An unusual austerity budget for 2016

President Mohammed  Buhari finally laid the proposed 2016 Budget before the Legislature barely a week before parliament proceeded on recess in December. Regrettably, If the budget must be subjected to exhaustive scrutiny and quality debate, it may take another 3months or more after the National Assembly resumes in January 2016 before the Budget becomes Law.

                        Buhari presents N6.08trn 2016 budget to NASS

Consequently, the release of funds for capital expenditure may unfortunately not effectively begin until April, and this will invariably, jeopardise full implementation of those critical projects which could improve our social welfare. Regrettably, flagrant violations of the  constitutional provisions on our Budget process, are often discountenanced and the extended delay in enacting Budget 2016, for example, may never attract more than a slap on the wrist as deterrent.

Sadly, the comprehensive implementation of an expanded capital budget of N1.2Tn is already clearly jeopardised ab initio and any hope for significant social infrastructural renewal in 2016 will clearly be misplaced.

Nonetheless, budgets traditionally serve as unambiguous statements of expectations and intentions, and responsible budget preparation will be guided by clear recognition of realistic potentials and limitations. Thus, when potential income appear realistically bountiful, the related budget could appropriately reflect increased public spending; conversely, imminent apparent challenges to revenue expectations will advise an austere budget with more restrictive spending estimates.

Incidentally, in public administration, austerity is defined as “ a state of reduced spending and increased frugality”; thus, governments adopt austerity measures to reduce expenditures and shrink growing budget deficits to avoid unnecessary debt accumulation.

Alarmingly, crude oil, our major income source for over 50 years, has lately suffered a serious price crash, which threatens our income expectations.  The path of wisdom for nations in such dire straits would be to cut down on unnecessary things and live with minimum comfort until the bad times pass over.

Conversely, misguided and self serving administrations may sustain or increase consumption, despite imminent revenue shortfalls, by borrowing; if such loans are directly dedicated to creating critical infrastructure which will significantly enhance mass social welfare, such debt accumulation may be recommended, particularly if cost of borrowing remains within best practice levels below 5%, for such risk free sovereign loans.

If, however, budget deficits are funded with loans with oppressive double digit interest rates, and if the proceeds of such loans are then applied directly to recurrent consumption, then such a spending plan will be perceived as profligate and reckless, if such borrowings further compound debt service provisions beyond the worrisome level of 35% of the total N3.86Tn projected generated revenue in 2016.

Thus, a debt service provision of N1.36Tn or 35% of estimated generated revenue must disturb any patriot. It is equally disturbing that despite the expected significant revenue shortfall, Buhari increased recurrent expenditure from N3.97Tn in 2015 to N4.28Tn in 2016; consequently, about N2Trillion would now be required as loan, with possibly double digit interest rates, to fund increased consumption, the exceptional capital budget of N1.8Tn, and to service existing national debts which are currently in excess of N12 Trillion.

It is clearly inexplicable that government recurrent expenditure should spike in a predictably austere economy; it is equally worrisome that despite media reports of due process in public procurement and steady progress in eliminating thousands of ghost workers from government’s payroll and the implementation of other similar programs intended to plug leakages and reduce wastage by previous administrations, the size of recurrent expenditure has continued to rise!

Ironically, despite his well attested frugal administrative style, President Buhari has unexpectedly, pumped up recurrent budget from N3.97Tn in 2015 to N4.28Tn in 2016. The downside of this expansion is that the additional borrowing will certainly increase government activity in the capital market, so that government will invariably continue to outbid and crowd out the real sector from access to cheap loans. Obviously, such outcome does not augur well for economic and industrial growth or job creation in any economy. Inexplicably, the banks who will become the prime beneficiaries of increased government borrowing, will also ironically be funded by the usual surplus liquidity instigated by CBN’s subsisting obtuse monetary management.

Incidentally, some experts have suggested that a weak economy requires a huge dose of public spending to stimulate consumer demand and spur investment to create increasing job opportunities. Indeed, this may be so in an economy that is starved of liquidity; the Nigerian economy, however, is already eternally awash with excess liquidity, which ironically still constitutes the greatest challenge to CBN’s ability to establish productive price stability that would successfully drive growth. Thus, in a cash surfeit economy such as ours, the projected increased expenditure will ironically simply fuel inflation well above 10% to the chagrin of every income earner in 2016.

Nonetheless, the provision of N1.8Tn or 30% of total expenditure for capital projects may appear to be a step in the right direction. Instructively, however, if the present dollar demand pressure persists and the Naira inevitably suffers significant devaluation, successful implementation of the 2016 capital budget will obviously become seriously challenged; furthermore, if the National Assembly appropriately conducts a thorough budget evaluation and debate, the actualisation of the capital budget will become delayed as implementation may not commence until after the budget becomes law, possibly in April 2016.

Evidently, Nigerians would be more comfortable if capital votes are dedicated to specific and viable projects which can be readily identified and monitored up to completion. It would also be reassuring if the current capital budget was consolidated after a thorough inventory and evaluation of on-going projects  which could be quickly completed for public use rather than left to decay as is often the case by successive governments after each election.

Nonetheless, if the adopted benchmark of $38/barrel is compared with current market forecast that crude price will recede well below $30/barrel, the 2016 revenue projections and borrowing plans will seem to be clearly ambitious. Indeed, if such dismal projections materalise, the already inappropriate humongous deficit of N2.2Tn may remain open ended and will invariably need more borrowing to fund any additional shortfall, particularly when government tax revenue is simultaneously constrained by high cost of funds to the real sector, and  the lower economic activity caused by the exclusion of official dollar supply to some businesses and niggling multiple business taxes.

Furthermore, the absence of any provision for fuel subsidy is obviously a gamble on crude price remaining at the present lowly level. Evidently, however, if the Naira exchange rate depreciates significantly for whatever reason, the pump price of fuel will spiral and make provision for subsidy unavoidable. Any subsidy payment may unfortunately require to be funded with additional borrowing with the usual oppressive interest rate.

SAVE THE NAIRA! SAVE NIGERIANS!!