Nigeria: Budgeting for growth

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Emphasising the government’s fiscal prudence, Nigerian President Goodluck Jonathan presented the 2012 federal budget to the National Assembly in mid-December, noting that although spending is expected to rise, the deficit is projected to fall.

While reaction to the new budget has generally been positive, some criticism has been raised both at home and abroad, including an alleged lack of infrastructure investment and concerns regarding the removal of the country’s long-standing fuel subsidy.

According to figures presented by President Jonathan, the government expects that revenue available for the 2012 budget will amount to about N3.644trn ($22.2bn) in 2012, an increase of 9% over 2011.

Because oil is the largest source of revenue for the government, its assumptions regarding price and volume of output are important factors in its calculations. For 2012, the government has assumed a price of oil of $70 per barrel, a conservative revision to the $75 per barrel used in the 2011 budget. On the other hand, it expects that oil production will rise from 2.3m barrels per day (bpd) to 2.48m bpd in 2012.

The contribution from non-oil sources is also projected to increase significantly, in part due to an improved system of revenue collection. At the same time, recent investments in non-oil sectors are expected to yield results in 2012, the president told the National Assembly, although he did not provide specific figures.

Just as revenues are expected to rise, expenditures are projected to go up in 2012, increasing by 6% to reach N4.749trn ($28.9bn). About 28% of this total, or N1.32trn ($8bn), is accounted for by capital investment. As Jonathan noted in his speech, this represents an improvement over the 26% allocation in 2011 and reverses a downward trend in this figure in recent years.

The government would like to see capital investments as a percent of total expenditures reach 33% by 2015, he added. This development could alleviate some concerns in the past that Nigeria has spent too much on federal employee salaries and other administrative costs, rather than invest in infrastructure that could facilitate economic growth.

The balance of expenditures is accounted for by recurrent spending, such as appropriations to ministries, departments and agencies. Major recipients of this category of spending include the Ministry of Education (N345.1bn, $2.1bn), Police Formations and Command (N298.8bn, $1.8bn), the Ministry of Defence (N291.7bn, $1.77bn) and the Ministry of Health (N225.8bn, $1.37bn).

Recurrent spending also includes debt service costs of N560bn ($3.39bn), equivalent to about 12% of total expenditures. The country’s domestic debt profile has risen in recent years, currently standing at 16.4% of GDP, according to the government. External debt has been estimated at about 2.2%, which means that Nigeria is still well below the 30% maximum that the government has set for the country’s debt-to-GDP ratio.

Nonetheless, in his speech to the National Assembly, Jonathan said that the government is “determined to rein in domestic borrowing”. In this connection, he noted that the projected fiscal deficit for 2012 is equivalent to about 2.77% of GDP, an improvement over the 2.96% figure presented in the 2011 budget.

A reduction in the deficit as a share of GDP, as well as the decline in current spending as a percent of total expenditures, is likely to be well-received by the markets, according to Razia Khan, the head of Africa research at Standard Chartered Bank. However, in an interview with Reuters, she cautioned that there are still major concerns, in part due to general global economic uncertainty, as well as the chance that Nigeria’s oil production could be less than projected.

“Spending has been raised further during uncertain times globally ... leaving little wriggle room for the budget in response to any downside uncertainty that may impact on domestic (oil) output,” Khan said.

Others have expressed concern that insufficient funds have been allocated to capital investments, in particular for important areas of the economy such as the generation and distribution of electricity. According to the Lagos Chamber of Commerce and Industry (LCCI), the 2012 budget did not meet its expectations for a major fiscal restructuring.

“The numbers did not show a significant paradigm shift. What was presented was only a marginal reduction in recurrent budget, which was reduced from 74.4% to 72% of the total budget compared to 2011 budget, a mere 2.4 percentage point reduction. This is not a significant reduction,” LCCI said in a position statement signed by its director-general, Muda Yusuff.

Finally, an area of interest for many was one that remained entirely unmentioned by the president in his presentation to the National Assembly, namely fuel subsidies. Some N240bn ($1.46bn) was allocated to fuel subsidies in the 2011 budget, but zero provision has been made in the upcoming budget, effectively revealing that discounted prices on fuel will no longer exist.

In the past the subsidy was criticised by many economists, who pointed out that it presented opportunities for corruption, such as creating incentives to smuggle fuel to neighbouring countries.

Ending the subsidy plan would also remove a significant burden on the government’s finances. According to Ngozi Okonjo-Iweala, the minister of finance, fuel subsidies in 2011 were expected to amount to about N1.43trn ($8.7bn), significantly higher than the budgeted figure and equivalent to nearly 25% of projected spending for 2012.

Okonjo-Iweala revealed this figure in late December at a public meeting organised by the Newspaper Proprietors’ Association of Nigeria in Lagos, where she and Central Bank Governor Sanusi Lamido Sanusi defended the government’s decision to remove the subsidy, which has been poorly received by the public, particularly by the labour unions and some members of the National Assembly. However, as of early 2012, there were no indications that the subsidy would be reinstated.

While removing the fuel subsidy may not be politically popular, it is expected that it will free up funds that could instead be used to finance capital projects and reduce the deficit. Indeed, it is this aspect of the 2012 budget – fiscal prudence – that is likely to help make Nigeria a more attractive destination for investors, which could ultimately lead to greater economic growth.

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