The many contradictions of 2017 Appropriation Bill

The 2017 Appropriation Bill is an unprecedented spending plan.  The federal government plans to spend N7.3 trillion in 2017.  Aside from the historic figure, the entire budget estimate is a monstrous caricature of Nigeria’s jaundiced federalism. A bunch of people sit in Abuja and control the budget for maintenance of dilapidated roads stretching from Lagos to Maiduguri and Calabar to Sokoto.

The federal government spoon-feeds the federating units with crumbs from the federation account and keeps a rather disproportionate chunk of the income for services it often fails to render.
That explains why at a time when some states are allocating 70 per cent of their budgets to capital expenditure, the federal government with a bloated cash-guzzling civil service structure, squanders 70 per cent of its annual budget on recurrent expenditure.
In the 2017 Appropriation Bill, the cumbersome civil service structure guzzles the lion’s share, leaving a scant N2.24 trillion (or 30 per cent) for investment in decaying infrastructure.
The bill is decked out with a record deficit of N2.3 trillion. Government plans to fund the deficit with N1.06 external loans while the balance of N1.25 would be raised from the cash-strapped domestic money market.  The huge borrowing would crowd out the endangered private sector from the money market as banks scramble to invest in government’s risk-free debt instruments.

The architects of the budget may be cheering themselves for raising the capital expenditure from 27 per cent in 2016 to 30 per cent in 2017.  The truth, however, is that capital votes are hardly released on time.  Out of the N1.8 trillion voted for capital expenditure in 2016, only N753 had been released by the end of October.
Perhaps the most unrealistic projections in the bill are the economic indices that the budget is predicated upon.  The architects of the budget build it around an exchange rate of N305 to the dollar, inflation rate of 12 per cent, oil reference price of $42.5 and production level of 2.2 million barrels per day (mbd).
Of all the above indices, only the oil reference price looks realistic.  For the first time in two years since supply glut plummeted oil prices precipitously, the Organisation of petroleum Exporting Countries (OPEC), is beginning to show real signs of cutting supply to boost prices.  Last week oil price responded to the move by inching close to $58.
The production quota of 2.2 mbd is as unrealistic as it was in 2016. Industry watchers contend that average oil production for 2016 hovered around 1.4 mbd.  The gunmen in Niger Delta scuttled production and exports of crude oil by blowing up pipelines and oil facilities.

As the National Assembly debates an Appropriation Bill predicated on production level of 2.2 mbd, militants are poised to resume intensive bombing of the pipelines.
Given the federal government askance posture on most of the militants’ demands and the reluctance to engage them in a full scale military showdown, the chances of raising oil production above 1.6 mbd in 2017 are very slim. That suggests a revenue shortfall that could cripple the ambitious budget and keep the economy languishing in recession.
The inflation and exchange rate projections for the budget reduce the whole document to something of wishful thinking.  The economy ended 2016 with inflation rate sailing perilously close to 19 per cent. Although inflation rate is slowing down, economy watchers expect it to hit 20 per cent before the actual climb down begins.

There is practically no basis for predicating 2017 budget on inflation rate of 12 per cent.  With an expansionist fiscal policy designed to get the economy out of recession, no one expects inflation to climb down as fast as the architects of the budget defiantly proposed.
Perhaps the most unrealistic of the projections is the exchange rate of N305 to the dollar.  Investors’ response to the budget exchange rate is that government is not willing to admit Nigeria’s exchange rate crisis.  The perception is that a government that builds its budget on N305 to the dollar when the parallel market rate is N490 is not ready to confront its exchange rate problem. Nigeria runs six different exchange rates. It sends wrong signals to investors.  Until that problem is admitted and confronted, no one can convince investors to bring in scarce foreign exchange.

Government can only restore investors’ confidence in the economy with policies that would allow the naira to find its level.  The yawning gap between parallel and official market rates is a disincentive to investors and would reduce the chances of the 2017 budget getting the economy out of recession as planned.
Monetary economists believe that if the naira is floated, its purchasing power parity would put the excahnge rate around N320 to the dollar.  The parallel market rate of N490 is a reflection of the perception that Nigeria is bereft of investor-friendly policies.
That perception puts pressure on the naira as people save in dollars because the naira is expected to continue its journey down the abyss. Smart policies can halt the drift. The 2017 Appropriation Bill is ambitious, but it lacks the policy thrust to change investors’ perception of a drifting economy

Monetary economists believe that if the naira is floated, its purchasing power parity would put the excahnge rate around N320 to the dollar.  The parallel market rate of N490 is a reflection of the perception that Nigeria is bereft of investor-friendly policies