With the 2016 budget now passed by the National Assembly and a N3trillion war chest, the government of President Muhammadu Buhari says it is set to take on the struggling Nigerian economy and is promising it will win.
Analysts said last night that the package and the stimulus budget would aid the growth in GDP that has been experiencing slow growth.
Bola Agbola, executive director, Cashcraft Asset Management limited, said: “The resumption of spending by the Federal Government eleven clear months after inauguration of the government and three months into the new year, should reactivate the economy all things being equal. The fundamental issues of sagging imports and fuel scarcity may dampen the impact of the reflationary spending .
“The much awaited new foreign exchange policy should be released without further delay, as the existing huge gap between official and parallel market rates is not only fueling inflation but might be creating a cesspool of corrupt practices in the opaque foreign exchange allocation chain, which may not boost the image of the government.”
Johnson Chukwu, managing director, chief executive, Cowry Asset Management Limited, had last week told BusinessDay that, “The expansionary nature of the budget and the package will offset the negative effect of the contractionary monetary policies,”
According to Chukwu, “In a situation of slowing economy, the emphasis should rather be on stimulating the economy and addressing the structural impediments that are triggering the inflationary pressure. It must also be noted that without addressing the current challenges in the foreign exchange market, increases in interest rates will not lure investors, particularly foreign portfolio investors back to the Nigerian market.”
The president who is planning a number of town hall meetings to make his case directly with the Nigerian people, has come under attack for failing to halt the economic slide and for his insistence on applying outdated solutions to some of the country’s economic challenges.
Emboldened by the N3trn stashed away in the TSA purse, the government has already announced it will immediately reflate the economy with about N350bn in payment to contractors and many say while this will be helpful in oiling the economy, concerns will still continue about how to expand productivity in the economy, so as not to push up inflation.
The economy is still better defined with its debilitating foreign exchange shortage which is leading to declining factory activities and resultant job losses, with even the local manufacturing which the government hopes to promote being some of the worst hit.
A large foam maker had to turn down a single order for over 3,000 mattresses because the company cannot get the required raw materials and even local cable making firms which are having increased demand from builders and construction firms, are finding they cannot meet the demand because of their inability to access the required raw materials.
Nigeria’s lawmakers passed the budget after months of political wrangling, pushing through record federal spending even as low oil prices have brought the worst economic slowdown in 15 years.
The Federal Government plans to spend a record breaking N1.8 trillion on capital projects, N1.5 trillion to service debts and N2.65 trillion on recurrent expenditures excluding debt, Senate President Bukola Saraki said in parliament in the capital, Abuja, on Wednesday.
“The budget reflects efficient and equitable allocation of resources,” Saraki said. “For once, there was no bickering over the benchmark oil price, but rather we all devoted time and energy to ensure that we have a budget that is implementable.”
The spending plan factored in oil at $38 per barrel and projected output of 2.2 million barrels a day.
“This budget empowers us to invest in the infrastructure needed to unlock our non-oil economy and reduce our vulnerability to the oil price”, Nigeria’s finance minister, Kemi Adeosun, told the Financial Times.
The prolonged and sometimes dramatic process which the budget has undergone at the parliament and the lack of speed by the government, fuelled concerns that Buhari’s government is not responding quickly enough to the economic problems caused by the collapse in oil prices.
Now that the budget has been passed, financing the high spending — and dealing with a deficit of N3tn ($15bn) — will be a challenge according to analysts. Nigeria’s government is in talks with the World Bank and the African Development Bank over $3.5bn in loans, but it is not clear where the rest of the funds needed will come from.
Buhari’s proposed budget in December included cautious expectations for oil revenues “but the problem at the time was there was not a great deal of detail about where the rest of revenues were going to come from”, said Razia Khan, chief Africa economist for Standard Chartered.
“Where that revenue comes from and what measures are going to be driving it are the key questions,” Khan added.
Nigeria’s economy grew about 2.8 per cent last year, its slowest rate since 1999, as lower crude prices took their toll.
Nigeria has traditionally earned 70 per cent of its revenue from crude exports and has few other sources of foreign exchange earnings.
The Buhari administration argues that heavy state spending is needed to cut oil dependency in the long term, adding that such a move has been put off for too long.
Despite the government’s optimism, many in the investor community remain worried about the success of the govenrment’s plan.
Matthew Page, of the Council on Foreign Relations wrote a piece in the FT in which he said
Africa’s largest economy will continue to struggle to find its feet as sliding oil prices threaten to derail Buhari’s efforts to put Nigeria’s public finances back in order, fund planned infrastructure spending, and field much-needed social programmes.
According to him, “until global crude prices rebound or he undertakes more ambitious reforms, Mr Buhari almost certainly will need to borrow just to make ends meet.
“The good news for Mr Buhari is Federal Government debt is relatively low, as a percentage of GDP, which was estimated at $488bn in 2013. In 2005, Nigeria struck a deal with Paris Club lenders to write off over half of the country’s $30bn debt. Since then, however, Nigeria’s debt profile has steadily grown. As of the end of last year, Abuja owed domestic and international creditors roughly $55bn.
“The bad news facing Mr Buhari is that a disproportionate amount of government borrowing is in the form of high interest loans from domestic banks. Fiscal federalism means that federal government liabilities could balloon suddenly if Nigeria’s 36 states begin defaulting on their debts.”
Oluseun Onigbinde, co-founder of the Nigerian civil society organisation BudgIT, said the budget showed that there was still a long way to go.
The National Assembly, comprising the Senate and the House of Representatives, was allocated the equivalent of $600m — higher than Nigeria’s expenditure on its universities, said Mr Onigbinde.
Nigerian lawmakers may be the highest paid in the world, according to BudgIT, which has lobbied lawmakers to release the breakdown of how that money will be spent. It says their annual salary is the equivalent of $150,000 to $190,000, or about 50 times gross domestic product per capita.