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Borrowing our way into economic woes 12 Nov 2018

For the first time since 2004, Nigeria will have a contractionary budget in 2019. The rolling three-year budgetary framework, so-called Medium-term Expenditure Framework and Fiscal Strategy Paper (MTEF-FSP), which the Federal Executive Council approved last month, cuts back the 2019 federal budget to N8.73 trillion. This represents 4.5% contraction, compared with the 2018 budget of N9.12 trillion.
    
Accordingly, the 2019 budget deficit will scale back. The Minister of Budget and National Planning, Udoma Udo Udoma, had hinted that the deficit will probably reduce to N1.6 trillion, from N1.95 trillion in 2018. Even so, the total outlay for capital expenditure will shrink. With this, the total amount of borrowing in the 2019 fiscal year will also reduce.

Why this sudden change of fiscal direction? One, the President Muhammadu Buhari administration failed to realise its revenue projections in the 2016 and 2017 expansionary budgets, and it already foresees a similar fate in the 2018 fiscal year. Two, the public debt has now spiralled out of order, rising from N12.1 trillion in June 2015 to N22.3 trillion in June 2018. Three, the illusion of Buhari’s debt-fuelled, expansionary fiscal strategy is now glaring, and it is time to stop chasing shadows.

His expansionary fiscal strategy began in earnest in 2016, when the budget for that year increased by 38.7%, from N4.9 trillion in 2015 to N6.8 trillion. It was thought that the huge jump would forestall a likely recession that year. But, alas, the economy contracted by 1.59% in 2016, the worst economic performance in two-and-half decades.

The 2017 and 2018 budgets were aimed at fostering economic recovery and strengthening growth. But their performances have been underwhelming. Actual growth in 2017 was 0.8%, whereas 2.5% was projected in the budget. The GDP is set to grow at below 2% in 2018, as against 3.5% projected. With economic growth well below the rate of population growth of circa 3%, GDP per capita has been falling.

Even at the most basic of its promises, Buhari’s fiscal strategy has spectacularly failed. With the 2018 budget, the fiscal year was supposed to have reverted to January to December. But this year’s budget was signed into law in June. As at October ending, the appropriation bill for 2019 has yet to be presented to the National Assembly. Therefore, the 2019 budget will be set for passing only months after the general elections in February.

The humongous N10.2 trillion borrowing of the last three years to June 30th, 2018 was supposedly channelled towards infrastructure development. This was expected to “reflate” the economy and create jobs. To its credit, the current administration completed the Abuja–Kaduna rail project it inherited from the previous administration. However, several old and new projects remain uncompleted. The federal roads, including those connecting the economic arteries of the country, especially the Apapa–Wharf Road and the Lagos–Ibadan Expressway, have remained in deplorable conditions.

With the economy deep in underperformance, the unemployment rate jumped from 13.3% in Q2 2016 to 18.8% in Q3 2017. Youth unemployment had reached an all-time high of 33.1% in the third quarter of 2017.

So, if the last three years of expansionary budgeting have been dismal for jobs, economic growth and infrastructural development, what are we to expect from the contractionary budget of 2019? Would the Buhari administration achieve more with less budget?

The likely good side effect of the contractionary 2019 budget is that it will slow the growth of both the public debt and inflation than otherwise would have been the case. After 18 consecutive months of moderation since February 2017, inflation rose to 11.23% in August and 11.28% in September.

Beyond this, the government may have tacitly admitted that its expansionary fiscal strategy is unsustainable. As I have argued for two years, the regime has failed to demonstrate the competence and unity to deliver the ambitions of its fiscal policy. A number of economic pundits have more recently expressed concerns over the country’s debt sustainability. The IMF has said that Nigeria faces a debt crisis, with 63% of government revenue to be soaked up by debt service in 2018. This is contrary to the insistence of the fiscal authorities that Nigeria’s debt level, which currently stands at about 21.3% of GDP, supports even more borrowing.

The immediate future of the Nigerian economy now appears quite frightful. For a number of reasons, it is believed that the world economy is set to decelerate towards a recession by 2020. China’s GDP growth rate is slowing; it grew at 7.3% in Q3 2018, the depth of its economic growth since the last financial crisis. The cleverly-choreographed U.S. economic growth, which hit 4.1% in Q2, cooled to 3.5% in Q3, and will likely slow further next year. Added to these is the toll that Brexit and its uncertainties will take on global growth. In any case, some economists, including Nouriel Roubini who predicted the last financial crisis, have begun to say the end of the current growth cycle is near.

The risk of a next global economic downturn for Nigeria is that the price of crude oil will tumble. This next time, a precipitated fall in oil prices would be from around $80 per barrel, not from $110 in 2014. This suggests the depth of the impending oil-price crash may be lower than the last time.

Nigeria faced the last oil price crash with almost no fiscal savings but with moderate economic growth and a decent level of foreign reserves. The country would face the probable next oil price slump from a weaker position and with less resilience, given the still-low fiscal savings, dismal economic growth, high unemployment and high public debt.

Even without the probable adverse global economic conditions and oil price slump, Nigeria faces a dire economic future with ‘Buharinomics’ that has now gone awry. We have borrowed our way not out of recession but into deeper economic woes.

The Nigerian economy is in need of a catalyst for performance, even without the worst-case scenario. There is nowhere else to look for this than to aspire for a more competent economic management team for the country.