Funding 2021 Budget Pressure on monetary space despite lags in MDAs revenue remittances

By Charles Abuede

Nigeria’s 2021 Budget of N13.08 trillion currently before the National Assembly for consideration and passage, has been prepared in the face of difficult global and domestic environments owing to persevering headwinds from the coronavirus pandemic.

The ongoing global economic downturn, low oil costs and increased global financial vulnerability have had significant repercussion for the country’s our economy. Nevertheless, the Nigerian economy is presently confronted with real economic difficulties, the macroeconomic atmosphere being generally upset by the pandemic, and the fact that real GDP growth declined by a high 6.1 per cent in the second quarter of 2020.

The 2021 budget, which is titled, “Economic Recovery and Resilience” and aimed at promoting economic diversity as well as enhancing social inclusion was presented to the joint session of the National Assembly on Thursday, October 2020, exactly eight days after the nation celebrated her 60th independence anniversary. The President Muhammadu Buhari government has pegged the spending plan for 2021 at N13.1 trillion, 21.3 per cent higher than the N10.8 trillion revised budgeted spend for 2020.

Meanwhile, inside the 2021 budget consist of:

•  N5.65 trillion for non-debt recurrent expenditure,

•  Personnel Costs of N3.76 trillion;

•  Pensions, Gratuities and Retirees’ Benefits of N501.19 billion;

•  Overheads of N625.50 billion;

•  Debt Service of N3.124 trillion;

•  Statutory Transfers of N484.49 billion; and

•  Sinking Fund of N220 billion (to retire certain maturing bonds).

Expediency for early execution may lock pressure on the monetary space

While many experts spoken to by Business A.M. for this story are of the opinion that the timely submission of the proposal should ramp up the passage of the Bill, and hence limit room for expenditure rollovers, they have also highlighted that the fact that with the current economic realities the giant of Africa is facing, amidst global uncertainties, there is likely to be some pressures on the monetary side, as more borrowings will be made to finance the deficit while the Nigerian government carries in its books a whopping N31 trillion in form of external debt as a result of previous borrowings.

In the view of Kasimu Garba Kurfi, the managing director and chief executive officer of APT Securities and Funds Limited, pressure arising from the current expenditure may likely be on the inflation rate which will, in turn, make a mockery of savings as investor confidence on savings will be dampened or waned owing to negative returns.

“The budget, if fully implemented will put pressure on the monetary side in view of the current expenditure which is almost similar to revenue generated or more. The capital expenditure is left with no options than to borrow funds which you are not sure of obtaining. Alternatively, you may get the funds with stringent conditions that will make life more difficult.

“Also, the full implementation of the current expenditure will put pressure on inflation and make a mockery of saving because no investor will like to save with negative returns; that is why capital market is rising as banking money finds its way into the capital market. It is likely to do the same with agricultural commodities; by the time it is harvesting period and everything will go higher,” Kurfi told Business A.M. in response to questions.

There is an assumption, given the scenario painted in the budget, that for its effective execution, an oil price benchmark of $40 to a barrel with an estimated daily production of 1.86 million barrels will be feasible. Also, an assumed inflation rate of 11.95 per cent, foreign exchange target of N379 per dollar and output (GDP) growth of 3 per cent were considered by the federal government to tackle the economic challenges in 2021.

A number of analysts who responded to questions Business A.M. put across to them are already picking holes with the assumptions, saying broadly that they may not be realistic and are hoping that the senate, in its scrutiny, makes a downward review of some of the assumption.

Kurfi also said that more monetary policy strength will need to be applied in order to achieve the assumed inflation rate of 11.95 per cent given that headline inflation is currently above 13 per cent.

“The assumption as regards to the price of crude oil is ok but at the same time to assume inflation will come down to 11.95 per cent when already it is above 13 per cent, will need to apply more strength in the monetary policy. Also, to restrain the exchange rate to N379/$1 will be difficult as the local currency already is trading at N450/$1 in the open market for now.  But, by the time the economy is fully opened, there will be more demand for the US dollar that will lead to more depreciation of the naira and more pressure,” Kurfi posited.

Uche Uwaleke, a capital market professor, in his note to Business A.M. appear to share same sentiments with Kurfi as he said the exchange rate at N397 to a dollar may not hold weight due to the ongoing process of exchange rate unification across all foreign exchange windows by the apex bank.

“I think the assumptions and budget parameters are realistic except for the exchange rate of N379 to the dollar; that may not hold due to the on-going process of unifying exchange rates across all forex windows by the CBN consistent with the IMF prescription. I also think the real GDP growth rate projected at 3 per cent is a little ambitious in view of the impact of COVID-19 on the economy, which is expected to linger till next year. This is why the recent Fitch report on Nigeria projects a GDP growth rate of 1.3 per cent for the country in 2021.”

How does the FG intend to fund the 2021 budget considering the lags in remittances from the MDAs?

While the aggregate revenue available to fund the national budget is placed at N7.89 trillion, the president further declared that new borrowings to the tune of N4.28 trillion will be used mainly for the financing. In the same way, will be the sum of N709.69 billion in bilateral and multilateral loans secured for specific projects and programmes as well as the sum of N205.15 billion as proceeds from privatizations.

Also, anticipated revenue from oil estimated at N2.01 trillion and the Non-oil revenue estimated at N1.49 trillion will be added up for the budget financing.

However, from the fiscal assumptions in place, the total federally shareable income is estimated at N8.433 trillion for the year 2021.

A critical look into the financing sources portends that the federal government will incur more debts externally or domestically through borrowings whereas, several ministries, departments and agencies (MDAs) of the government are yet to remit to the national treasury proceeds from their annual activities as government parastatals.

However, looking at the revenue line, about N8 trillion or 50 per cent is non-oil revenue. The continued reliance on the revenues from the MDAs, we have seen over time, has seen the government lagging behind in that space.

“I must add, however, that new borrowings of over N4 trillion to part-finance a deficit of over N5 trillion is worrisome given the already huge amount of over N3 trillion allocated to debt servicing alone,” Uwaleke added.

Notwithstanding all that has been said by analysts, with the capital expenditure relying very much on borrowed funds, there is a need to revisit the budget all together. Though, efforts in the search for ways that the government can cover up the huge gaps with respect to the fallings in revenue collection from by the MDAs, need to be intensified, the Senate will need to scrutinize the budget elements with a toothcomb.

Many analysts say the start of the new decade presents an open door for Nigeria to re-position its economy to thrive and benefits her citizens more robustly. If the new decade will be a time of growth, the reasonable execution of the 2020 budget will be significant. In spite of Nigeria’s record of negative quarterly GDP growth of – 6.10 per cent in Q2 2020, inflation remains high and the future of foreign investments looked mixed by the recent credit ratings by Fitch and Moody’s.

To lead Nigeria to a prosperous decade, those at the helms of affairs through all phases of the budget cycle, which starts from formulation, approval, implementation and oversight —must attempt to build the trust of citizens, decrease superfluous spending while forcefully increasing income with an honestly executed plan.