Budget 2010: Bumpy Road Ahead
by Jerry Uwah
The scene of the world economy is changing rapidly. By this time last year, economic projectors were working on assumptions that the financial meltdown imposed on the globe by the reckless risk managers of America’s unruly mortgage industry would take oil prices to $30 per barrel from an all-time high of $147. Oil prices actually dropped to $33 per barrel by the first quarter of 2009 but the slip did not last. That trend, however, informed the adoption of $45 per barrel as the reference price for the ill-fated 2009 budget. The situation in the oil industry was so fluid that the reference price was keenly contested by economy watchers as unrealistic. Everyone expected the 2009 budget deficit, which was already projected in excess of N1 trillion, to balloon out of proportion as oil price plummets along with oil production which had been strained by the activities of militants in the oil-rich Niger Delta region. The 2009 budget gave its architects myriads of challenges.
Today, the challenges facing the architects of the 2010 budget is quite different. Oil price is sailing pretty close to the $80 mark. Production in Nigerian oil fields has surged to 2 million barrels per day (mbpd), up from an all-time low of 1.3 mbpd as the federal government amnesty programme curtails militancy in the oil-producing areas.
Economy watchers now see the $57 per barrel reference price of the 2010 budget as pretty conservative as everyone expects oil price to cross the $80 mark during the period. In fact, the contention now is that the conservative reference price for the budget would deposit so much money in the controversial Excess Crude Account that it could once again spark off the debate about when and how to share it with the three tiers of government. The reason is obvious: at the current rate of economic recovery in China , India , the United States of America , Europe and Japan , crude oil price could easily surge to levels where the Excess Crude Account would be chalking up $30 per barrel on the quantity of crude oil exported daily. And at current rates, that sum could be surging by $60 million daily.
On paper, the 2010 Appropriation Bill as presented to the National Assembly is a huge pack of goodies. The budget proposal is built around crude production rate of 2.088 mbpd, gross domestic product (GDP) growth rate target of 6.1 per cent and inflation rate target of 11.2 per cent.
The exchange rate reference price of N150 to the dollar in the face of positive growth rate projections in the world industrial nations and its attendant expected surge in crude oil prices would give the federal government huge sums in naira to play along in the domestic market compared to an exchange reference rate of N117 to the dollar in the failed 2008 budget.
With expected surge in incomes, the federal government could comfortably plough the sum of N1.3 trillion into capital projects during the year. The sum is almost two times the amount projected for capital projects in the equally failed 2009 budget. The budget, which the president said is designed as a fiscal stimulus to counter the crippling effect of the current credit crunch on the economy as well as reduce the yawning infrastructure gap, is largely seen as an expansionary budget. It would tackle the near-total darkness that has descended on the land, make considerable impact on the deplorable state of roads, and attempt to diversify the land transportation system by resuscitating the nation’s moribund rail system.
All these are on paper. With three straight failed budgets on a stretch, economy watchers wonder the magic wand that would conjure the full implementation of the 2010 Appropriation Bill, especially when it has to be executed in a crucial election year. Nigeria, in the last three years, has been crippled by clumsy budget implementations. It took the prying eyes of the House of Representatives to discover the sum of N500 billion in unimplemented capital projects in the 2007 budget. The 2008 budget suffered even worse fate in terms of implementation. The 2009 budget, by various estimates, has only managed to record a humiliating 30 per cent implementation rate.
Besides the concomitant failure in capital budget implementation, economy watchers have persistently questioned the senselessly high cost of governance in the land. The last three budgets have seen recurrent expenditures almost tripling capital expenditures, which in most cases suffer crippling under-implementation. While the presidency had almost always returned to the National Assembly with request for approval of huge sums in supplementary recurrent expenditures, capital budgets have always been rolled over with huge chunks of it slipping into private pockets. That is the basis for the pessimism in the 2010 Appropriation Bill.
Equally untested is the hypothesis that the federal government could reverse the crippling credit crunch in the economy with fiscal stimulation which the president and the architects of the 2010 budget proposal expect to accelerate economic recovery through targeted fiscal interventions. The intention of the federal government is based on the belief that the crippling credit crunch in the economy, like what happened in the U.S. , Europe and Japan in 2008, is triggered by liquidity squeeze. Unfortunately, the situation in the Nigerian money market is quite different from that of the developed economies. There are strong indications that if liquidity squeeze was at the root of the current credit crunch, the massive intervention of the Central Bank of Nigeria (CBN) in the last four months would have reversed the situation.
The apex bank has reportedly pumped close to N 650 billion into the money market with a view to unnerving a perceived liquidity squeeze, thus empowering banks to open credit lines. The credit has still refused to flow ever since. Aside from the massive intervention from the reserve bank, there have been huge sums pumped into the system from the federation accounts doled out to the three tiers of governments at different times.
In fact, bankers contend that the system is awash with cash to the extent that there are no investment outlets for the excess liquidity. A recent 128 per cent subscription rate for the low-yield federal government bond does not portray a money market in liquidity squeeze.
That assumption is further buttressed by the fact that banks have practically stopped the mobilisation of funds. The result is that deposit rates are plummeting while lending rates continue to surge. “There is no business, so why do you mobilise funds?” quipped a banker who was assessing the possible effect of the federal government’s fiscal stimulation on the credit squeeze. The banks are sitting on a huge mountain of cash. The plummeting deposit rates point to this reality.
The truth, however, is that the banks are not willing to lend because the land is awash with marginal borrowers whose credit ratings are so abysmal that they cannot be trusted with funds at a time when the CBN has upped the ante in risk management. Bankers contend that lending to businesses that used to give them huge margins have been curtailed by the apex bank’s calls for strict provisioning for facilities that in some instances could not rightly be adjudged as non-performing.
Besides, the productive arm of the economy, the embattled manufacturing sector, is deliberately starved of funds because the inclement investment weather in the industry has made loans recovery a Herculean task. No risk manager wants to lend to high-risk borrowers at a time when the CBN demands nothing less than strict compliance with Banks and Other Financial Institution Act (BOFIA) reporting requirements.
Those challenges would have to be tackled for any palliative on the credit squeeze to be effective. There is panic in the money market with risk managers not knowing the way out. The CBN might have to draw up fresh lending rules to get credit flowing once again.
The president passively admitted the inflationary trend in the budget by predicating it on an inflation rate of 11.2 per cent as against the current rate of 10.4 per cent. The 2009 budget was based on an inflation rate of 8.5 per cent. Given these antecedents, the 2010 Appropriation Bill is an invitation to high inflation. Those who set the inflation target of 11.2 per cent are either being deceitful or have grossly underestimated the inflationary dynamics that the policy thrust of the budget would unleash on the economy.
A deficit of 4.87 per cent of GDP, a planned unparalleled expansion in money supply, along with an expected unrestricted rise in transport fares, rents and food prices to be triggered off by the impending deregulation of the downstream sector of the oil industry, would almost certainly push inflation beyond limits. The situation is worsened by the choice of N150 to the dollar as exchange rate for the Appropriation Bill which indicates that, despite expected improvement in oil revenues, the federal government wants the naira to continue its slide against the dollar, with the attendant high cost of living. The naira has lost 20 per cent of its value in the last one year. This is another budget without a human face.
December 1, 2009
Tags: budget, Nigeria Posted in: Jerry Uwah
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