The facts about Federal Government’s fiscal plan in 2016 are obvious. That it made an all-time high budget plan at N6.06 trillion. But it also appropriated an all-time deficit at N2.2tr. Against more than N1.5tr oil-related revenue projection in 2015; government was however, conservative in 2016, with a paltry N820b.
This is based on 2.2 million barrels per day crude oil production at a benchmark of $38 per barrel.
Presently, a reality check is revealing worrisome developments against these ambitious propositions for reviving the nation’s ebbing economy, which switched into gradual decline since June 2014-round of crude oil price volatility.
Nigeria, for a fact, is facing a recession, a plunging currency, inflation at a decade-high and a widening budget deficit. It has only one thing going for it now and that is low debt to Gross Domestic Product (GDP). This however, does not mean that current debt stock is not big, but in comparison to assessed wealth and potential, it is low.
For an optimist, the economic potentials are still there, but to the extremist, these economic projections are now tending towards impossibility. Again, “numbers don’t lie”, a chief operations officer of a mid-tier bank in Nigeria told The Guardian. “We have the market (population) and resources, but we have failed to use them positively. Now they are hurting our budget projections and development.” The challenge is that everything about Nigeria till date is about oil. For example, oil sector’s contribution to the GDP is less than 10 per cent, but this paltry percentage accounts for about 90 per cent of the country’s total foreign exchange earnings. It also accounts for about 70 per cent of the country’s total earnings. Nigeria’s budget is oil and oil is Nigeria’s budget.
Of course, since the return of the global oil crisis that has lasted more than two years, with the worse points being in 2016, oil dependent economies have known no peace. Unfortunately, Nigeria stands in the middle of the crisis.
For the banker mentioned earlier, “when we had the boom, we could develop human capital and physical infrastructure. Now when we want to do it, the burst curve has elongated beyond imagination. In fact, no one knows the end of this crisis. Nigeria’s budget implementation is now challenged. Economy is in shambles. Foreign exchange is scarce and Naira has lost it value. It is all about oil.”
The oil crisis is pushing the economy further. Nigeria plans to borrow as much as $4.5b in the bond market through 2018. Already, the country is planning a return to the international capital market after the 2013 capital raising. Of the $4.5b, it is testing the debt “waters” first with $1b borrowing.
The money, according to government, will be spent on roads, railways, ports and electricity generation, to support diversification of the oil-dependent economy into agriculture and solid-minerals development. These are part of the 2016 budget items, now sub-contracted to debt issuance because of oil crisis.
Before the crisis, regulatory agencies affirmed to The Guardian that monthly foreign exchange earnings were mostly in excess of $3b.
“Presently, we have a record foreign exchange inflow below $1b monthly. In fact, the last record of inflow, oil related earnings could hardly reach $600m, has recorded only a total of $800m,” the source said.
The implication of the borrowing is not always manifest in the immediate. In 2016, debt service provision was in excess of N1.4tr. In 2015, it was about N943b, representing 22 per cent of the overall budget in 2015, representing 32.4 per cent increase over the level in 2014 and the third consecutive increase- N559b in 2012; N591b in 2013; and N712b in 2014.
This will raise the debt level; the more service provision rise. This may not be in the picture immediately, until the next budget planning and/or review of implementation of budget
While additional external debt is not likely to have any material negative impact on the total debt stock, given that the economy is under-borrowed, it is clear that the yield (cost of borrowing) is likely to be higher than Nigeria’s last Eurobond sale in 2013, as the macroeconomic fundamentals have deteriorated significantly.
The country’s ratio of debt to gross domestic product, at 13.2 percent, is the lowest in sub-Saharan Africa and about a third of the average of 37.2 percent, according to the International Monetary Fund.
Yields on the country’s $500m of bonds due July 2023 fell 1 basis point to 6.64 percent last Thursday. The yield is down 204 basis points this year. Nigeria’s dollar-denominated bonds have returned 1.9 percent this quarter, compared with the 4.7 percent average return of dollar debt in sub-Saharan Africa, according to data compiled by Bloomberg.
