2016 budget

2016 Budget.......

The 2016 budget has been presented by Mr President, the first Progressive budget. A budget is not really about figures it’s about intentions. The figures for the 2016 budget are public information, but do allow me to highlight key findings

Income:

The Federal Government projects to make N3.8t in 2016. Of this figure only 21% is projected to come from crude oil and gas sales. The balance will be from Customs Duties and Taxes and “independent revenues”

Expenditure

The Federal Government projects to spend N6.08t in 2016. This is the largest budget in Nigeria history. It’s also a deficit budget meaning spending is in excess of revenues.

Analysis of the budget

First of all this is a budget of debt and deficits, the Federal Government will borrow a record N2.2 trillion to fund the 2016 budget, that’s a massive amount.

To put this in perspective, the total amount the FGN will make from non-oil incomes i.e. from customs, PAYE and other taxes is N1.45t. This figure will go towards paying interest on the Federal Government debt. In effect, the FGN revenues left to fund non debt expenditure eg building roads are only crude oil and “independent revenue”. Thus we have to watch output targets and crude oil prices closely. Should oil prices fall, our ability to fund capital expenditure will be hampered and the deficit will increase. Whilst the FGN has committed to a 9% drop in recurrent expenditures, a good start, it’s clearly not enough. Nigeria cannot afford to continue deploy all non-oil revenues to pay salaries, then borrow to build roads.

This is also a budget of job creation. The allocation of the budget to Capital Expenses has increased by 223% from 2015 budget, massive and welcome. This allocation will not just build roads and rails, it will create local jobs.

This is also a budget of bad optics, the allocation to Education and Health have gone down from year 2015…..how does the government explain, it will reduce allocation to Education and yet hire 500,00 new teachers? Why should special intervention schemes get N300b and health get N221b. What are Special Intervention Programs? Another SURE P?

I was particularly impressed by the statement that Nigeria’s job creation drive will be private sector led, and there will be a reduction tax rates for smaller businesses. Excellent.

The President says the Petroleum Products Pricing Regulatory Agency (PPPRA) to adjust its pricing template to reflect competitive and market driven components. This is a loaded statement, in essence it signals that the subsidy on certain components on the template will go. This will allow the FGN reduces cost of enforcing the subsidy but does not remove the subsidy. This is a strategic error of non-action, there is no better time to remove the cost of imported subsidies than now with crude oil price at below $40

The FGN now allows the International Oil Companies (IOCs) to fund the JV budgets, another excellent move. This releases pressure on the FGN Budget, but at what cost? If the IOCs are funding the budgets then what effect will this have on their take of the profit? More details on this is needed here.

The President believes the demand for Foreign Exchange is artificial and rent seeking, that cannot be true picture of things. Without an easing of the capital controls, the private sector cannot create jobs as envisaged in the budget.

Overall, the capital budget still rests on crude oil. Even though crude oil revenues are still 20% of revenues. This is because the size and cost of government is still too high and eats up the non oil revenues. This is a headline analysis, we await the Ministry of Finance breakdown to see the details of of the zero based budget