Detailed commentary on the new administration’s fiscal policy has been light. In the case of analysts and investors at offshore institutions, we attribute this failing to a collective hissy fit sparked by the failure of the monetary authorities to heed their recommendations on exchange-rate policy. The 2016-2018 Medium-Term Expenditure Framework and Fiscal Strategy Paper,approved by the Senate last week, consists of just 18 pages of text as well as tables with the detailed budget projections. Further, the commentary is double-spaced so there are few excuses not to read it.
We indulge in this easy target practice because we have read it, and we like much of it. Firstly, the framework makes pragmatic assumptions for the oil price. It may look in today’s market that the assumption for 2016 leaves little room for manoeuvre but few would quarrel with an average of US$38/b for next year. Nor is US$50/b for 2018 overly ambitious. This low-price environment creates what the framework terms a “window of opportunity” and what we would see as the last chance saloon.
This is not the first Nigerian administration to talk of a diversified, non-rentier economy. However, we would argue that the size and cost of the public sector has become so large, and its standards of governance so low that time is running out for a successful turnaround. (We hesitate to talk of transformation because of the ancient regime associations.)
Secondly, we like the profile of non-oil revenue in the framework. The total is forecast to increase by 41 percent next year in relation to the 2015 budget and by 115 percent from the outturn in January-September, which suggest that the collection agencies took their eyes off the ball in the election period. Strong growth is forecast from VAT, corporate tax and FGN independent, but very little from customs, we assume, because of the prevalence of smuggling, the CBN’s administrative measures and the FGN’s import substitution policies. This overall robust growth is based upon a combination of fewer tax incentives and exemptions, more rigorous pursuit of taxpayers and computerisation.
Thirdly, we make a point about which everybody is agreed. The allocation for capital spending is hiked to N1.60trn (US$13.1bn) from N720bn in this year’s budget. We all know that governments across the world axe capital projects whenever the going gets tough. So this year the FGN released only N38bn in H1 and N195bn cumulative in the first nine months for capital programmes. It acted because of lower-than-projected oil revenues. If the new administration has to act similarly this year, it will be for other reasons.
Still on expenditure, we note that the framework is conservative on the new administration’s social investment. We recall the election pledge to make a cash transfer of N5,000 per month to 25 million low-income Nigerians (or N1.5trn over a year). What we find is just a total of N500bn, divided between N300bn for post NYSE entrepreneurial development under recurrent items and N200bn under capital items.
Prudent on the election pledges, the framework is also notable for some deliberate omissions. There are no allocations whatsoever for the Subsidy Reinvestment and Empowerment Programme (SURE-P). This is presumably connected to the absence of funding for fuel subsidies other than N150bn for the payment of 2015 arrears. Another omission is the end of support for the presidential amnesty in the Niger Delta after next year.
Finally, we comment upon the projected deficit of N2.2trn (US$11.2bn) in 2016, equivalent to 2.2 percent of estimated GDP. This would fall within the threshold of 3.0 percent in the Fiscal Responsibility Act 2007. In the event of an external or domestic shock, we are confident that the FGN would make the necessary fiscal adjustment mid-year. As it stands, however, we are comfortable with the projected deficit.
New borrowings are set to raise N1.84trn towards deficit financing: N1.20trn domestically and N640bn externally on concessional terms. We do not think that the former is crowding out the private sector or that it is likely to push yields sharply upwards. The 10-year benchmark FGN bond is paying a little over 11.0 percent but banks could lend to the real economy without credit committee approval for far better returns.
The deficit balance of N380bn in 2016 is to be funded by privatization, signature bonuses and recoveries. The same non-debt creating flows are projected to contribute just N200bn in 2017 and N40bn in 2018 towards deficit financing. We see considerable room for extracting more revenue from these sources. On the bonuses, for example, it would be very surprising if the FGN was not in a position to hold a bidding round for oil leases before the end of the framework. Expectations of recoveries also look modest: N350bn in 2016 and N120bn in 2017. We suspect that the recoveries will take longer than assumed but we also note that some of the transactions under investigation are each in a different (higher) league.
Still on non-debt creating flows, we wonder at the accounting treatment of large fines such as the moveable US$3.9bn on MTN Nigeria. The new administration had said during the election campaigning that it wanted regulators to have sharper teeth, so we should anticipate more fines ahead. We assume that the telecoms regulator NCC will not be allowed to keep more than a small fraction of any fine paid by MTN. An enviable challenge therefore arises for the FGN. It could look for tips to the US where regulators and courts have been fining financial institutions tens of billions of dollars in the past decade.
Gregory Kronsten
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