"There are two ways to be fooled. One is to believe what isn't true; the other is to refuse to believe what is true." Soren Kierkegaard (1813-1855)
Mr. John Aboh, popularly called "Uncle John" by his younger friends like us, is a great banker. He is a man full of wisdom and wits. Sometimes, he would drop rib-cracking jokes while keeping a straight face such that listeners would be wondering whether it was he who actually cracked the joke. I had the privilege of working with him in three different financial institutions in the past. In one of them, a colleague who had just resigned from the bank, was put under pressure by management to rescind his decision. As it was usual to seek advice from Uncle John, this colleague approached him and told him he was considering withdrawing his resignation. Uncle John promptly asked him, "why pull out a gun, if you know you are not going to shoot"? My colleague got the message and continued with his exit plans. Years later, it was my turn to advise a younger colleague. He had been offered a senior role in another bank and had tendered his resignation. His then employers would have none of that. They started the usual thing that management does, pleading with him not to go, as the bank's "survival" depended on him. Matters were not helped by the Chairman of the bank, a man he respected, who joined the pleading. I had no difficulty in quoting Uncle John for him. Unfortunately, he did the opposite. He withdrew his resignation. Months later when the bank was ready with his replacement, he was removed from his role and given a not- too- important role, a signal that the bank was then prepared for his exit. Of course, by this time, the bank that made him the offer had filled the role. The frustration led him to quit without another job. The truth is that institutions don't like to be taken unawares. Secondly, most institutions believe in Murphy's law that if something can go wrong, it will surely go wrong. So, if you had considered leaving, it is a question of time before you did.
Today, we are relating that wise saying to the circumstances surrounding the 2019 budget recently signed into law by the President. Luckily, as he was signing the budget, he made a remark which acknowledges the position of this column. He had confessed that the budget would be difficult to implement. Someone would then ask, if he knew that the budget would run into stormy waters, why did he sign it? The President might have reasoned that if it took the National Assembly over 6 months to pass the budget, he shouldn't risk withholding accent which may lead to an indefinite wait. As can be seen, it has become part of our culture to pass national budgets between May and June of the budget year. The only exception being 2013 when the budget was 'miraculously' passed in February. Be that as it may, the 2019 budget has become law, as every budget approved by the National Assembly is indeed a law. Our worry is that there is nothing to indicate that this budget would be implemented, except in breach.
It is no longer news that the National Assembly increased the budget size by N90.33b from N8.83t to N8.92t. In doing this, the National Assembly appropriated N23.68b for itself as severance benefits for its non-returning members, added N80b for security, removed some projects budgeted for by the executive and inserted constituency projects for its members. Even at that, the National Assembly was not done with tinkering with the budget. In a strange action, the assembly reduced the proposed borrowing by N44b from N1.649t to N1.605t. This increased the deficit in the budget from N1.859t to N1.918t representing 1.37% of GDP and creating in the process, a funding gap of close to N103b.
The other issue of concern relates to the fundamental assumptions of the budget. At a projected oil production volume of 2.3m barrels per day, it is our view that the stage has already been set for the budget to fail. Going by records, we have not been able to significantly go above the 2m barrels mark in the last one year. One would like to know what new thing we are expecting would happen to add about 300,000 barrels per day to our production capacity this year. And by the way, bear in mind that the year is almost half gone and that magic doesn't seem to have happened. It is our opinion that this projection is unrealistic.
The budget also proposes a benchmark oil price of $60 per barrel. It is our belief that the prognosis for oil price this year is negative. For instance, the OPEC daily basket prices for crude stood at $60.88 as at Thursday June 6 as against $67.10 per barrel a week earlier. One would have expected that we adopt a more conservative position as we are almost at the benchmark and in the light of the trade war between China and the US, anything can happen. In the event that prices continue on a downward spiral, our budget would go off the mark.
The other fundamental assumption is exchange rate which the budget leaves at N305 per dollar. While this rate has remained stable, it is also true that the market exchange rate is almost N50 per dollar higher. If the two assumptions discussed earlier fail, then it would be very difficult for the adopted exchange rate to stand. It is also noteworthy that it is only the government that does business at the official exchange rate. The vast majority of us trade at about N360 per dollar
Before we go further, it will not be out of place to query the implementation of the 2018 budget. The 2018 budget projected a total revenue of N7.1t, but the actual revenue raised was N3.96t. This is just about 55% of the total projected revenue. Of the N3.96t, 60% or N2.32t came from crude oil sales, while N1.64t came from non-oil sources, including taxation. The performance of 55% of revenue in 2018, is marginally higher than the performance of 53% of revenue in the 2017 budget. On the expenditure side, recurrent expenditure for last year budgeted at N6.25t was virtually fully implemented. Capital expenditure, however, which was proposed at N2.87t fell short of implementation by N1.32t as only N1.55t was realised. This shows that a little above 50% of capital expenditure items in the budget were implemented.
Another major expenditure head in the budget is Salaries and Allowances. N2.12t was budgeted and spent, representing 55% of revenues. Again, since revenues drastically fell short of budget, the only way to fund some of the expenditures was through extra-budgetary borrowing. We predicted this in this column about a year ago. Of course, we all know that by the end of 2018, we had raved up borrowing such that our loan profile had surged from N21.73t ($71b) in 2017 to N24.39t ($79.44b). As a result of this, our projected debt service to revenue ratio of 31.5% ballooned to 66%. In simple English, for every N100 we earned last year, we used N66 to pay back loans. This trend did not start today. In 2015, our debt service to total revenue ratio was 33% , increasing to 45% in 2016 and further to 62% in 2017.