After shrinking 0.4 percent in the first quarter, International Monetary Fund has said the economy is set to contract 1.8 percent in 2016 as power outages and supply shortage of foreign currency curb output. But as the economy scampers for safety and strategies to douse the multiplier effects, CBN has increased interest rates by three percentage points this year- from 11 to 12 to 14 percent as inflation hit 16.5 percent in June.
The currency has also slumped 38 percent against the dollar since it was allowed to trade freely at the interbank market on June 20. For many analysts, the lifting of the peg is a step in the right direction.
Corporate earnings for the first half of the year have been weak and outright negative for some, especially in the banking sector. These are cases related to oil sector crisis. In the banking sector, the tougher operating environment is reflected in industry levels of profitability and asset quality. There have been observed spikes in Non-Performing Loans (NPLs) and impairment charges, which weighed on profitability of banks.
Consequently, investor sentiment at the capital market has also waned, reversing gains recorded in June, which followed foreign exchange policy implementation that drove indices to positive year-to-date returns. Last Thursday, Nigerian equities’ market was unable to sustain gains recorded on Wednesday, as the All-Share Index slid 0.5 per cent to close at 27,280.95 points, with year-to-date returns settling at -4.8 per cent. Investors lost N48.4b as market capitalization declined to N9.4tr. It’s all about the fiscal status of the country and oil-related foreign exchange crisis.
“The market is well supported at the moment as sentiment remains constructive,” said Samir Gadio, head of Africa Strategy at Standard Chartered Bank Plc in London. Investors had expected Nigeria to borrow more than the $1b it plans to raise in the Eurobond market, he said.
The government has also approached the World Bank and export-credit agencies to borrow at concessionary terms in addition to commercial loans to help finance a budget gap of N2.2tr, Finance Minister, Kemi Adeosun, said last Tuesday in Abuja.
Of course, Nigeria’s debt profile has been globally acclaimed as one of the most favorable ones in Africa. Investors both local and international have always scrambled for it. Its yields, despite high-risk tag in recent months have been top among emerging markets.
The reality of the 2016 budget’s failure is now becoming obvious, not only with the continuous fall in the price of crude and Saudi Arabia’s threat to cut price, but also the unending shut-ins in production capacity.
A fiscal governance expert, Eze Onyekpere, said before the Saudi’s threat, the budget was not working because even the production benchmark of 2.2 million barrels per day has never been met once.
“Where actually are we going to get the money from? This is not a matter of optimism, but that of reality. Crude oil price and its quantity is the key to a lot of things, especially the budget implementation.
“It is still the major earner of our foreign exchange. The fact that we are no longer getting as much as we used to get from crude oil is the major source of the foreign exchange crisis vis-a-vis the pressure on the Naira.
“Our projections from the non-oil income like tax is in doubt too. How much is the profit of companies these days? These companies need foreign exchange that comes from crude oil to import all manner of items for production.
“But the absence of the foreign exchange and consequent fall in the value of the Naira is the reason for the gale of retrenchments in the country. Look at corporate results from banks to industries, they are all going down. From where then, will the government get the estimated tax?” he queried.
According to him, the hope of the budget performance is increasingly dissipating.
For financial expert and Managing Director of Cowry Asset Management Limited, Johnson Chukwu, the new development is another blow on the feasibility of this year’s fiscal plan, with over N1tr mooted revenue shortfall in the first half of the year. In the near term, there is nothing like ‘we can do without oil’. The Niger Delta remains the food basket of the nation. I think we must think out ways to end the militancy in the area so that we can get the oil. It is our mainstay for now.”
He noted that economic activities have really slowed down and consequently; taxes payable by economic agents are declining. What is left is to get more people into the tax net, but for oil projections, I can’t see expected success. “I am even afraid if there are more capable and willing taxpayers the way the economy looks.”