Nigeria’s 2021 Budget and the realities of the COVID-19 economic challenges: An overview of the Budget estimates By Dr. Kazeem Bello
The global economy is currently witnessing an unprecedented paradigm shift which was occasioned by the sudden appearance of COVID-19 at the beginning of 2020. Nigeria is not spared in this myriad of economic, social, general well being problems created by the pandemic on a global scale. It is projected that this trend may continue well into the second quarter of 2022 before we can begin to recover from the damages done by the pandemic. The 2021 National Budget of Nigeria was recently passed by the Congress (National Assembly) and it is about time to take a cursory look at it with a view to providing an analytical perspective on how it will perform or otherwise. This is an abridged presentation of the main write up already presented to the Brookings Institution which contains more in-depth overview of the 2021 Nigerian National Budget and its capacity to address the gazillions of economic challenges currently being faced by Nigeria.
It is no longer news that Nigeria is back into a full-scale recession just when it was set for full recovery from the recent recession. This current recession is inevitable and could be blamed on the pandemic to some extent. The fact that the Nigerian economy easily slipped into full scale recession again clearly underscores the fragility of the Nigerian economy itself. The fundamental microeconomics, budgetary and management strategies are either very weak or are not just performing. It is general knowledge that to solve the problems of incessant dematogory in economic parlance, we would need to adopt strategic planning that will assist to produce desired results in both the short, medium and long terms. It has been noted that Nigeria currently uses the mid-term economic plan strategy which provides for Three-Year Economic Plans. While this is standard for fragile economic dynamics, the lack of a long-term planning model is equally demystifying the prospects for developing a strong economic result. It is just imperative that Nigeria adopts both the mid-term Economic Plans and also creates the platform for long term sustainable economic growth and development by adopting a 12 Year Economic Development Plan or Goals. This will assist to provide ample time for planning, sourcing revenues, and capital to execute core development projects.
At the moment, Nigeria’s economy is seriously bedeviled by negative growth again, occasioned by the global pandemic, near collapse of the foreign exchange market which has exacerbated the problems of nominal inflation in Nigeria at about 19% (The Imported Inflation is recorded as high as 27%), growing challenges to locate and generate adequate revenues, rising poverty level and unemployment, mounting insecurity across the board and several other prevalent economic challenges. Year 2020 started with a moderate growth rate of about 1.19% with the hope that the growth will improve to generate about 3.3% by the end of the 2020. Records show that the growth rate is currently in the negative range of 3%. There is, therefore, need to tackle these significant problems with creative ideas and innovative strategies. It is not certain if the approved 2021 Budget estimate has been created with anything new or appropriately different from the status quo.
First, we have indicated for years that the size of the Nigerian Budgets is extremely small to sustain or solve the huge fundamental dislocation and deficiencies in the Nigerian Economy. The approved 2020 Budget was about $34billion and the 2021 Budget is equally approved for $35 Billion. The 2021 Budget looks predominantly recycled 2020 budget despite the visible expansion in the economic problems confronting Nigeria currently. We do not need any empirical analysis to conclude that the size of the budget will not provide any meaning solution to assist solve the major economic challenges Nigeria is facing. The 2020 Budget recorded about 70% performance due largely to revenue shortage and inability to secure funding either through FDI’s, Oil price increase or other sources. Already, the 2021 budget has been predicated on a revenue shortage of over 40% which will ultimately translate to Government being able to secure debts/loan to the tune of Naira 5.5 Billion Naira to fully implement the budget. The definition of this in real economic terms is that the projected growth rate of 3.3% by the end of 2021 is just not feasible. It is illusionary, a mirage. We are approaching a Debt Valley Zone (DVZ) in Nigeria very soon and it may be detrimental for a long-term economic goal. We currently lack the tentacles and dexterity to manage Debt in a scientific way in Nigeria and our Debt profile is very dismay in terms of global standards.
