Udoma: Why FG Opted for Offshore Borrowing to Finance 2016 Budget Deficit

The federal government has given a hint on why it is opting for offshore borrowing to finance a major part of the N2.2 trillion deficit in the 2016 budget, saying its preference was dictated by a desire not to crowd out the nation’s private sector.

The deficit in the N6.06 trillion budget characterised by an expansive fiscal spending directed at reflating the economy, is about 2.41 per cent of the Gross Domestic Product (GDP) and is within the 3 per cent threshold prescribed by the Fiscal Responsibility Act, 2007.

Speaking during the highlights of the budget in Abuja Thursday, the minister stated that the borrowing was to be raised roughly equally from domestic and foreign sources

The deficit is to be financed mainly by borrowings projected at N1.84 trillion, with the local component standing at N984 billion and N900 billion from international sources,

“We have decided to source from international sources so as not to rely exclusively on domestic borrowing, which may have the effect of crowding out the private sector Furthermore, we are optimistic that we may be able to access some of the foreign loans on a concessionary basis. The Ministry of Finance is currently negotiating with multiple sources to secure the external financing,” Udoma said.

The minister noted that the 2016 budget was the first full-year budget of the current administration, adding that it was prepared against a background of general slowdown in global economic growth, and more significantly, a massive decline in crude oil prices.

“It will be recalled that crude oil exports had hitherto accounted for over 70 per cent of government revenues and over 90 per cent of foreign exchange earnings. Consequently the 67 per cent fall in oil prices from mid-2014 to end-2015 has had wide ranging adverse ramifications for the Nigerian economy, especially on the external sector.

“The budget was guided by the 2016-2018 Medium Term Expenditure Framework (MTEF), Fiscal Strategy Paper (FSP) and the 2016 Agenda outlined in the previous section. It is also the first time the Zero Based Budgeting (ZBB) approach is being adopted in preparing the FGN’s budget.

“The ZBB requires Ministries, Departments and Agencies (MDAs) to justify every item of revenue and expenditure, as well as projects and programmes included in the budget. It is a departure from the traditional Incremental Budgeting approach that simply adjusts (usually upwards) amounts included in the prior period’s budget.

“Coming from 2015 that was characterised by significant decline in revenue and GDP growth, rising inflation, weakening balance of payment, declining foreign reserves, rising public debt, weak capital market and rising unemployment, the federal government made a deliberate choice to pursue an expansionary fiscal policy in 2016,” the minister said.