•This is best time to remove fuel subsidy, World Bank advises
• Cautions against abuse of fiscal space to borrow
• Oil price may fall to $20 as OPEC ditches quotas
By Omololu Ogunmade, Damilola Oyedele, James Emejo and Jemima Bolokor in Abuja
The federal government has earmarked N500 billion for the
implementation of its social security scheme for unemployed young
graduates under the 2016-2017 Medium Term Expenditure Framework (MTEF)
and Fiscal Policy Strategy (FPS) submitted to the National Assembly on
Tuesday.
The N500 billion projection comprises the amount to be spent on the
government’s school feeding initiative as well as conditional cash
transfers of N5,000 to “the most vulnerable persons in the society”.
According to the MTEF, the scheme, which will commence in collaboration
with state governments, will start as a pilot, following which the
federal government will later seek the support of donor agencies.
“The federal government will collaborate with state governments to
institute well-structured social welfare intervention programmes such as
school feeding programme initiatives, conditional cash transfers to the
most vulnerable and post-NYSC grant.
“N500 billion has been provisioned in the 2016 budget as social investment for these programmes.
“These interventions will start as a pilot scheme and work towards
securing the support of donor agencies and our development partners in
order to minimise potential risks,” the document stated.
The federal government also explained that in the future, a broader
social welfare scheme would be created to cater for the larger
population which it said would include the poorest and most vulnerable
Nigerians “upon evidence of children’s enrolment in school and evidence
of immunisation”.
In order to legalise the scheme, a bill seeking to provide a framework
for a social security scheme passed through the first reading in the
Senate last week.
However, the government only provided N63.29 billion as fuel subsidy in
2016, compared to the N42.20 billion budgeted in the 2015 fiscal year
but failed to make a provision for emergency subsidy as was the case in
the 2015 budget when N217 billion was provided for emergency petrol
subsidy.
The government also made no allocation for kerosene subsidy, but
budgeted another N150 billion as arrears for fuel subsidy claims carried
over from 2015.
The government has spent N402 billion on subsidy in 2015. This amount
was part of the N522 billion recently approved by the National Assembly
in a supplementary budget sent by President Muhammadu Buhari.
It put the Niger Delta Development Commission (NDDC) share of the
Excess Crude Account in the Subsidy Reinvestment Programme (SURE-P) in
2016 at N241.5 billion.
It also retained the Amnesty Programme in the Niger Delta with a
projection of N20 billion, down from N63.2 billion spent in 2015.
The document also contained the report of N350.3 billion as projected
recoveries by the federal government as misappropriated funds.
The breakdown of the recoveries showed that the government is
projecting N137.90 billion from strategic alliance contracts entered
into by the Nigerian Petroleum Development Company (NPDC) and some oil
firms; another N162.43 billion from the Nigerian National Petroleum
Corporation (NNPC) and Central Bank of Nigeria (CBN) while the balance
of N50 billion is expected from other misappropriated funds.
It also projected a reduction in the National Assembly budget from N120 billion this year to N115 billion in 2016.
The federal government also projected N1.2 trillion in 2016 as domestic borrowing and N635 billion as foreign borrowing.
Domestic borrowings were however reduced to N1 trillion and N1.080
trillion in 2017 and 2018 while N416.82 billion and N433.650 billion was
projected as foreign borrowings for 2017 and 2018 respectively.
The government also plans to spend N1.307 trillion for domestic debt
service obligations and N54.48 billion to service foreign debt.
The document further puts the country’s debt relative to its gross
domestic product (GDP) at 12 per cent, adding that the figure is one of
the lowest in the world. It adds that “the government will ensure
additional borrowing is kept within prudent limits and channelled
towards infrastructure”.
According to the document, the N6.077 trillion budget with a revenue
target of N3.82 trillion, projects a deficit of N2.22 trillion or 2.16
per cent of GDP, and projects that recurrent expenditure will drop from
84 per cent in this year’s budget to 70 per cent in 2016 while capital
expenditure of 16 per cent in the 2015 budget was raised to 30 per cent
in 2016.
The revenue target of N3.82 trillion shows that value added tax (VAT)
in 2016 will contribute N67.7 billion from the N67.5 billion projected
in 2015.
The government is also projecting an average growth rate in 2016 of
4.37 per cent and expects this to increase by 10 per cent year-on-year
through 2017 to 4.61 per cent in 2018.
The government also said it would continue to prune the size of its
ministries, departments and agencies (MDAs) without compromising
efficiency, just as it ruled out the possibility of increasing salaries
and allowances of workers as well as pensions and other benefits in the
next fiscal year.
