23 September 2013

Nigeria: Economy May Face Harsh Times in 2014

There are indications that harsh times await Nigeria's economy due to increasing challenges in the sources of income to fund government expenditures in the next fiscal year.

The challenges come to light in the documents submitted by President Goodluck Jonathan to the National Assembly recently.

On Tuesday 17th September, 2013, President Goodluck Jonathan presented the 2013-2016 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) to the National Assembly.

In a letter addressed to Senate President, David Mark, dated 12th September, Jonathan said submission of the two documents were pursuant to provisions of the Fiscal Responsibility Act, 2007, and the developments towards preparation of the 2014 budget.

"Prepared against the backdrop of global economic uncertainty, the MTEF and FSP reflect the reality of our circumstance; and will ensure that planned spending is set at prudent and sustainable levels consistent with government's overall medium-term development objectives."

In the first few paragraphs of the paper, government took time to compare economic growth projections in some developed and developing countries of the world and how their various economies may perform next year. In Japan for instance, the short term outlook for slow recovery with the Japanese economy is expected to expand about 2 percent due to substantial fiscal stimulus package, monetary easing and improvement in net exports.

In sub-Saharan Africa, it is expected that there will be improvement in output growth of 5.1 percent this year and 3.8 percent in 2014 but if "robust recovery is experienced in the euro area."

The government argued that the international natural resources map is also changing due to rising output from non-oil production sources especially the Shale formations in North America exceeding earlier expectations resulting in precipitous fall in the US import of Nigerian crude oil even though India, China and other Asian countries have increased their demands for Nigeria's oil.

More so, there's increased exploitation of gas resources in China which is about doubled and is expected to have enormous impact on the international oil market in the medium-term. This is in addition to rising oil output from the Brazilian deep water fields. At the same time, regional producers, including Ghana, Cote d'Ivoire, Liberia and Uganda are adding to the supply such that previous importers of Nigeria's crude oil are now producing and exporting oil. These developments according to the government suggest there could be significantly lower demand for Nigeria's crude oil over the medium term to long term and thus suggests the need for more prudence in managing "our available resources."

In addition to the challenges mentioned, Nigeria has also faced serious challenges since the first quarter of 2013 as a result of significant disruptions to oil production which has led to an output drop of almost 400,000 barrels per day, resulting in revenue loss which has affected the implementation of the budget even though the government said it has been able to cope, thanks to the Excess Crude Account (ECA).

Consequently, the balance in the ECA stands at $5 billion USD as at August which is a serious drop from $9 billion as at December 2012.

Now, the fall in oil prices, risk to oil production, and the continuous oil theft in the Niger Delta, all pose great challenges to the economy, creating financial problems for the country.

Similarly, another serious challenge to the Nigerian economy in the next fiscal year is the rising debt profile which affects all tiers of government. As at March 2013, the total external debt stock stood at $.67 billion out of which the federal government's share was 63.5 percent, while the 36 states and the FCT accounted for the balance of 36.5 percent. Again, the domestic debt for the same period stood at N6.49 trillion, bringing the total debt to N7.53 trillion which is also 17.75 of the GDP.

Consequently, in 2014, the government will borrow N572 billion which is slightly down from the N577 billion borrowed this year.

The government has said that because of the budgetary constraints, it will try to sustain its policy of not embarking on new capital projects in 2014 "so as to minimize the risk of contractor arrears."

It would be recalled that this year, the government projected a revenue of N4.1 trillion and an aggregate expenditure of N4.987 trillion which was signed into law in February after two months of power tussle between the executive and the legislature. Out of it, only N1.621 trillion was allocated to capital expenditure while the remaining went for recurrent and overhead cost.

Next year, the aggregate total expenditure is put at N4.77 trillion including N2.73.14 billion under the Subsidy Re-Investment Programme (SURE-P), yet capital votes will still be N1.45 trillion.

In 2014, the daily crude oil production is projected to be 2.3888 million barrels which is lower than the 2.526 budgeted this year, representing about 200,000 barrels less.

The oil bench mark next year is pegged at $74 per barrel, $75 in 2015 and $76 in 2016, this the government said it arrived at after taking into account the weakening future prices occasioned by rising oil and unconventional oil supplies, as well as economic recovery.

Analysts say what is disturbing is that despite painting a gloomy future for the country's revenue projections, Jonathan is going to submit a budget estimate with a deeper cut into the capital expenditure while the recurrent and overhead expenses will witness some increases.

Observers say, it does not make economic sense for an under-developed country like Nigeria to keep spending over 70 percent of its annual income on recurrent expenditure instead of making heavy investments in infrastructure such as rail lines, electricity, education, health and small scale industries that will generate employment for the teeming unemployed youths roaring the streets.

The government has also admitted this in the MTEF paper but tried to justify its infamous decision saying, "because of the new challenges occasioned by the projected significant reduction in revenue in 2014, there will be a temporary dip in the share of capital spending to about 26.22 percent down from 32 percent in 2014. This is because the brunt of the shortfall in revenue is borne by capital expenditure."

But the question here is: why should capital expenditure bear the brunt if there is any revenue shortfall? Is this supposed to be the best of decisions that the Economic Management Team led by Dr. Ngozi Okonjo-Iweala could arrived at? Or is it a disparate effort to justify the expected huge spendings that is the practice in every election year? Only time will tell but all eyes are on the Senators as they brace up to debate the document.

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