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2017 Budget Can’t End The Recession By Odilim Enwegbara

December 24, 2016

First, let me tell Mr. President right away that if he hopes to grow the economy out the recession in 2017, this budget is not the one to do it. This is because it is not only not expansionary, it is not pro-investment, pro-growth, and pro-jobs. As a result, it is not enough to be expected to perform such magic.

Let us agree that like most recessions; our present recession is not a product of a sudden accident. That is why this conviction in sending this economy to the emergency ward does not arise.

Like every recessionary economy, this economy too urgently needs serious restructuring along with unconventional policies, designed to permanently put it on a healthy and sustainable growth path. This has not yet happened because President Buhari is yet to bring together those gifted pro-expansionary Nigerians to begin performing this inevitable economic diversification surgery.

Why Nigeria’s budget to GDP ratio is very low is because our tax to GDP ratio has remained over the years very. In fact, ours is lowest among peer economies. South Africa for example, in the 2016/2017 budget has South African Revenue Services (SARS) collected R 1.0699 trillion in taxes, surpassing the R1.0697 trillion targets by R154.07 million.

And with such high tax to GDP ratio of 26.3%, South Africa — unlike Nigeria — has its 2016/2017 tax to GDP very close to what it used to be during the mid-2000s commodity booms. Upon that, South Africa’s 2016/2017 fiscal deficit is 3.2%. That explains why the South Africa’s to budget spending in 2016 is $143.966bn against Nigeria’s $23.928bn in 2017.

That is why 2017 with all the good intentions, rather than being an expansionary budget, it is a contractionary budget because it is smaller than 2016, especially with such low fiscal deficit of 2.18% to GDP against South Africa’s 3.2%. A look at the proposed 2017 budget’s N7.298tn against 2016’s N6.077tn seems higher in size.

But, then, taking N305 per dollar and over 18% inflation average into consideration against 2016’s N197 per dollar and 16% inflation average, it becomes certain that 2017 budget is smaller. It becomes far less expansionary than 2016 with N2.24tn capital budget at N305 per dollar is only $7.344bn against N1.8tn capital spending at 197 per dollar is $9.137bn.

What economic sense does it make that a country with $350bn infrastructure deficit is okay with 14% debt to GDP ratio (with external portion less than 2%), whereas its peer economies such as South Africa, with such low infrastructure deficits and world-class infrastructure, have as high as 44% debt to GDP ratio and 39.30% external debt component?

No doubt, that the 2017 budget’s N2.36tn deficit which has N1.067tn (46%) external borrowing is a reversal from the past when externally borrowing accounted for less than 5% (in some cases 0%) is a welcome development. But, then, with close to 40% government revenues spent mostly on domestic debt service — and N1.66tn this year alone, what other solutions do we have than quantitative easing (QE) — printing enough naira to buy back our domestic debts? Or is it not called domestic debt so that when overwhelmed in serving it, the government prints the same local currency to settle it?

Another flaw in the 2017 proposed budget is the fact that price of oil is benchmarked at $42.50 per barrel. It is important to fully interrogate this because, at a time of recession like this, all avenues to increase government revenues should be stretched as far as they can go. My insistence that benchmarking oil price at $42.50 per barrel should be increased to $50 per barrel is based on the fact that in 2017 oil price should be expected to rise as high as $65 per barrel. My reasons are obvious. 

First, one reason Putin supported Trump in 2016 presidential election is for him to help reverse oil prices upward, possibly close to what it was in 2013 before the US-led west to punish Russia for invading Ukraine manipulated it down. And that Trump is signaling to do that is explained by appointing Mr. Rex Tillerson, the ExxonMobil CEO as his Secretary of State. Second, like Putin, Trump too would like to see oil prices upward for the simple reason that high oil prices is needed if his government should be able to raise the trillions of dollars to be injected into improving America’s infrastructure. It is a welcome development because if huge American infrastructure spending happens, that would result in a global economic growth. 

On whether or not the finance minister is doing the right thing, my answer is that she is yet to show the kind of tax policy overhauls needed to aggressively increase government’s tax revenues to what it should be. Our tax-to-GDP ratio should have been getting close to 30%. But even the little VAT money collected, as high as 70% of the money is being diverted by both FIRS officials and the collecting businesses, mostly Chinese and India businesses operating in Nigeria that has continued to connive with the staff of the FIRS to not remit the VAT money collected.