The government also explained the rationale behind the implementation
of treasury single account (TSA), saying: “Multiplicity of government
accounts had made it difficult to have an accurate picture of public
financial resources.”
It added that it would pursue macro-economic policies and a sector
growth strategy that would achieve fiscal stability and improve non-oil
sector competitiveness.
The government also said its fiscal policy would support a low interest
rate regime as well as low inflation through strict adherence to target
levels of the fiscal deficit, adding that fiscal incentives would
encourage industrial and manufacturing sectors and attract new domestic
and foreign investments.
Meanwhile, the World Bank yesterday expressed concern over the impact
of the huge cost of fuel subsidies on the Nigerian economy in the face
of the economic slowdown and dwindling oil revenue, adding that the
subsidy bill was likely to rise over time irrespective of whether oil
prices remained low or rebound.
World Bank lead economist, Mr. John Litwack, who said the country spent
$35 billion on fuel subsidy between 2010 and 2014, argued that the
benefits of subsidy in Nigeria appeared quite limited amid high costs.
He added that fuel subsidy obligations in 2015 were expected to account
for 18 per cent of all oil revenue or the equivalent of 25 per cent of
the federal budget. He said the sharp decline in oil prices called for a
major fiscal adjustment to lower oil revenue.
According to him, the benefits of petrol subsidy had become less
evident, given that the price of oil is lower while enforcement at the
pump had weakened.
Litwack said reports of widespread subsidy fraud are costly to the
reputation of the government while price distortions encourage
overconsumption of fuel.
Speaking in Abuja during the launch of the third edition of Nigerian
Economic Report (NER) produced by the bank’s country office, Litwack
added that the subsidy scheme appeared to have only benefitted fuel
importers and the rich rather than the citizenry.
The NER report assessed the cost and benefits of fuel subsidy against
the current prospects for oil prices and revenue, and posited that the
scheme had modest benefits for majority of Nigerians at a rather high
cost.
He said: “There is a strong tendency for the cost of the fuel subsidy
to increase over time as increasing domestic demand for petrol outpaces
growth in oil output or revenues.”
The report stated that the payment of $35 billion in fuel subsidy
between 2010 and 2014 partly accounted for why the country could not
build its fiscal reserves including the Excess Crude Account (ECA) which
could have shielded it from the recent oil price shock.
Furthermore, Litwack warned of consequences of the decision by the
fiscal authorities to hold on to the exchange rate rather than allow the
naira to depreciate.
He said the reluctance to devalue the currency could be counterproductive in the long run.
He further cautioned the federal and state governments not to abuse the
fiscal space to borrow in view of the country’s low debt to GDP ratio.
He said: “The reason there is pressure on the exchange rate is one,
there is a lot of speculative movement on the exchange rate. Some people
expect there is going to be a devaluation.
“Secondly, there are fundamentals: if there is an imbalance of payments
or more money leaving the country than coming in because of the trade
imbalance or credit crunch, then that’s another reason why there is a
pressure on the exchange rate.”
He acknowledged that the fiscal and monetary authorities would prefer to do what they can to address speculative demand.
“But when fundamentals move, trying to hold on to the exchange rate in
the end can be counterproductive; you could end up losing a lot of
reserves. That’s the kind of area any country including Nigeria needs to
be focused on,” he added.
Responding to questions from the media, the World Bank economist said:
“It’s quite natural that when oil prices are declining, the expectations
about oil prices are much lower, it is quite natural that the naira
should depreciate because oil price is a major fundamental for Nigeria
in terms of its external balance. It’s a natural phenomenon, so if you
try to counteract it, it can be counterproductive.”
Although he commended the central bank for some of the policy
initiatives to reduce pressure on the naira, he said holding on to the
exchange rate could backfire.
According to him, “The logic of why the Central Bank of Nigeria is
doing this is clear but I think there’s also a cost to this kind of
extensive policy and Nigeria should consider this seriously.
“It certainly has a negative effect on the general attitude of
investors towards Nigeria if this kind of regulation can change very
quickly to alter profitability and that’s a one big cost.
“Another cost, as I mentioned, is a budgetary crisis. If the Federation
Account is now getting N240 for every one oil dollar, there will be a
lot more money for spending, rather than at N197.
“The depreciation of the naira can benefit budgets in situations like
this and one can take the Russian Federation which is also an oil
dependent country, they have also experienced a big oil shock, and they
also have much slower growth, even recession.
“But they don’t have a budgetary crisis per se because the currency
depreciated very strongly along with the decline in oil prices.
