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2017 budget will not inspire Nigerian economic recovery 16 Jan 2017

In the parlance of APC – when it was an opposition party – Nigeria will most likely revert to ‘statistical’ economic growth in 2017. Fair enough; that will see off the 2016 recession. The assurance for this lurks in the awareness that it is the dismal economic data of last year we will be comparing 2017 GDP data with.
    
In that context, the GDP growth rate of 2.5 percent anticipated in the 2017 budget will be very weak, indeed. It will prove ineffectual in restoring the material wellbeing of most Nigerians. The jobs, businesses, opportunities and happiness that disappeared in 2016 will largely remain lost.

In other words, there will be no economic recovery in 2017. According to Wikipedia, “An economic recovery is the phase of the business cycle following a recession, during which an economy regains and exceeds peak employment and output levels achieved prior to downturn.” Therefore, the promise of recovery in the 2017 budget is in tune with the accustomed, but often ignorant exaggerations of the APC government.

But, even the anticipated GDP growth is not a done deal. In the last quarter of 2016, the Niger Delta militants observed a respite from bombing oil installations. That helped ramp up oil production to 1.63 million barrels per day in October and 1.69 million bpd in November. However, an unfortunate relapse to oil sabotage could actually see production dip below the level reached in Q4 2016. This will push daily oil production further below the excessively optimistic target of 2.2 million bpd benchmarked in the budget.

Government’s bargain for peace in the Niger Delta – a necessity for bolstering oil production – is increased budgetary allocations to the Ministry of Niger Delta, Niger Delta Development Commission, and the Amnesty programme, totalling N161.5 billion. But this easily translates to a chicken-and-egg situation. Which comes first: peace that is required to boost oil production or the funding that is required to guarantee the peace?

Even if the dilemma is resolved in favour of the government, there are additional concerns for fiscal 2017. Mostly discerned is the exchange rate of N305/$1. This rate will put at risk the complementarity of foreign investment inflows when oil prices are on a recovery path. Increases in oil receipts since the mid-2000s spurred foreign investors’ interests in Nigeria. Between 2011 and 2013, the country attracted average $7.2 billion yearly in FDI inflows, and foreign portfolios piggybacked the capital market. These liquidity-boosts further supported economic growth.

But the 2017 budget is set to perpetuate the present Nigerian currency risk. By December, the gap between rates in the official and parallel markets had widened to 53 percent. Rather than instil confidence, CBN’s management of the forex demand-supply disequilibrium created uneven playing field that scared off foreign investors. If CBN’s current official rate is maintained in the budget, much of the problems associated with it in 2016 will also hold sway in 2017.

Besides, the forex policy will erode the advantage of the conservative benchmark oil price of $42.50 per barrel. Instead of helping to build reserve savings, considerable dollar earnings would be used to maintain the official exchange rate. And if the OPEC supply-cut agreement collapses, and oil prices drop below the floor of $50, the domestic forex market could re-enter the crisis mode of the past 12 months.

The advantage of the expansionary budget of N7.3 trillion, in fuelling domestic production and job creation, is also at risk. Whenever the government gets on track with the N4.9 trillion revenue and N2.36 trillion deficit financing targets, we can expect a naira liquidity surfeit. To this, the knee-jack response of the CBN would be the enactment of its expensive Open Market Operation of mopping up ‘excess liquidity’ to stave off inflation. Banks will happily transfer the liquidity to CBN’s vault and earn good, risk-free interest from doing so, instead of lending to the real sectors and SMEs to boost domestic production.

It is disappointing that the infrastructure investment mantra was further hyped up in the budget. Capital expenditure rose 30.7 percent above the 2016 figure to N2.24 trillion. The bet is that this huge outlay will ‘reflate’ the economy and create local jobs. But as the government boasted of the disbursement of unprecedented N753 billion for capital projects in 2016, even so was the economy in recession, and unemployment worsened to 13.9 percent in the third quarter of the year.

This is a consequence of aping foreign economic orthodoxy. As I recently argued in the piece: “Nigeria’s Misplaced Priority in Infrastructure Investment,” Nigerian rail and highway projects cannot achieve the same objectives that are realised with similar investments in the advanced economies. Precisely because everything needed for the Nigerian projects – ranging from financing, technology, expertise, materials, and, in some cases, labour – are sourced from abroad.

Without this realisation, the Buhari administration is pressing on with huge deficit financing for some infrastructural boondoggles. So doing, it has transmogrified the fiscal policy of borrowing to exclusively fund infrastructure projects to financing infrastructure entirely by borrowing. With that, the alley for public debt to spiral out of control has been created. And, quite paradoxically, when biometric audit of the federal workforce has supposedly weeded out tens of thousands of ghost-workers, recurrent expenditure has ballooned to N2.98 trillion in the 2017 budget.

Indeed, the National Assembly has a lot of work to do on the budget. The key assumptions of the MTEF should be revised, especially the exchange rate. A downward review of the oil production benchmark to a realistic level of 1.9 million barrels per day is necessary. If undertaken, it will become obvious that the current budget deficit is too high as a percentage of government revenue.

However, the bright spot in the 2017 budget is the N500 billion social investment programme. As a concept, the programme can further catalyse domestic production by improving effective demand. Thus, if the recovery anticipated this year would have welfare impact, a significant part of that will come about with effective implementation of the programme. But this programme, although not new, has nothing to learn from – including its politicisation. It hardly got off the ground when first introduced last year.

In summary, the APC cohorts that disparaged positive statistics as an opposition party must offer more than statistical growth to convince on the viability of its economic policies and programmes. Welfare impacts of economic growth must be felt by Nigerians in line with the APC’s dictum. For greater effects, the social investment programme should be scaled up, and directed more at boosting production and consumption.

The scope for such expansion includes public-private partnership ventures in which the federal government holds minority stakes in food production and processing plants. With this innovation, the government can finally make a true claim to an original initiative in Nigerian agricultural reform. To fund the JVs on the government’s side, the allocation for so-called infrastructure projects should be slashed, with the cuts added to the social investment programme.