2013 Budget Analysis

The annual budget of the Federal Government of Nigeria is always awaited in an anxious anticipation as it plays a major role in driving economic activities with implications for politics, security and business opportunities. The passage of the budget on the 20th of December, 2012 was historical as it was the first time the National Assembly passed the budget before the end of the year since the commencement of the current democracy in 1999.

President Goodluck Jonathan on February 26th assented to the 2013 Appropriation Bill. However, some clauses were inserted into the budget to guide the executive on its implementation. One of such clauses was that all the unutilised capital expenditure component of the 2012 Appropriation Act should be rolled over and should be construed to form part of the 2013 Appropriation Act, “provided that the unutilised capital expenditure component of 2012 budget shall lapse on the 12th day of April, 2013.”

Conservative Assumptions?
The budget was underpinned by some assumptions which included a projected oil production level of 2.53 million barrels per day (bpd), up by 2.02% from the 2.48 million bpd projected for 2012. The benchmark oil price was set at $75/barrel, a modest increase from the $72/barrel approved in the 2012 Budget; while GDP growth was estimated at 6.5%, down from the 6.85% projected in the Fiscal Strategy Paper. The downward revision of the growth rate was against the backdrop of severe floods experienced in some parts of the country which would consequently impact on economic activity in 2013.

Highlights of The 2013 Budget
In the appropriation bill for the 2013 fiscal year, the Federal Government (FG) is proposing a ₦4.92 trillion spending plan, representing an increase of 5% over the ₦4.7 trillion appropriated for the 2012 fiscal year. The budget was later increased by ₦63 million to ₦4.987 trillion, from the initial ₦4.92 trillion budget proposal submitted by the president.

The year-on-year increase in the 2013 budget, though significant, remains relatively conservative when compared with the 5.91% growth in expenditure observed in the 2012 budget. The aggregate expenditure figure comprises of ₦1.54 trillion for capital expenditure, ₦2.41 trillion for recurrent expenditure, ₦380.02 billion for statutory transfers and ₦591.76 billion for debt service.

Recurrent Expenditure Slashed
In the original proposal, the President had set aside ₦2.41 trillion for recurrent expenditure, but the lawmakers slashed it by 0.03% to ₦2.38 trillion. Meanwhile, capital vote was raised to ₦1.62 trillion, up from ₦1.54 trillion. The sum of ₦591.7 billion was earmarked for debt servicing, while ₦387.9 billion was allocated to statutory transfers. The crude oil benchmark was also increased from the Executive proposal of $75 to $79 per barrel.

The House rejected the $75 crude oil benchmark proposed by the Executive with a view to cut deficit and reducing borrowing to fund the budget. The extra $4 to be saved from raising the benchmark to $79 will be used to “bring the deficit of ₦1.03 trillion down to about ₦887 billion.” This is reflecting a debt to GDP ratio of 1.8%, as against the 2.7% in the Executive proposal.

Oil production was retained at 2.53 million bpd as initially proposed by the Federal Government. The higher benchmark cuts ₦143 billion off the FG deficit, reducing it to ₦887 billion from the initial planned ₦1.03 trillion. The reduction in the deficit plan will have impact on the FG’s planned domestic borrowing in 2013.

Funding for the initial proposed ₦1.03 trillion plan was to come from the domestic and external borrowing plan of the government in 2013. The National Assembly has, however, reduced the government domestic borrowing plan from the planned ₦727 billion to ₦534 billion. This is significant considering that the Federal Government domestic borrowing was ₦852 billion ($5.47 billion) in 2011 and ₦744 billion ($4.78 billion) in 2012.

A planned $1.0 billion Eurobond issue in 2013 and proceeds from the privatisation of power assets are expected to bridge the gap of reduced domestic borrowing in 2013. A reduction in domestic borrowing will have a positive impact on the Nigerian private sector. The reduction is expected to free up a minimum of ₦194 billion for banks to invest in the private sector which was hard pressed for credit in 2012. The budget as passed by the National Assembly is based on oil production of 2.56 million barrel per day; however, the crude oil production assumption contained in the 2013 budget was never achieved in 2012.

A Swing in Spending Pattern
There is an observed shift in the percentage of recurrent expenditure to total expenditure, which is estimated to decline to 69% of aggregate expenditure from 72% in 2012 budget; while capital expenditure as a share of aggregate spending is estimated at 31% in 2013 from 28% in 2012. In recent years, recurrent expenditure has been a larger component of Nigeria’s annual national budgets; even as the country’s largely inadequate physical infrastructure came under enormous pressure from population growth and lack of maintenance. Therefore, it is expected that the increase in capital expenditure as a percentage of total expenditure for the 2013 fiscal year will be the beginning of a consistent drift in government spending in favour of capital projects that will further aid sustainable economic growth and development in the years to come.

Education and Defence Got The Lion Share
The education, defence and police sectors were allocated the highest share of ₦1.10 trillion. Education was allocated the largest share of the budget accounting for about 9% of the aggregate expenditure. This is a departure from historical trends where funds allocated to key development-driving sectors such as education and works were significantly less than obvious funding requirements. For instance, in the 2012 fiscal year, the combined size of the next three largest sectors (in terms of allocation) did not add up to the sum allocated to the security sector.

Key allocations in the 2013 budget include the ₦183.5 billion allocated to works (roads, bridges etc.); ₦279.23 billion allocated to healthcare; ₦81.41 billion allocated to the agricultural sector and ₦74.26 billion allocated to the power sector. The power sector is also to be supported by the proposed Infrastructure Euro Bond of about $1 billion in order to complete gas pipelines and other infrastructure investments.