“It’s also the case that sometimes, markets know better than the
officials whether there is potential for import substitution, for
example, a weaker exchange rate gives the market opportunity to identify
exactly where import substitution might be profitable.
“It is clear why the central bank has adopted the policies and adopted
what it’s trying to accomplish, but I think that seriously needs to be
weighed against the cost and seriously considered in Nigeria.”
Litwack admitted that though the bank was not in a position to force
recommendations on the government on both fuel subsidy and exchange rate
issues, it nevertheless had a compelling obligation to put the facts on
the table.
The NER report showed that the fuel subsidy burden could grow steadily
from 18 per cent of oil revenue to 35 per cent by 2018, while
distributions to budgets fall to 29 per cent.
In its short term assessment, it noted that the outlook for the country
remained difficult due to expected low oil prices, arguing that even if
oil prices recovered, government oil revenue should continue to decline
in the medium-term relative to the size of the Nigerian economy,
further necessitating critical fiscal adjustment.
The report said investors are willing to bring considerable investment
into the country if they received credible signals from the new
administration of commitment to policy directions and regulations
consistent with strong private sector growth.
It further assessed Nigeria’s natural gas sector and called for a regulatory framework to boost the sector.
But with the federal government setting a 2016 budget oil benchmark of
$38 a barrel, current forecasts show that oil prices could fall as low
as $20 per barrel next year, as the Organisation of Petroleum Exporting
Countries’ (OPEC) decision to abandon a formal production quota
exacerbates a bulging supply glut, reported Reuters yesterday.
Speaking as the price of a barrel of Brent crude, the benchmark
international contract, slipped 5.2 per cent to $40.75 in New York, the
lowest since February 2009, Ole Hansen, head of commodity strategy at
Saxo Bank, said it was “difficult to rule out anything”.
“We could see a short-lived phase of all-out panic, which could trigger
a free fall situation,” he said. “With no signs of non-OPEC producers,
such as US and Russia, cutting back, the near-term outlook for oil
remains very challenging indeed.”
A meeting of the OPEC cartel in Vienna broke up on Friday with no agreement between members on output levels.
The price of crude has already plunged nearly by 64 per cent since June
2014, when a barrel of Brent cost $114, after Saudi Arabia opted to
pump at near-record levels to maintain market share while putting
pressure on producers in North America.
Hansen said that downward pressure on crude oil prices would intensify
in the first three months of 2016 because of increased output from Iran
and a seasonal rise in US stockpiles.
Goldman Sachs also warned that OPEC’s inconclusive meeting could
trigger further falls, to as low as $20 per barrel, and said that prices
were now likely to remain “lower for longer”.
There was disagreement between OPEC’s 13 members on how to accommodate
the extra Iranian oil expected to flood the market when Western
sanctions over the country’s nuclear programme are lifted, probably in
the first or second quarter of next year.
Iran has refused to consider reining back its production until it
reaches its pre-sanctions level of four million barrels per day. Saudi
Arabia has no plans to curb its own production without cooperation from
Iran, Iraq and others.
“The market is taking on board the fact that Saudi Arabia’s production
strategy is long term and they are simply not going to cut,” Michael
Wittner, an oil analyst at Société Générale in New York, said.
OPEC’s present output is 31.5 million barrels per day — one third of
the world’s oil and well above its previous official quota of 30 million
barrels.
The group acknowledged that there was little it could do to shore up
the market as long as non-OPEC producers continued to pump at
near-record levels.
Emmanuel Ibe Kachikwu, Nigeria’s Minister of State for Petroleum and
President of OPEC, said that the group was in “wait and watch” mode
until its next meeting, in June. Uncertainty about Iran’s production was
a driver for the decision not to make changes, he said.
Oil has not traded at its present levels since the collapse of Lehman
Brothers in 2008 sent financial markets into a tailspin. The latest
price fall came as the European Union said yesterday that it was
dropping an investigation into alleged oil price manipulation during the
financial crisis by groups, including Shell and BP.
Figures to be published this week by the International Energy Agency
(IEA) are likely to point to a swelling global glut of oil, which
already stands at about three billion barrels.
HIGHLIGHTS OF 2016 BUDGET
• FG to spend N6.077tn, projects revenue of N3.82tn
• Budget deficit raised to N2.22tn or 2.16% of GDP
• Recurrent expenditure slashed to 70%
• Capital spending raised to 30%
• To borrow N1.8tn
• Projects recoveries of N350bn misappropriated funds
• To spend N63.3bn on petrol subsidy and N150bn carried over from 2015
• Scraps subsidy on kerosene
• Pegs oil benchmark at $38/bl, exchange rate at N198/$
• Projects GDP growth rate of 4.37%
