Nigerians welcomed the early presentation of the 2020 federal budget estimates by President Muhammadu Buhari on October 8, 2019 to the National Assembly in accordance with Section 81 of the Constitution of the Federal Republic of Nigeria 1999, as amended. The budget, aptly titled, Budget of Sustaining growth and job creation, projects expenditure in the sum of N10.330tn. The 2020 proposals represent an 11% increase when compared to the 2019 appropriation of N9.12tn. The proposed retained revenue is N8.155tn and a deficit of N2.18tn which is 1.52% of the GDP. The key assumptions are the benchmark price of $57 per barrel of crude oil; daily oil production of 2.18 million barrels per day (mbpd) and an exchange rate of N305 to 1USD. The real GDP is expected to grow at 2.93% while inflation rate is projected at 10.81%. In this discourse, I seek to review a few key issues arising from the budget as presented by the President.
The first issue is that the deficit is in the sum of N2.18tn and it is to be financed mainly by new foreign and domestic borrowing, privatisation proceeds, signature bonuses and draw-downs on loans secured for specific purposes. This will further add to our already high debt profile of $81.274bn. The deficit is 21.10% of the overall expenditure of N10.33 tn. Also, the deficit is 26.7% of the projected revenue of N8.155tn. When it is considered that by the end of June 2019, a deficit of N1.35tn had been recorded in the implementation of the 2019 budget, representing 70% of the budgeted deficit for the full year, and the deficit was recorded at a time not a single kobo has been spent of capital expenditure for the year, then the extent of the proposed deficit financing for 2020 raises very critical challenges. It is like sinking further into a slippery hole.
The Senate in the approval of the Medium Term Expenditure Framework proposes to limit new borrowing to N1.5tn. But we need to take cognisance of the fact that in 2018, the ratio of debt repayment to retained revenue was 54.3%. This is not sustainable either in the short, medium or long term as the capacity to repay is diminishing.
The second issue is that in the 2018 and 2019 federal budgets, Nigeria proposed to earn revenue from the proceeds of oil assets ownership restructuring. But in the two years, not a kobo was earned as no steps were taken to kick-start the process of restructuring. Surprisingly, in the MTEF 2020-2022 which backgrounds the 2020 budget, this revenue head was omitted. Has the Federal Government abandoned the idea? There should be clarity and consistency in policy implementation considering that Nigeria’s extant Petroleum Policy canvasses this divestment. Again, is it reasonable to expect the divestment process to be concluded before the end of 2019 when it has yet to start by October 2019; considering that the process of restructuring and divestment will take a fairly long period of time.
The third issue is a challenge of the revenue framework. It is on the expected revenue from oil. The $57 benchmark seems overtly optimistic considering the projected dynamics of the international oil market. The draft MTEF 2020-2022 had stated that: “A lower benchmark oil price of $55/b (against $60/b for 2019) is assumed considering the expected oil glut in 2020, as well as the need to cushion against unexpected price shock. There are strong indications of an oversupplied market in 2020. All three of the major forecasters -Organisation of the Petroleum Exporting Countries, International Energy Association and the U.S Energy Information Administration generally see non-OPEC production growing by around 2mbpd this year, and by even more next year. The US shale oil accounts for most of the total supply increase, but new projects in Norway, Brazil and Australia will also contribute to the increase in non-OPEC supply. Also, market sentiments do not support an expansion in demand. In fact, the growth in demand for OPEC oil specifically is projected to slow down next year”.
Thus, the oil price projection was not guided by the cautionary approach to plan on the conservative side and if the price is exceeded, to save the same in the Excess Crude Account and later budget for it. The fact that the ECA has little or no funds left in it shows that the country has no buffer to fall back on. The revenue framework projects that Nigeria will produce 2.18mbpd. This is less than projections in previous years of 2.3mbpd. However, in 2018, the actual was 1.86mbpd while data from the first half of 2019 indicate actual production as of June 2019 of the same 1.86mbpd. Furthermore, Nigeria’s quota from OPEC is currently 1.774mbpd. This projection of 2.18mbpd also seems overtly optimistic and may not materialise. There has been no change in circumstance to warrant the new production volume. Oil revenue was below target by 41% as of June 2019 and in 2017, it had a negative variance of 47% and in 2018, it fell short by 23%. Thus, the expectation from oil revenue seems not to be founded on empirical evidence and may need to be downwardly reviewed.
The fourth issue is that generally, our revenue projections have on several times missed the mark over the years. In 2016, revenue projections fell short by 23%; in 2017, it fell short by 47.73% and in 2018 by 45%. This indicates that overall, a good part of our revenue projections has not been based on empirical evidence. Furthermore, if projected revenue in 2018 was N7.1tn and we missed the mark by 45% and have also missed the mark by 30% in the half year of 2019, the further increase in projected revenue to N8.155tn in 2020 seems to be hanging in the air. The revenue projections for 2020 should have been greatly influenced by the trend and actuals of 2018 and 2019 except there has been a dramatic change in economic circumstances warranting the new projection.
The fifth issue is the President’s acknowledgement that the poor performance of oil revenue reflects inter alia, deductions for cost under-recovery in the supply of Premium Motor Spirit. Allowing the Nigerian National Petroleum Corporation to deduct money due for the Federation Account under the guise of under recovery is an affront to Section 80 of the 1999 Constitution because expenditure without appropriation is beyond the contemplation of the constitution. It is illegal as well as unconstitutional. The National Assembly should take steps to stop this illegality by directing the President to bring estimates for fuel subsidy for approval. Also, during the years preceding 2015 and at a time of about six per cent economic growth, the NNPC reported that Nigeria was consuming about 35 litres of PMS every day. During the recession and after the recession when many companies had closed down, jobs lost and the economy greatly slowed down, the NNPC claims that Nigeria is now consuming between 55 and 65 million litres per day. Such a wild claim cannot be supported by empirical evidence. It is most likely to be false. The state oil company should come forward with the evidence in support of such a claim beyond its mere declaration.
Clearly, fuel subsidy under whatever guise is anachronistic and has no place in modern economic thought process. Nigeria can save a minimum of N1.5tn every year if the subsidy/under recovery is stopped. And this will be channelled to infrastructure and social spending.