We cannot conclude our query of the 2018 budget without bringing in an updated schedule we created when we discussed last year's budget. We had looked at our budget in per capita terms and compared it with other African countries who do not lay claim to being the "giant" of Africa. While a Nigerian's share of last year's budget was $150, the 2019 budget has reduced that to $145. Our counterparts from South Africa would now earn $2,155, an increase of $45 from the 2018 figures of $2,110.
COMPARISON OF BUDGET PER HEAD FOR SELECTED AFRICAN COUNTRIES(2018-2019)
Country 2018 Budget 2018 Population 2018 Budget Per Head 2019 Budget 2019 Population 2019 Budget Per Head
Nigeria $30 B 198 M $150 $29B 200M $145
Egypt $55 B 90.2 M $610 $89B 99.5M $910
Angola $45 B 27.3 M $1,648 $36.4B 31.7M $1,148
Algeria $71 B 40.8 M $1,740 $72B 42.68M $1,687
South Africa $116 B 55 M $2,110 $125B 58M $2,155
From the table above, it is quite clear that something is fundamentally wrong with us. Countries with fractions of our population have budget figures that are far higher than ours in absolute figures. How come Angola with 15% of our population has a budget that is $7.4b bigger than ours? The issue is real economic activity or productivity. Until we have our huge population productively engaged, it would continue to be a drag on the economy. It is also the reason why we have become the poverty capital of the world.
Clearly, the 2018 budget of N9.12t was larger than the 2019 budget of N8.92. Applying the average inflation rate last year of 11.3% to the 2019 budget will reduce the size of the budget further to N7.91t. That would translate to $25.7b as against the $30b of 2018. Those are actually the relevant numbers that point to the contraction of the economy.
A few other interesting observations are in order here. One billion dollars was provided for fuel subsidy. We had taken up this matter in a previous piece where we argued that subsidy has outlived its usefulness, if any, and should be scrapped. The fact that fuel subsidy has failed to get to those that needed it most, the poorer people and the opaque manner in which it is implemented coupled with the massive corruption that it has been associated with, make subsidy, a candidate that should not have found its way into the 2019 budget. Think of allocating the $1b to another item that will support job creation and increase productivity. Or simply using it to subsidise production rather than consumption and the kind of impact it would make on the economy.
A closer look at the expenditure side of the budget would reveal avoidable waste. For instance, there is some N8b Working Capital for the National Carrier under the Ministry of Transport. Everyone knows that this is not a priority at this time. We also know that the government is still struggling with the two local carriers, Arik and Aero Contractors, currently under the management of AMCON. If the airline business was a priority, why not start with those that are technically owned by government? Under the Ministry of health, there is a heading, "Construction of NAFDAC Offices in the 36 states and FCT" with a proposed spend of N229m. One wonders what this is about as we know that the agency is present in most if not all the states. If they were renting prior to this time, is this a good time to own? Again, under the Ministry of Trade and Industries, the budget provides N1b for "Industrial Policy Reforms and Enabling Business Environment", whatever that means!. There was also a heading tagged "Strategic Negotiation and Engagement" whose budget is N250m and another N240m earmarked for the "Development of new Commodity Priority Products for International Markets".
Looking at the most important factors in the Human Development Index; Education got an allocation of N620.5b which is about 7% of budget while Health got a paltry N365.76b representing 4% of the budget. These numbers remain abysmally low given the UNESCO recommendation of between 15% and 20% for Education and the 2001 Abuja declaration of African Counties under the auspices of the World Health Organisation,(WHO) also requiring member countries to set aside, at least 15% of their budgets for health care.
Our submission is that budgets in this country have become a ritual. And it does appear that those involved know that there are no consequences for not delivering on the budget. They are, therefore, not bound to introduce rigour into the budgeting process. There is also a tendency to go into the exercise with the 'contract' mindset rather than the delivery mindset. Therefore, if a provision of N10m has been made to construct a building, what is important is that a contract is awarded and payment is made within the budget year. Constructing the building itself, becomes secondary.
A major setback to budget implementation is revenue pressure. Budgeting should focus on how to expand the revenue base of the country. We have heard that we have improved on "ease of doing business" but that, sadly, has not translated to more business as can be seen from our continued reliance on oil revenue to fund our budget. I believe it is time we stop doing things that are not working. We must deliberately invest in known growth sectors of the global economy. While we admit that Agriculture and Solid Minerals are important, we must begin to invest massively in the knowledge economy. The last time I checked, the major companies of the world today do not have so much stock of raw materials and finished goods in some warehouses like before. This is the time to encourage investment in Information and Communications Technology, artificial intelligence, robotics, 3D Printing and next generation engineering. We must sustain investment in infrastructure and reduce drastically, all forms of waste in terms of bloated government, unsustainable wage bills, corruption and outright stealing. We must scrutinize our budgets very well to ensure that they fit into a philosophy or a framework and the budget should not be a stand-alone document that has little or no connection with the past nor the future. Finally, there should be a feedback mechanism where governments publish the performance of previous budgets before approving new budgets. This will force governments to understand that the budget is a law that should not be implemented in breach while at the same time providing the people with information which would help them to hold their governments to account.
Read the original article on This Day.
AllAfrica publishes around 600 reports a day from more than 150 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.
Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.
AllAfrica is a voice of, by and about Africa - aggregating, producing and distributing 600 news and information items daily from over 150 African news organizations and our own reporters to an African and global public. We operate from Cape Town, Dakar, Abuja, Monrovia, Nairobi and Washington DC.