The puzzle in the 2016 budget - THE NEW DAWN ONLINE

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Sunday, December 27, 2015

The puzzle in the 2016 budget

PREAMBLE
In 1984, when Buhari presented his first budget as the military Head of State, the price of crude oil was sliding downwards from an unprecedented $38 per barrel towards $15 per barrel. In December 2015 as he presents his third annual budget, the nation is once again facing a grim situation. As Buhari announced to the National Assembly and the global community, “By June 2014, oil prices averaged $112 per barrel. But, as at today, the price is under $39 per barrel.” With the budget based on $38 per barrel as the price of crude oil for 2016, the margin of error is very thin indeed. There ends the similarity.
In 1984, the federal government unilaterally announced the budget and commenced implementation at once. In 2016, Buhari will have to wait for the National Assembly, NASS, to agree with his projections. It will not be easy. In fact, it is unlikely that the budget presented on Tuesday, December 22, 2015, will survive, intact, the assault on it by the NASS. There are several provisions in it which would spark off disagreements and which will need to be modified.
BUDGETING: MIXTURE OF SCIENCE, ART AND LUCK
Even when the global and national economic situations are favorable and fairly predictable, budgeting had never been an exact scientific undertaking. Invariably, it involves forecasting the future trends of several variables which are not controllable by those charged with the exercise.
The margin of error rest on the sincerity, experience, diligence and rigor of thought of those charged with deciding the final outcome. Most Business Schools teach courses titled “Decision Making Under  Conditions of Uncertainty” or some such title. Budgeting under conditions of several global, national and local uncertainties is the ultimate test for the officials saddled with those responsibilities.
Perhaps that explains the reason for the failure of governments in the last sixteen years to successfully implement their budgets. Even a two-time Head of State, Obasanjo, like Buhari, failed woefully to execute the eight budgets presented. Under Yar’Adua and Jonathan annual budgets became a hollow ritual. The current 2015 budget is probably the worst in history; it was presented by a President who was too pre-occupied with the election campaign to provide the leadership the nation required as the price of crude tumbled rapidly. National budget preparation can be likened to trying to sew buttons on amala.
FROM LEFT: SENATE PRESIDENT BUKOLA SARAKI; SPEAKER, HOUSE OF REPRESENTATIVES, YAKUBU DOGARA; PRESIDENT MUHAMMED BUHARI, AND CLERK OF THE NATIONAL ASSEMBLY (SENATE), ALHAJI SALISU MAIKASUWA, DURING PRESENTATION OF THE 2016 APPROPRIATION BILL BY PRESIDENT BUHARI TO A JOINT SESSION OF THE NATIONAL ASSEMBLY, IN ABUJA ON TUESDAY (22/12/15). 7806/22/12/2015/JAU/BJO/NAN
FROM LEFT: SENATE PRESIDENT BUKOLA SARAKI; SPEAKER, HOUSE OF REPRESENTATIVES, YAKUBU DOGARA; PRESIDENT MUHAMMED BUHARI, AND CLERK OF THE NATIONAL ASSEMBLY (SENATE), ALHAJI SALISU MAIKASUWA, DURING PRESENTATION OF THE 2016 APPROPRIATION BILL BY PRESIDENT BUHARI TO A JOINT SESSION OF THE NATIONAL ASSEMBLY, IN ABUJA ON TUESDAY (22/12/15).
As we enter into the year 2016, the global economic situation and trends are the least favorable that Nigeria had experienced since 1983-1988. Added to those are the domestic economic, social and political problems, which would have taxed the governments of the Federation – Federal, States and Local – to the limit without the global components of the basket of uncertainties.
One example will serve as metaphor for the socio/political uncertainties which waylay the successful execution of the 2016 Budget. Insurgencies, both political and religious threaten to make the political environment less conducive to rapid economic growth and development – without which there can be no job creation and reduction of unemployment. Unemployment, as former President Obasanjo had told us, “is a time bomb.” That time bomb can go off any time. But, it will go off sooner if other factors now visible on the Nigerian landscape render job creation impossible. Boko Haram, agitation for Biafra and, now, the killing of Shi’te Muslims pose combine threats to security of lives and property which can set back all the attempts to accelerate the economic development of the country.
However, the major threat to the success of execution of the 2016 Budget remains the price of crude oil. Despite all the promises by various governments, since 1980, to diversify the economy and reduce the nation’s reliance on crude oil exports for revenue, Nigeria still remains largely a mono-product economy depending on crude oil exports for its economic survival. For that reason alone, the place to start examining the 2016 Budget is to take a critical look at the trends – past, present and future of the global price of crude oil in relation to the 2016 Budget.
CRUDE PRICE FORECAST FOR 2016
First, a quick glance at the recent past is required in this regard. The first draft of the 2015 Budget, proposed in November 2014, was based on a benchmark of $78 per barrel. Our analysts at VANGUARD announced that it was unrealistic. The benchmark was later reduced to $73 per barrel. Still VANGUARD pronounced that figure unrealistic. Finally, the Federal Government and the National Assembly agreed on $65 per barrel. This again was considered unachievable by our people.
Pressed to the wall, it was clearly stated here that Nigeria will be lucky to average $50 per barrel in 2015. Today, as the price of crude slides downwards towards $30 per barrel, Nigerians can see why the forecast of the benchmark for 2016 is the central issue. Everything else is secondary. Unless we get the figure right, with narrow margin for error, the 2016 Budget, like others before it, cannot be successfully executed.
So the first and most vital question to ask is: how reliable is the “benchmark price $38 per barrel and the daily production estimate of 2.2 million barrels per day for 2016”? The honest answer is: not very. The reasons are not hard to discover; but a few will point to the dangers ahead – as early as January 2016, in fact. Among the variables likely to waylay the budget are the following:
  • global economic downturn
  • over-supply of crude oil
  • plummeting average crude price
With the exception of the United States and some countries in Europe, the global economic downturn experienced in 2015 is likely to persist throughout 2016 and might even get worse as China’s economy slows down to a crawl. The demand for crude is expected to be significantly lower than this year’s – which is the worst year for Nigerian crude in decades. Crude exports this year averaged less than 2 million barrels a day; and, unless we have discovered new buyers, nothing suggests that demand will be higher in 2016.
