|2009: Between economic deficit and budget implementation|
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|Sunday, 07 December 2008|
Expectations are high, yet the world economy is in financial crisis while Nigerian economy is having its sad share of it. Nigeria, a mono-economy, oil producing nation, has not only suffered a major blow from its daily proceeds from crude oil exports in recent times, its economy may witness major deficit in 2009, a hard time ahead for Nigerians, you may say.
Specifically, within the last three months, it has not been easy for any of the oil producing nations like Nigeria. With an average of $147 per barrel in July, there were no immediate prediction and projections that indicated that world oil prices would crash so soon to as low as $47 per barrel in December. But, it has happened. The oil price is still falling, no hold back as the world is grappling with reality of financial meltdown.
Although the federal government had pegged the 2008 budget on $59 per oil barrel and a daily production of 2.5 million barrels, the nation could not maximise the immense benefits of the high price of crude oil in the international market because of its internal crisis in the Niger Delta region.
The fear, however, is that with continuing sliding in the crude oil price in the international market and persistent hostilities in the Niger Delta region, how realistic is year 2009 budget?
The presidency seems to understand this and that explains its decision to finance the year’s deficit with $500 million through international bonds.
President Umar Musa Yar’adua, in his presentation of N2.87 trillion budget to the National Assembly said the deficit would be financed by outstanding signature bonuses, proceeds from on-going privatisation, recall of $200 million from the Nigerian Trust Fund of the African Development Bank, unspent balances from 2008 budget, domestic borrowing and naira denominated international bond issue of $500 million.
The high point of the budget include reversal of crude oil revenue from N2.59 trillion projected in 2008 to N1.778 trillion in 2009, joint venture cash calls of $5 billion, GDP growth rate of 8.9 per cent, inflation rate of 8.2 per cent.
It also comprised of N140.7 statutory transfer, N283.6 billion debt service, N1.649 trillion for recurrent, non debt expenditure and N796.7 billion for capital expenditure.
However, experts who spoke to Sunday Trust on likely effect of the budget on the economy next year expressed mixed feelings.
For instance, on the allocation of $5 billion for cash calls, the managing director of Platform Petroleum, Austin Avuru said the allocation was not enough. His augment was that if truly Nigeria was to increase its proven reserves from 35 to 40 billion barrels, increase production from 3 to 4.5 million barrels per day by 2010, the allocation was definitely not enough.
“Cash call allocation from the federal government can never be enough and as usual, it is not unexpected if only $3 billion is utilised from the $5 billion budgeted. Under normal circumstances, cash calls payment should not be in the budget, what goes to the federation accounts such as earnings from taxes, royalties, fines and revenue accrued from crude oil are what should be budgeted for but cash calls is a distortion which ought not to be in the budget, but it has been there,” he said.
On the issue on diversification to other sectors, Avuru said the assumption was not new. “We have heard that in 1960, 1971, 1980 and 2000. For me, this is just reactionary statement brought about by poverty of planning. We had enough revenue from crude oil between 2003 and 2008, what did we use the excess from the crude for?” he queried.
On the $45 per barrel benchmark, Avuru said some of them, experts in the energy sector had always advocated that rather than government on annual basis proposed a benchmark, it should have a fixed benchmark which would give average projection whereby if the price of crude was above that, it was religiously put somewhere and if at a point, it was below, it was made up. “That was what I though we should be doing,” he said.
Deputy Director, Department of Petroleum Resources, (DPR), Billy Agba said the inclusion of $5 billion cash calls funding government operation geared towards improvement of the nation’s oil and gas adding that the essence of the provision was to ensure optimal operation of the sector.
But on his part, the chief executive officer, International Energy Services, Diran Fawibe said the $45 per barrel budget benchmark price projected the reality on ground.
Said he, “There is a tendency to say that $45 is too close to the current oil price, which is less than $50 per barrel. But we can also say that the price is likely to improve because if OPEC is able to stabilise the market, the price may go beyond the $45 per barrel, which is okay.”
He said the success or otherwise of OPEC’s management would depend on the discipline displayed by member countries in maintaining their production quotas adding that from what was being experienced in the market, OPEC would have learnt some lessons from past cheating attitudes of some countries.
He asked, “Nevertheless, if production is trimmed down, how are we sure that we can attain 2.292 million barrels per day. How are we sure that our own share of the production quota will give us 2.292 mbpd on the average?”
The production level, he said could be said to be a bit ambitious, based on the international situation.
“On the whole, the budget is realistic, considering the situation we are facing currently. It is like rationing the expected revenue among key sectors, he added.
The president of Lagos Chamber of Commence and Industry (LCCI), Solomon Onafowokan said the recurrent expenditure was on the high side, which ought not to be adding that it was an indication that government was not mindful of the mono economic status of the nation.
He said government ought to have channelled more resources towards key sectors such as energy and power.
But the president of the Nigerian Economic Summit Group, Maxi Sam Onhumbuwa disagreed with Onafowokan.
He said the budget had improved capital allocation to critical infrastructures like power but said government should focus largely on diversification of the nation’s economy from the current single commodity economy.
Managing Director, Financial Derivatives, Bismarck Rewane said given the crisis in the Niger Delta, the 2.292 million barrels per day production and 8.9 per cent Gross Domestic Product growth rate assumptions were optimistic.
According to him, the N88.5bn allocated to power was rather too small, being a critical sector adding that if government intended to improve the power sector through Private-Public Partnerships, the current situation might not allow for that because credits had been dried up with the global financial turmoil that had caused developed countries trillions of dollars.
Said he, “It is a relief that Mr. President has, at long last, in the presentation of the budget, made it clear that the Nigerian economy was adversely affected and constrained by the global economic and financial crisis. This is contrary to the official pronouncement of top policy makers in recent months, that our economy is fundamentally strong.
“The 2009 budget is a wake-up call to Nigerians to brace up for the looming harsh times accompanying the deteriorating global financial crisis. The current global economic turmoil sets the parameters for the budget. It constrains the budget and rightly, Mr. President recognises the challenges and the opportunities inherent in this defining moment for the world and our country’s economies. This is best drawn out by: The recognition of the budget to increase non-oil revenue, strengthen tax proceeds by the federal government and fortify the ongoing performance of the non-oil sector,” he said.
He said the forecast of the projection of inflation at 8.2 per cent appeared optimistic because there was an ongoing massive depreciation of the naira, which would be inflationary, and because the inflation rate released by the CBN was even over 10 per cent. The deficit of N1.09tn meant government would have to borrow money to fund the deficit, which would also be inflationary.
Ultimately, the outcome of the 2009 budget would depend on two critical factors – the price of oil, which is beyond our control, and our capacity to implement the budget effectively, he said.