No Budget for SEC
The National Assembly kept its word not to have any dealings with the Securities and Exchange Commission (SEC) until its Director General, Ms. Arunma Oteh, was removed from office. The House stated in the Appropriation Bill passed on the 20th of December, 2012 that the agency must not spend any funds in 2013 without appropriation by the National Assembly.

A clause dedicated to SEC in the bill read: “All revenue however so described, including all fees received, fines, grants, budgetary provisions and all internally and externally generated revenue shall not be spent by the Securities and Exchange Commission for recurrent or capital purposes or for any other matters, nor liabilities thereon incurred except with the prior appropriation and approval by the National Assembly.” This is considered to be the downside of the 2013 Appropriation.

Controversial Allocations
Controversy plaguing the budget is the amount earmarked for each of the Ministries, Departments and Agencies (MDA). Even though education, health and security (Ministries of Defence and Police) got the lion share of the 2013 budget, stakeholders in the education and health sectors have criticised the envelope for the two ministries as being too little. The education budget, which is about 9% of the total budget, is seen as being a far cry from the UNESCO recommended 26%. Similarly, the Nigeria Medical Association has condemned the Executive for the allocation (about 6%) earmarked for the ailing health sector which has made wealthy and not-so-wealthy Nigerians to take solace in medical tourism; an indulgence that makes the country to lose about ₦81 billion ($500 million) annually.

The most condemned sectoral budget for 2013 is that of the Federal Ministry of Agriculture; ₦81.4 billion is seen as paltry. This is in the light of the threat of food shortage which the country may likely face on the heels of the nationwide flooding experienced in some parts of the country within the third quarter of 2012 which has destroyed many farmlands. It was expected that agriculture would get more than it was allocated for in the budget. There is a need to adequately provide against food shortage in the next fiscal year by substantial investments to further stimulate food production.

There has been fuss on the lopsidedness of the share of the recurrent expenditure over capital expenditure as well as the content of the expenditures.  “An aggregate expenditure of ₦4.92 trillion is proposed for the main budget of the 2013 fiscal year, representing a modest increase of about 5% over the ₦4.7 trillion appropriated for 2012. This is made up of ₦380.02 billion for Statutory Transfers, ₦591.76 billion for Debt Service, ₦2.41 trillion for Recurrent (Non-Debt) Expenditure and ₦1.54 trillion for Capital Expenditure.” In essence, the share of recurrent spending in aggregate expenditure has been reduced from 71.47% in 2012 to 68.7% in the 2013 Budget, while capital expenditure aggregate share spending was increased from 28.53% in 2012 to 31.3% in 2013. Much of these steps are in the right direction but the imbalance is clearly too significant. This is so because Nigeria is plagued with an enormous infrastructural deficit which needs to be fixed for Nigerians to feel better impact of good governance.

Prudent Spending?
Under the recurrent expenditure, it is amazing to see the huge budget of the Presidency and the bulk sum of ₦150 billion allegedly set aside for the National Assembly.

In the same vein, the Federal Government has earmarked the sum of ₦33.54 million for newspapers and magazines in 2013 fiscal year. Details of the budget showed that Aso Rock would spend ₦1.51 billion on personnel; ₦7.48 billion on overhead and ₦8.99 billion as recurrent expenditure. In 2013, ₦7.48 million would be spent on local travels, transport and training; ₦1.04 billion on international travels while ₦783.89 million would be spent on foodstuff and refreshment. Also, ₦133.18 million was proposed for purchase and maintenance of generating sets; ₦19.25 million on books; ₦2.88 billion on repair and renovation of buildings; ₦95.89 million on computer software and ₦148.11 million on electricity charges. This is imprudent and against the letter and spirit of fiscal discretion that the President claimed in his budget speech.

Implication for Business
The combination of the FG’s budget 2013 proposal and the continued retention of the current monetary policy of the Central Bank of Nigeria may present businesses with the following economic environment of doing business:

  • GDP growth rate: 6+ or -1%
  • Inflation: 15+ or -2%
  • Interest rates: 22+ or -2%
  • Continued crowding out of the private sector from borrowings by government
  • Continued depreciation of the naira. The currency to hold remains the dollar
  • High unemployment rate and continued job and business attrition
  • Worsening poverty indices
  • Constrained demand: weak consumer demand, strong government demand

Businesses in Nigeria may continue to be crowded out of borrowing by government in 2013. Access to funds to grow private businesses may remain challenging, and where available will be priced out of reach of Small and Medium Enterprises (SMEs). Interest bearing loans will continue to be priced beyond 20% for SMEs in 2013. Therefore, businesses need to grow by a minimum of 15% (nominal growth) in 2013 to retain 2012 value. Prices need to increase by a minimum of 15% to retain the value of 2012 prices of products or services. Salaries need to increase by a minimum of 15% for employees to retain the value of their 2012 earnings. Double digit growth of business in 2013 is therefore a must to remain competitive.

The Federal Government, in the 2013 budget proposal, focused on macroeconomic stability and fiscal prudence through the restructuring of budgetary allocation, improved efficiency in domestic debt management and additional fiscal measures to ensure sustained structural reforms. The budget assumptions broadly appear realistic, except for the oil production figure which may be undermined by the incidence of oil theft and lingering domestic security challenge.

Improvement in fiscal savings is expected to boost exchange rate stability, supported by enhanced import substitution and the emergence of a stronger external sector position. Fiscal prudence and clear plan for debt repayment is expected to moderate perceived risk on government borrowing, thereby driving yield on government securities further down in the medium term. While we expect a better budget performance in 2013, we reckon that improvements in the global economic uncertainty and domestic security conditions are crucial to the successful implementation of the 2013 budget.