Just as the Federal Government was putting finishing touches to the 2016 unnamed budget, the United States of America, USA, was turning the screws on global crude supply. The US Congress had passed a law and President Obama had signed it into law allowing American companies to export crude oil for the first time in 40 years. That means unknown quantities of US crude will soon flow into the global market. In addition, Iran, which had been largely shut out of the world market, is getting set to start shipping crude again. More crude oil glut is expected and the price of crude is expected to drop further.
Nigeria will be fortunate if the average for 2016 settles at $25-30 per barrel. And if that happens the 2016 budget will suffer the same fate as the current one. Remember; our analysts told the nation, last year, that the nation would be lucky to receive $50 per barrel in 2015. Once more, they strongly believe that $38 per barrel is unrealistic and the nation is in for another shock in 2016.
DOUBTFUL IMPLEMENTATION OF THE 2016 BUDGET
That Senator Udo Udoma is the Minister for Budget and Planning is the most re-assuring thing about the 2016 Budget. The Minister comes into office after years as Chairman of UAC of Nigeria, UACN – once Nigeria’s largest conglomerate. With over twenty divisions in several sectors of the economy, he had years experience managing a diversified economic unit in which, above all, budgets are taken seriously and implementation is fully expected from division managers as well as everybody in the organization.
That experience was apparent when shortly after his assumption of office, the N7-8 trillion first announced as likely budget for 2016 by the Vice-President, Mr Yemi Osinbajo, was trimmed down to N6.08tn. For a nation struggling and failing to meet revenue estimates of N4tn for 2015, economists were alarmed by the announcement in late October. While doubt persists about the nation’s ability to generate the revenue for 2016, the presence of an experienced hand on the wheel provides some hope that the defects might be corrected during implementation.
Given reservations regarding the revenue to expect from crude oil, it is difficult to assess the relative importance given to the critical sectors – Power, Works and Housing (N433.4bn), Education (N369.6bn), Defence (N294bn), Health (N221.7bn), Transport (N202bn), Interior/Police (N145bn). If the price and volume of crude oil falls below the budget estimates, it is certain that none of the sectors will receive what had been appropriated for them on paper.
The real concern is about capital expenditure, especially the plan to borrow N1.8tn to finance infrastructure. With crude prices and volume exports likely to fall short of estimates, the projected deficit will probably increase, the cost of servicing debt will proportionately increase and lenders will be wary about the prospects of default. Furthermore, the low price of crude is not likely to end in 2016. Experts warn that it might last until 2018-19. Meanwhile, diversification has not taken place; efforts to increase revenue from other sources will not yield results immediately and some, like VAT, might actually shrink as companies’ experience low sales nationwide. Proposed energy tariff increase might actually send some companies out of business. Clearly financing infrastructure with loans might not be the best approach since the most certain result is increase in the debt stock. Are we not repeating the mistake of 1984/5 when the price of crude went down and we thought it was a temporary set back which turned out to be the case?
EMPLOYMENT OF 500,000 GRADUATES AND CONSEQUENCES
This is either an exceptional social programme or it is the greatest gimmick designed to fool Nigerians. Apart from the fact that it might be difficult to assemble 500,000 Nigerian graduates who would accept teaching as a career, the cost of the project is staggering. Bearing in mind that the choices we make have consequences, the first thing to do is to look at the cost of the programme.
Assuming a modest monthly salary/entitlements of fifty thousand naira per person, the wage bill comes to N300bn per annum. Meanwhile the total allocation for Education in the 2016 Budget is N369bn. Under which heading is the N300bn for the new teachers captured? Even if the remuneration package is only half of that, there is still N150bn to account for; otherwise the entire thing is spurious.
Left untouched are other matters arising out of this decision to employ 500,000. The important question now is: where is the money?
SILENCE ON FREE FOOD AND FREE MONTHLY SALARY
Two items which had been on the front page of the government’s agenda and which everybody expected would be addresses in the budget are: free food for school children and N5000 per month to be paid to 25 million unemployed Nigerians. Government has not provided an estimate for the free lunch, but our financial analysts recon it will add, at least, N250bn to the budget at N100 per day per pupil. But, the free salary programme would have added at least N1.5tn to the budget. Where is the N1.75tn tucked? Have they been dropped or shelved? Have they, very quickly become two more examples of politician’s promises which like “pie crusts are made to be broken”? (VANGUARD BOOK OF QUOTATIONS p 203).
THE VERDICT
President Buhari, unlike Obasanjo, Yar’Adua and Jonathan before him, did not name his budget. Most observers consider it expansionary. The government is proposing to spend more even as the nation currently earns less revenue from all sources than it did in the first quarter of 2014. Some others will call it taking a huge gamble. It can only be a stimulus budget if the funds allocated are available – as and when due. That is why the 2016 Budget just presented is a puzzle. It is difficult to fault it; yet, it is also difficult to be enthusiastic about it. Commendation or condemnation, both still depend largely on the direction of the price of crude in 2016. It might work if the price stays above $38 and the volume is achieved. It will fail if the price of crude stays persistently below $38. It will become an unmitigated disaster if the price dives below $30.
The fear here is that the price of crude might fall below $30 by June 2016 or before. The question is: is there a contingency plan if it does? That is the vital question at the moment.

Credit: Vanguard

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