Debts, Deficits and the 2018 Budget: The Big Picture
On November 7, President Muhammadu Buhari, in accordance with Section 81 of the Constitution of the Federal Republic of Nigeria 1999, as amended, presented the 2018 federal Appropriation Bill to the National Assembly. The budget expenditure is in the sum of N8.612tn which is a 16 per cent increase over the 2017 figure; retained revenue of N6.607tn being 30 per cent above the 2017 estimates and a deficit of N2.005tn. The key assumptions are the benchmark price of $45 per barrel of crude oil; daily production of 2.3 mbpd and an average exchange rate N305 to 1USD. The real GDP growth is projected at 3.5 per cent and inflation rate of 12.4 per cent.
The projected expenditure of N8.612tn, even though it is high in naira terms, amounts to a paltry $28.24bn at the official exchange rate of N305 to $1. But when the real street value exchange rate of N360 to $1 is used, it amounts to $23.92bn.
This piece seeks to examine the proposed deficit financing, debt service and its implications for the economy. It also seeks to interrogate whether there are alternative scenarios to the continued procurement of debts as a way of reflating the economy and funding infrastructure. The deficit is in the sum of N2.005tn and it is to be financed mainly by borrowing the sum of N1.699tn from external and domestic sources.
The balance of the deficit in the sum of N306bn will be financed from the proceeds of privatisation of some non-oil assets by the Bureau of Public Enterprises. The proposed borrowing will further add to our already high debt profile. The deficit is 23.27 per cent of the overall expenditure of N8.612tn. Again, the deficit is 30.35 per cent of the retained revenue.
The proposal for debt service is N2.014tn. The rising debt service appears to be crowding out expenditure in critical infrastructure and human development. At 23 per cent of overall expenditure, the debt service is high. Also, at about 31 per cent of retained revenue, the debt service is very high. It should be noted that the projected revenue which comes up to the retained revenue of N6.607tn was based on overly ambitious and non-empirical foundations.
Thus, the prospect of a revenue shortfall during the 2018 financial is very real. But while the revenue projection is based on a shaky foundation and may or may not be realised, the debt service is for real. It will not be less than projected; it may even be more. By the time, we capture the sinking fund of 0.22tn which is about three per cent of proposed expenditure in 2018, the debt repayment scenario becomes complicated.
At the end of the day, if there is a shortfall in revenue, salaries and overheads will be drawn down, debts will be serviced whilst capital projects suffer. Based on official figures, when the 2016 experience is used, it shows that Nigeria used N1.385tn to service debts while deploying N1.219tn for capital expenditure. By the end of the Second Quarter of 2017, Nigeria had used over N900bn to service debts at a time it had not invested a kobo into capital expenditure. We will end up expending over N1.8tn for debt service and likely under N800bn for capital expenditure at the end of 2017 financial year.
To calculate the opportunity cost of debt service in practical terms, it is imperative to compare the capital vote of 13 key MDAs and sectors to the debt service projection. The capital votes of agriculture, education, health, power, works and housing, water resources, zonal intervention projects, transport, interior, trade and industry, Niger Delta affairs ministry and special intervention programmes amount to a total sum of N1.801tn whilst service is in the sum of N2.014tn. This means that debt service exceeds these votes by over N200bn. And this debt service is more than the combined capital expenditure of 2016 and what has so far been spent implementing the 2017 capital budget.
This raises the poser about the options available to the Federal Government to fill the funding gap if we are not happy with procurement of new debts. This brings us to the big picture of development and management of public resources. The budget needs to be anchored on robust and realistic economic, fiscal and developmental frameworks which emphasise domestic resource mobilisation and popular capitalism driven by the commitment of all members of society; where every ready and willing Nigerian partakes in the baking of the national cake and as such, claims a right to be at the table in the sharing of the proceeds of national investments. In this direction, a number of sectors can benefit from funds raised to support their development. A few examples can point in the direction of needed change and transformation.
Universal health coverage and improved health indicators will not be possible without a universal and compulsory health insurance scheme for their financing. It makes no sense borrowing from the World Bank or any concessional source for funding immunisation and other components of maternal, new born and child health when we can have a Nigerian Immunisation Trust Fund. No matter how concessional a loan is, it must be paid back at the appropriate time. Road sector financing can be improved through a Road Fund and Road Management Authority that will raise funds from a plethora of sources including toll gates, special surcharge on some commodities including fuel, etc. Special purpose vehicles to aggregate resources from institutional and retail investors will direct other resources into the road sector.
Reorganising railway development to remove it as a federal monopoly so as to bring in private sector investments especially from those already operating in the transport sector is missing from our projections. This will require an amendment of extant laws and policy. The National Housing Fund needs to be reorganised to mobilise funds that will benefit contributors over the short, medium and long terms. If the Fund had been well-managed since inception during the Ibrahim Babaginda days, it could have garnered trillions of naira in its kitty.
Furthermore, opening the window of investments into the electricity sector especially in transmission and distribution is long overdue. The current managers and operators of the distribution companies have neither the technical, managerial and financial capacity to move the sector to the next level whilst government has no resources to improve the transmission subsector. What are we waiting for before opening the subsectors to new Nigerian private capital? The song of consideration, passage and assent to the Petroleum Industry Bill for reforms in the oil and gas sector is now an old one. But our legislators seem not to understand that time waits for no one and that this reform should have happened twenty years ago.
Ultimately, these changes will relieve the treasury of or reduce the undue burden of funding key infrastructure projects and as such, reduce the need for borrowing whilst the infrastructure still gets built. It will also reduce the demand for funds to pay back and service debts. Nigerians may experience hardship and inconvenience at the beginning of this process of self-reliance and enhanced domestic resource mobilisation, but it will be for a while, and things are bound to improve once we begin to rely on ourselves.