the budget deficit is set to rise to 3% of GDP, or N836.6bn ($5.7bn), the maximum allowed under the Fiscal Responsibility Act.
The deficit could rise further, however, if budget assumptions are not met, crucially oil production must reach at least 2.29m barrels per day (bpd) and the sale price remain above $45 a barrel. This could indeed prove challenging, given that cement production hovers around 1.83m bpd, while an average oil price of $40 a barrel would see the fiscal deficit rise to 5.24% of GDP, or N1.35tn ($9.1bn).
"The budget for 2009 implies a huge deficit, which we will finance through various means, such as government bonds, among others," Senator Nkechi J Nwaogu, the chairman of the Senate Committee on Banking, Insurance and other Financial Services, told OBG. "It looked quite realistic when it was proposed last year but the world has changed since then. Our benchmark price for crude oil was $45 in the budget, but this is now a thing of the past, while production is only at about 60% of the targeted 2.2m bpd forecast."
Similarly, although Nigeria's real GDP rose from 6.2% in 2007 to 6.8% in 2008, the IMF has forecast growth of only 3.3% this year. Meanwhile, the Ministry of Finance is predicting that real GDP growth will reach 6% in 2009.
In order to attain the government's ambitious Vision 2020 goals of being one of the 20 biggest economies in the world by 2020, GDP growth will have to average 8.9% yearly for the next 11 years. This would mean a tripling of GDP to $900bn by 2020 (up from $294bn in 2008), which translates to a GDP per head of $4000, up from $1128 presently.
Part of the slowdown in growth rates is due to a drop in trade. The export component of growth is likely to slow significantly this year, thanks to the fall in international crude prices. Whereas Nigeria earned $76.3bn in 2008 from its exports, these are expected to fall to $28.2bn this year if the oil price remains at around present levels. If this happens, Nigeria's current account will reach a deficit of 14.7% of GDP.
The outlook for foreign direct investment (FDI) is modest, in light of prevailing economic conditions. Whereas inward FDI had remained above $10bn a year since 2006, Nigerian economists are forecasting $3bn in FDI in 2009, largely due to rescheduled oil projects and investment by international investors.
The financing of the budget deficit will prove challenging, given the state of the international capital markets. The government has had to postpone the issuing of a $500m bond denominated in Naira, originally planned by the Debt Management Office's bond programme, in light of these conditions. However, the government's overall debt position remains strong largely due to the rescheduling of $18bn worth of debt by the previous administration of President Olusegun Obasanjo, as well as the repaying of $12bn to foreign creditors in the Paris Club. Unfortunately, the prospects of issuing new debt to finance the budget remain limited.
The resumption of the government's privatisation programme will likely boost revenues. The minister of petroleum resources announced at the end of February that the sale of the state's four refineries would be finalised in the medium term. Meanwhile, the Bureau of Public Enterprises has resumed its search for an investor in the privatisation of Nitel, the former telecommunications monopoly. However, no forecasts have been published on how much income this would produce. In the meantime, the government has access to its $20bn Excess Crude Account, a rainy day fund built up in times of high oil prices.
2009 is also likely to see the continued dominance of the agricultural sector as the primary GDP contributor. Accounting for 42.07% of GDP in 2008, agriculture has far overshadowed the part played by oil and gas, whose contribution was at 17.54% in 2008. Trading, both wholesale and retail, has a similar contribution at 17.33%. However, manufacturing , always a weak spot in Nigeria, is likely to continue falling as a component of GDP. Handicapped by the unstable electricity supply in the country, the industrial sector, a potentially important job creator, only made up 4.13% of GDP in 2008.
Insiders of the financial community in Nigeria recognise the need to diversify the bases of economic growth. "The global economic meltdown is having effects on the Nigerian economy," Baba Yusuf Ahmed, the CEO of the Nigerian Export-Import Bank, told OBG. "Diversification of export products and markets is a necessity now, due to the falling production and international price of our biggest export, oil. Agricultural products have been neglected for too long, but they could be a natural export."
A reflection of the challenging economic situation can be seen in the devaluation of the Nigerian naira. The Naira has fallen 25% compared to the US dollar (the currency of its largest trading partner) since late November, reaching N150 to the dollar in March.
The central bank (CBN) has imposed exchange controls in February to try to stall the Naira's fall and hinder currency speculation by Nigerian banks. This move has been criticised by the country's moneychangers, who say that this will only encourage the development of a parallel black market in currency exchange. Most bankers agree that the CBN is likely to try to contain the exchange rate to around N145 to the US dollar.
The performance of the inflation indicators remains satisfactory, particularly by African standards. The consumer price index is expected to continue its downward trend, with the CBN aiming for an average 11% inflation rate in 2009, down from 11.5% in 2008.
Like nearly every country around the world, Nigeria faces a number of challenges in 2009, brought on by falling revenues and the drought of accessible financing. However, given the economy's healthy underlying fundamentals (linked to a professional management of monetary policy in recent years) and the cushion of the Excess Crude Account, Nigeria remains in a healthier position than many of its African peers. Now, it is just a matter of waiting for the stormy weather to pass.