One year into the transition from President Jonathan to the Buhari led administration, the burden on Government remained the need to rejuvenate the Nigerian economy which has suffered from the declining global oil prices, poor governance structure, sub-optimal fiscal crisis and monetary policy actions. Recent domestic macroeconomic numbers have suffered from both global and domestic shocks which currently threaten the economic fundamentals of the country. The recent data published by the National Bureau of Statistics (NBS) reflects the impact of the delayed budget passage as well as the weak monetary policy response on macroeconomic aggregates.
The significant drop in government revenue and lower allocation to Sub-Nationals bites harder, pushing many States to the edge of a fiscal crisis with most unable to pay workers’ salaries for more than 3 months. However, many view the implementation of the 2016 budget as a catalyst for reflating the economy and resetting it on a growth pedestal.
According to the NBS, Real GDP contracted 0.36% in Q1:2016 dragged by declines in the manufacturing and key services sector components. Similarly, unemployment rate in Q1:2016 worsened to 12.4% from 10.1% in Q4:2015 as total number of people in full time employment decreased by 528,148 within the quarter and about 1.5m people joined the labour force. Inflationary pressures continued unabated rising to 13.7% in April 2016 (from the 12.8% in March 2016) due to cost push factors which impacted on most components of the Consumer Price Index (CPI).
Thus, Nigeria’s mystery index also rose to 24.9% in Q1:2016 from 20.0% in Q4:2015. Pressure on external reserves (declined 8.6% YTD) continued relentlessly despite controls introduced by the CBN. Parallel market FX rate has depreciated 24.0%YTD due to control measures in the official market. Thankfully, the Monetary Policy Committee (MPC) took a major move during the week in voting for the adoption of a flexible FX rate regime, though with a “small window” to cater for critical transactions. Nonetheless, the lack of economic impulse from the fiscal space for most of H1:2016 signals that the economy already nears a recession.
The Buhari led administration sought to employ a new approach to budget formation and implementation in a bid to hasten infrastructural development and reflate the economy. The 2016 Budget adopted a zero-based budgeting system, a move from incremental budgeting system. Hence, the 2016 Appropriation Bill tagged “the Budget of Change” was characterized with cocktail of controversies leading to late passage and signing by the President.
Nonetheless, the structure of the 2016 budget is a significant deviation from the previous years as the anticipated revenue was less tilted towards oil receipts (21.2%) and more skewed towards tax revenue as well as intensified efforts to reduce leakages across Ministries, Departments and Agencies (MDAs). On the back of the huge infrastructure deficit which has hampered growth and constrained business activities, the government increased allocation for capital expenditure from 11.0% in 2015 to 28.8% in 2016. Worthy of note is the special intervention programme on social safety nets (N500.0bn or 8.0% of total expenditure) to ensure an inclusive growth in 2016.
Whilst we hold the view that the 2016 budget has the potentials to reflate the economy if properly implemented, the required funding of the budget for optimal performance could be a drag. We note that the specific provisions for capital spending will boost infrastructure projects and investments while the recurrent expenditure would have a multiplier effect on private consumption expenditure component of the GDP.
We think the fiscal deficit may exceed the 2.2% level projected for 2016 owing to pipeline vandalism which has lately hampered production. We see the recent liberalization of the downstream petroleum sector and the interbank foreign exchange market as a seeming synergy of fiscal-monetary policy synchronization, but amidst the various macroeconomic constraints, we ask; how much can the “budget of change” achieve?