Experts tag Budget 2020 unrealistic by design, tall ambition by intent

In their reactions to the fiscal spending plan of the government for 2020 and basic assumptions in the document preparation, experts have called the budget a wilful error, unrealistic by design and a tall ambition by intent.

Experts at Afrinvest  as an example see the government 2020 budget as building a castle in the air while Policy analysts and consultants at LSintelligence Associates say the proposal is a tall ambition, hoping that it would be adjusted.

Poor budgeting, they say is key driver to government’s failure to achieve significant feat in the economy in the past decades.

“Non-performance has always been on the back of incidence of budget slacks, widening unfavourable variance in forecasted income generation along with weak implementation of capital projects”, economic policy analysts at LSintelligence told MarketForces.

The proposed N10.33 trillion fiscal spending for about 200 million people translates to about N52, 000 per person. This is still significantly low compare to other emerging economies that are serious about alleviating mass poverty.

It was gathered that government has always roll out ambitious GDP growth target, and unrealistic income projections, none of which the government has been able to realised in decade.

Critics think FG has not learned a thing from performing the annual rituals of designing spending plan, implementation of the same and observing trend, issues to ensure the budget impacts the economy, and the masses significantly.

Insanity, as the saying goes, is doing same thing all over and expects different results, but Nigerian government has proven not to have learned a thing from the annual ritual of budget design, presentation and implementation.

If this assertion were to be wrong, then the government spending plan for 2020 ought to have been a bit different for all it worth.

This would have been so having noticed what triggered under performances in the previous budgets. General expectation is that budget slacks in the previous spending plans should be removed in the subsequent ones.

Afrinvest likened the proposed budget to building castles in the air, thus reckoned that revenue expectation is like clutching at elusive fortune.

The investment banking firm said that the 2020 budget ignores lessons from the recent dire straits of the FG and budget performance.

“For context, FG’s revenues projection underperformed actual collections by 47.8% in 2017 and was little changed at 44.7% in 2018 and 41.6% as at the end of first half of 2019.

“The FG projects revenues of N8.2 trillion in 2020, which is 17.1% higher than N7 trillion in 2019 and more than twice the actual collection of N4 trillion in 2018”, Afrinvest stated.

Analysts said trend, of course is a guide to forecast but past record of Nigeria’s budget performance has not been impressive in decades.

The review of the content in the proposed budget shows that based on past records of performance the proposed spending plan for 2020 is filled with quite a number of exaggerated assumptions.

Compared to last year’s budget, the government has cut its capital expenditure target and pledged a larger share of spending towards wages and debt service payments.

More so, MarketForces calculation shows that at N305/$, the budget translates to $33.869 billion equivalent, or $169 per Nigerian for the fiscal year 2020. That is N51, 260 per head for a fiscal year.

It was noted that the budget designed is anchored on “other revenue” sources, a drastic shift away from petrol-dollar income financing.

However, fiscal records show that in the last five years, ‘other revenue’ sources have not exceeded over N500 billion annually. But FG estimated to rake in N3.7 trillion to finance the budget in 2020.

FG expects to generate revenues of N8.15 trillion, which comprises of oil revenue of N2.64 trillion, non-oil tax revenues of N1.80 trillion and other revenues of N3.70 trillion.

According to the president, the 2020 revenue figure is 7% higher than the 2019 comparative estimate of N7.59 trillion, inclusive of government-owned enterprises.

Meanwhile, the expenditure estimate includes the statutory transfer of N556.70 billion, non-debt recurrent expenditure of N4.88 trillion and N2.14 trillion of capital expenditure excluding the capital component of statutory transfers.

Analysts however observed that debt service is estimated at N2.45 trillion, and provision for a sinking fund to retire maturing bonds issued to local contractors is N296 billion.

Breaking down the N556.70 billion budget for statutory transfers, the National Assembly gets N125 billion, the Judiciary gets N110 billion, N37.83 billion for North-East Development Commission, N44.5 billion for Basic Health Care Provision Fund, N111.79 billion for the Universal Basic Education Commission; and N80.88 billion for Niger Delta Development Commission.

In a review, WSTC Securities Limited stated that the non-debt recurrent expenditure is to be spent on personnel and pension cost amount to N3.60 trillion, which is a 21% increase of N2.98 trillion in 2019.

“The increase reflects the new minimum wage as well as proposals to increase the remuneration of the Police and Armed Forces”, analysts at WSTC Securities noted.

The budget for capital expenditure, on aggregate terms is N2.46 trillion inclusive of N318.06 billion in statutory transfers.

This is 23% lower than N3.03 trillion budgeted for capital expenditure in 2019. According to the President, the Federal Government focus in 2020 will be on the completion of many on-going projects, rather than commencing new ones, analysts observed.

Then, the President further added that sequel to the launching of the Road Infrastructure Tax Credit Scheme (RIFRIC); approval has been made for the rehabilitation and construction of 19 roads and bridges of 794km across 11 states.

