President Muhammadu Buhari

Budget of Recovery Unappealing to Solve Nigerian Economic Woes”

In spite of 4% increase in spending plan for 2021, experts think budget of economic recovery as tagged by government remains unappealing to solve economic woes.

The outbreak of coronavirus impacted the real sector of the economy following months of activities lockdown.

The petrol-dollar powered economy then slipped into economic recession, the second time in five years, amidst weak investment inflow.

While country chose to spend their ways out of economic trough, Nigeria’s stimulus package was a “paltry 4%” of the gross domestic product (GDP).

This was way low when compare with Japan (67%), the UK (45%), and the US (28%).

In a new report, Greenwich Merchant Bank said the Nigerian budget of economic recovery is unappealing to solve economic woes.

The report explained that the Budget for Economic Recovery and Fiscal Sustainability sought to retain the Government’s expansionary stance, lending credence to other growth-boosting areas like infrastructures, human capital development and security.

Analysts noted that these key sectors are expected to gulp a total of ₦1.0 trillion or 7.5% of the expenditure plan for 2021.

After adjustment by the National Assembly, total spending plan for the year was pegged at ₦13.6 trillion, translating to a 3.9% higher than the initially proposed estimate of ₦13.1 trillion.

Meanwhile, it is 25.6% more than the approved figure for 2020 of ₦10.8 trillion.

The nation’s spending plan was estimated based on USD40 per barrel oil price assumption; and average crude oil production of 1.86 million barrel per day (mbpd).

The budget is converted in dollar term at CBN official exchange rate put at ₦379 to a dollar; and GDP growth rate of 3.0%.

It is suffice to say that Nigeria has not achieve 3% annual growth rate under the present administration despite more than N20 trillion addition to the nation’s debt profile.

Explaining further, Greenwich stated that the proportion of Government’s revenue to be committed into the budget funding stands at ₦8.0 trillion.

Of this, 30.0% is expected to be funded from oil receipts, while the remaining 70.0% will come from non-oil sources.

“This leaves a budget deficit of ₦5.6 trillion, representing 3.9% of GDP and higher than the 3.6% revised deficit of 2020”.

MarketForces Africa reported that the nation’s debt cost accounts for 24.4% or ₦3.3 trillion of the expenditure plan.

Meanwhile 30.3% of the budget will be used to fund capital projects and a notable 41.5% on non-debt recurrent expenditure.

Zainab Ahmed, the Finance Minister said at a virtual meeting that the deficit would be financed by domestic and foreign sources at ₦2.3 trillion apiece.

“Another ₦709.7 billion is expected from multilateral and bilateral loan drawdowns, while ₦205.2 billon will be sourced from privatisation proceeds”, she added.

Analysts believe that other forms of financing could also come in the form of the sale of Government assets and other non-oil assets along with the sourced funds from unclaimed dividends and dormant accounts.

“In our opinion, we laud the new spending plan, as we believe it should provide some level of relief to the most-affected sectors and individuals amid infrastructural developments”, Greenwich said.

However, the firm added that with the country’s earnings under marked stress, concerns persist.

“As the Government seeks out alternatives to upscale its non-oil receipts, it remains stuck towards lifting the subsidies off the Power and the Petroleum sectors.

“While the country has interesting set of reforms in the pipeline like the above mentioned and the Economic Sustainability Plan, the evolution of the pandemic and social group disruptions could make this challenging.

“We further expect its intention to utilize funds from dormant accounts and unclaimed dividends would benefit an economic recovery.

“The amount of new spending will be higher and should deepen the domestic Government debt market, which stands at ₦32.2 trillion”, it explained.

Rising Debt Profile Remains Unsettling

On the nation’s ticking debt clock, Greenwich noted that Nigeria’s debt profile continued to mount, given the steep rise seen in public debt over the years.

Nigeria on Brink of New Debt Trap, Analysts Warn

As of September 2020, the country’s debt stock stood at ₦32.2 trillion, which is an increase of 22.9% over the ₦26.2 trillion in the comparable period in 2019.

Domestic debt represents 62.2% of the total debt stock, which is equivalent to ₦20.0 trillion while the external debt made up the remainder at ₦12.2 trillion or 37.8%.

Nonetheless, Debt to GDP ratio sits comfortably at 24.1%.

This is well within the 25% stipulated by the Fiscal Responsibility Act, 2007 and below the World Bank’s/IMF recommended threshold of 56% for countries in Nigeria’s peer group.

The report added that the sharp rise in the country’s debt stock gave rise to increased debt service.

It added that current debt service stands at ₦3.0 trillion split into ₦1.9 trillion in domestic and ₦805.5 billion or USD2.3 billion, at an exchange rate of ₦356.9 per dollar.

Yet, in the 2021 budget, a total of ₦3.3 trillion or 24.4% was set aside for debt service given additional borrowings planned to fund the year’s budget.

“We also bear in mind the debt service to revenue ratio which stands at an unappealing rate of 82.6% as of Q3:2020”, Greenwich stated.

It added that in a bid to reflect its higher risks, three rating agencies Fitch, Moody’s, and Standard & Poor’s revised their outlooks on the country’s long-term growth

“This invariably pushes premia demanded by borrowers upwards”, analysts added.

The report noted that revisions were premised on the increasing exposure to fiscal and external shocks because of the very weak Government finances, constrained by an extremely narrow revenue base that hinders fiscal consolidation.

As a result, Eurobond issuance was downplayed, as the Government turned to the domestic market, borrowing about ₦2.0 trillion that further crowded-out the private sector.

Greenwich explained that the CBN’s Ways and Means support of ₦2.9 trillion was another source for borrowing, and the remaining ₦1.2 trillion was accessed from the foreign markets -particularly through bilateral loans.

“We agree that funding government expenditure through domestic borrowing has been excessive and urge the Government to seek alternative funding.

“However, we believe a recourse to foreign borrowing amid a “managed” exchange rate stability and fragile economic growth might be feasible in the short run, but places the economy at a foreign exchange risk and exposes the economy to a persistent external shock in the long run.

“We believe that exploring the other funding options such as revenue bond places more control with the Federal Government in terms of volatility of borrowing rates and will yield measurable impact in the development of the economy.

“In addition, other funding sources span across the sale of moribund assets, Public-Private Partnerships (PPP) and increased foreign direct investments”, Greenwich said in the report.

“Budget of Recovery Unappealing to Solve Nigerian Economic Woes”