10 Nov

The week ahead – Next year’s budget is moody

President Muhammadu Buhari presented on Tuesday a 2018 budget of ₦8.612 trillion, the country’s biggest ever, to lawmakers. He said the budget was based on an exchange rate of ₦305 to the dollar and a projected oil output of 2.3 million barrels per day at an assumed price of $45 per barrel. The president said he was targeting 1 January 2018 for the passage of next year’s budget, adding that the deficit is expected to be ₦2.005 trillion and real economic growth is estimated to be 3.5 percent for 2018. The budget will comprise of recurrent costs of ₦3.494 trillion, debt service of ₦2.014 trillion, statutory transfers of about ₦456 billion, a sinking fund of ₦220 billion to retire maturing bonds to local contractors and capital expenditure of ₦2.428 trillion.

Nigeria’s bonds were flat on Wednesday, shrugging off a downgrade by Moody‘s, since investors had already factored in issues that triggered the rating change and were buying debt at a discount to book profits, traders said. Ratings agency Moody’s cut Nigeria’s long-term foreign-currency bond to B1 from Ba3 and kept its outlook stable, saying Nigerian efforts to broaden non-oil revenue had been unsuccessful. The local-currency rating was unchanged at Ba1. Nigeria’s government balance sheet remains exposed to financial shocks, with interest payments high relative to revenues and deficits elevated despite cuts in capital spending, Moody’s said. Nigeria now has ₦19.63 trillion ($62.42 billion) in local bonds and $64.2 billion in foreign loans as of June 30, according to the debt office.

A new report says about 4.8 million Nigerians face looming food insecurity in 16 states and the FCT next year. The report, titled “Cadre Harmonise” for identification of risk areas and vulnerable populations in sixteen states and Federal Capital Territory explained that between October and December 2017, about 3.1 million people will face a food crisis. The states affected by food and nutrition insecurity are Adamawa, Bauchi, Benue, Borno, Gombe, Jigawa, Kaduna, Kano, Katsina, Kebbi, Niger, Plateau, Sokoto, Taraba, Yobe, Zamfara and the Federal Capital Territory. The report was put together by the Food and Agriculture Organisation, the World Food Programme, the National Programme for Food Security and other donor agencies.

Cross River is working on a draft anti-open grazing bill to deal with what state governor Ben Ayade calls “the continuous exodus of uncontrolled number of herdsmen into the state.” Speaker of the State House of Assembly John Gaul Lebo said in a Facebook comment on 6 November that the legislature’s legal department was in the latter stages of drafting a law banning open grazing and instituting strict penalties in the state pursuant to a House motion adopted in January, joining the likes of Benue and Ekiti. This comes as some herdsmen and farmers in Ugaga, Yala local government area clashed over grazing in the area, leading to the death of at least one person while several others were injured.

Suggestions

  • The best practice is for budgets to reflect reasonable, realistic expectations of revenues and expenditure. It is therefore worrisome that the Nigerian government continually prepares budgets that do not reflect current realities. This is especially illustrated by the abysmal budget performance report for 2016 and the ongoing 2017. The potential conclusions that can be drawn from this are one of the following – that the Nigerian government has no real intentions of fully implementing its budget; that the budget is not seen as the living document that guides government spending and implementation of policy strategy; or that the strategy setting process is faulty. Any of these conclusions portends big problems for the country, and as we enter an electioneering year, the signal is that the business of governance is effectively over.
  • We believe the government will be able to raise the debt planned from the international market. On Tuesday, President Muhammadu Buhari presented to parliament a record ₦8.61 trillion budget for 2018 and said his government would borrow abroad to cover half of its deficit for next year. Furthermore, the government, in replying Moody’s, said increased oil production, combined with stable and now improving oil prices; a slowly improving revenue profile, with non-oil revenue (principally taxes) up 10 percent; month-on-month improvements in inflation levels since January 2017, with inflation continuing to trend downwards and strong year-on-year improvement on the World Bank Ease of Doing Business Rankings from 169th to 145th place, a 24 place move in one year put the new rating into doubt. The key question is the debt repayment and how it impacts development. Debt servicing is already taking close to the percentage that capex takes from government’s budgeted expenditure, meaning debt servicing is already hampering government’s spending on capex, while recurrent expenditure continues to rise in spite of government’s repeated announcements of cost cutting. Government is yet to cut the cost of running itself, and this is unlikely to happen in an election year.
  • Most of the states listed in the report on the food crisis have suffered from violence over the past few years, either through the activities of Boko Haram, or clashes between farming communities and nomadic herdsmen militia, the Pastoral Conflict. As a result of the insecurity, agricultural production has dropped due to farmers not tilling the land out of fear. States in the North-West, though relatively safer than the North-East, are feeling the effects of the pastoral conflict, and of climate change from decreased rainfall and loss of farmland to desertification. It is very important that the government’s response to climate change be expedited as it directly affects Nigeria’s food security. Just as important, there has to be a concerted effort to modernise agricultural practices in the country. The subsistence method of agriculture in Nigeria and inadequate extension services have ensured Nigeria does not have adequate food security cover.
  • The domino effect of the Benue anti-grazing law, signed in May and prescribing five-year jail terms and million naira fines for open grazing within its borders, have reached Cross River just eight days after its 1 November enforcement date kicked in – an assessment that Governor Ayade acknowledged himself. The oldest such state legislation, passed in Ekiti in August 2016 – with reserved land in select local government for herders, is barely a year old. It is still too early to make an assessment on the effectiveness of these state legislations – which the national herder body is still lobbying – but the lack of a coordinated legal and security framework at the federal level to address the simmering pastoral conflict will have an impact on the success of these current efforts. What is clear is that as governors see this work in other states, it is likely that more affected governors will adopt this measure and bring things to a head. Perhaps this will lead to the coordinated federal effort that will fully address the issue.