According to the President, the Scheme has attracted N205.00 billion worth of private investments. CardinalStone Partners stated that FG revenue track record is not consistent with FG’s plan to generate about N3.7 trillion from ‘other revenues’ in the coming fiscal year.

Other revenues target of N3.7 trillion budgeted accounts for 45.6% of total FG’s revenues, analysts’ reviews revealed.

The firm reckoned that the proposed 2020 budget adopted a $57 per barrel oil benchmark price, which represents a $2 increase from the benchmark outlined in the medium term expenditure framework (MTEF) document.

While oil production and exchange rate estimates remained aligned with the MTEF assumptions of 2.18 mbpd and N305/$, the GDP and inflation forecasts were held at 2.93% and 10.81% respectively.

In line with the proposed increase in the oil benchmark price and the VAT rate, the Federal Government (FG) estimated revenue of N8.1 trillion in the 2020 budget document is about N500 billion higher than MTEF forecasts (N7.6 trillion) and about N600 billion higher than the provision of the 2019 budget (N7.5 trillion).

According to Cardinalstone, the upward revision of oil benchmark price resulted in a N270 billion increase in projected oil revenue to N2.6 trillion as against MTEF forecasts.  Similarly, non-oil tax revenue is now projected N260 billion higher than MTEF forecasts on the back of the proposed VAT increase.

“We highlight that, for the first time, the bulk of FG’s revenue is expected to come from “other revenues”. These are revenues other than oil and non-oil tax revenues”, analysts at CardinalStone stated.

The investment firm stated that these revenue sources include; independent revenue, FGN balances in special levies accounts, signature bonus/renewals, domestic recoveries assets, fines; earmarked funds, stamped duty, grants and donor funding.

Cardinalstone said that Nigeria is likely to record a higher than projected budget deficit in 2020.

The budget deficit including project tied loans at total of N2.18 trillion in the proposed spending plan is marginally higher than MTEF’s forecast but below budgeted deficit of N2.5 trillion in 2019.

The deficit represents 1.5% of estimated GDP and is well below the 3 .0% threshold set by the Fiscal Responsibility Act of 2007.

“Meanwhile, as alluded to earlier, the dependence on other revenue sources leaves room for significant underperformance on the revenue front, which could also lead to an increase in budget deficit and associated borrowings”, CardinalStone said.

Thus, future debt service obligations are likely to be higher as debt service accounted for 54.3% of actual FG revenue in 2018.

Furthermore, the prospect of a higher debt service burden will have the opportunity cost of lower capital expenditure spending and difficulty of reaching GDP growth expectation.

Increased revenues from finance bill that proposes VAT rate hike to 7.5% from 5.0% is would have marginal effect on the revenue side.

This is because of the fact that bulk (85%) of revenues generated from VAT will accrue to the state and local governments, while the remainder will be remitted to the FG.

On the other hand, the VAT increase is also expected to help states implement the new minimum wage increase.

Experts at WSTC Securities believe that the core budget assumptions are in line with current realities. According to WSTC Securities, the benchmark crude oil price of $57 is moderate and below our crude oil price forecast of $58 – $63.

The investment securities firm also posits that the oil output projection is relatively rational.

Although the OPEC has capped Nigeria’s daily output to 1.7mbpd, analysts think that the output will be further supported by about 300,000 barrels per day of condensates whose production is not under the control of OPEC.

“We remain cautious on the outlook of other revenue lines, particularly the non-oil revenue and other revenue which we postulate to be from independent sources and revenue from government-owned enterprises.

“Over the last two to three years, total government revenue had always fallen short of budgeted revenue by about 46%. If past trends was anything to go by with, we might see a budget deficit of about N4.75 trillion which would be about N2.57 trillion higher than the estimated N2.18 trillion budget deficits.

Analysts have often attributed unrealistic budget assumptions as key reason for government budget failure. Again, budget 2020 is towing the same path, not different from the usual ambitious plan.

Afrinvest stated that oil revenue projection was lowered 29.7% to N2.6 trillion as against N3.7 trillion, reflecting prudent adjustments in the wake of lower for longer oil prices and weak oil production due to the slow pace of oil and gas reforms.

The firm said non-debt recurrent expenditure is high at N3.6 trillion or 35.0% of the budget, considering the FG’s fiscal consolidation plans.

It further stated that the non-discretionary minimum wage increase partly influenced this. The size of debt servicing cost at N2.45 trillion or 23.8% of the budget would continue to be a drag to human capital and infrastructure spending.

Analysts at Afrinvest think N2.5 trillion or 24.3% allocations to capital spending is unsupportive of the boost needed in infrastructure.

They think that this capital allocation falls short of the 30.0% target stipulated in the Economic Recovery and Growth Plan (ERGP).

“The budget deficit is projected at N2.2 trillion, but our estimate of N3.8 trillion exceeds this by a considerable margin as we expect revenues to under perform by 43.9%.

“We also expect debt service to revenues to be elevated at 53.3% compared with the budgeted 29.9%. In addition to borrowing to cover the shortfall in revenues, we expect increased financing of FG’s operations by the CBN”, Afrinvest noted.