In the similar budget overview report produced and published last year, we basically listed the following measures to assist cushion the economic progress in Nigeria and return the economy to a more stable and moderate growth. Those suggestions are still valid today hence, it falls within the realms of what the Government should be looking at:
1. We postulated that for the Nigerian economy to achieve stable growth and turnaround, there is need for an expansionary budget proposal. The naturally projected growth rate that is necessary to sustain the size of the Nigerian economy must be in the region of 7 to 8 % per annum. To achieve this growth target, the size of the National Budget must not be less than $90 Billion per annum. A budget of $35 Billion will never sustain or move Nigeria out of economic stagnation.
2. There is need to focus largely on getting the size of revenue to increase significantly. There is no econometric variations that could support the reasoning that an economy with annual GDP of $420Billion being unable to generate a revenue more than $25 Billion per annum. There is mismatch in this numbers that defers analysts and economic realities. It portends to add to the fact that Nigeria needs to get creative with generating necessary revenue and capital funds to support the economic projects, infrastructures and growth that is desirable for the size of the economy. We actually recommended avenues to assist generate more revenues for the country. These recommendations remain valid with other sources that would assist in increasing the level of revenue to fund the budget. The last four years Budgets in a row have all fallen short of 72% implementation due largely to lack of revenue to support the budgets even though substantial part of the target implementation were funded by Debts. By the end of 2021, Nigeria’s debt profile will be in the region of $55 Trillion Naira. There is need to prioritize the need to locate and generate additional revenue sources if Nigeria seriously means business tackling its economic challenges.
3. There is need to confront and tackle the problems with Foreign Exchange Market. It appears that the Market inadequacies are caused more by human factors than strategic plan issues or monetary policy issues. Nigeria needs to confront and surmount the political problems around its foreign exchange market system. The Central Bank has virtually used everything it could deploy in its arsenal to address the problems, but they continue to defy solutions. Again, the recommendation we made last year remain valid to assist address the market issue. In the last 12 months, the Naira has seen a whopping 670% devaluation while the Central Bank has depleted the Foreign Reserves to the tune of $20 Billion yet, the Naira continues to show weaknesses against major currencies. As stated previously, adopting the right strategy and removing the political quagmire around the Foreign Exchange regime will most predictably put the Naira exchange rate at around Naira 120 to the Dollar.
4. Implementing programs and projects that will directly assist to increase the consumption level in Nigeria which will bear direct proportionate effect on productivity and industrialization. Nigeria’s economy is currently in Recession and stagnation. There is need to generate desirable economic activities that will increase household disposable income. There is need to generate approximately 15,000 new SMEs annually with strong technological backing and enabling environment. With about 105 Million Nigerians unemployed or underemployed, the fiscal economic policies that can change the dynamics is reflating the economy to generate consumption which will lead to productivity and then translate to growth. The population of Nigerians that will enter the poverty level if the current 2021 Budget stays as proposed will increase by 11 Million by December 2021. Almost 7 Million Nigerians fell below the Global Poverty Index line in 2020. The budget needs to refocus on private sector led implementation.
5. We have postulated that there is need to decrease the crowding out of the private sector in the credit market and money market in Nigeria by the unprecedented borrowings of the Federal Government. The Private Sector remains the engine of growth. Increased productivity led by the private sector will ultimately assist to get Nigeria out of its current economic woes. That sector is currently deflated completely out of the credit market by increasing public sector borrowing. We recommended last year that, a shift is required but unfortunately, Public Debts continue to mount creating deficient credit capacity for the private groups that mostly need the credit to expand economic activities and generate growth through productivity. The Central Bank has a herculean task to assist in this direction otherwise, we would continue to witness decline in GDP and increase in poverty in Nigeria.
6. We also mentioned the need to strategically confront the issue of infrastructural gap in Nigeria. Nigeria will need approximately $24 Billion investment annually for the next 10 years to solve just 60% of its infrastructural deficiencies. Starting with the Power Sector, there is need to consider declaring an Emergency situation in that sector as it continues to create untold bottleneck in Nigeria, and it seems no solution is in sight. Nigeria potentially losses over $220 Billion annually in GDP due to the continued crisis in its power sector alone. At this point, a state of Emergency in that sector is generally required to tackle the problems once and for all. The idea of a 12 Year Economic Plan will be predicated on how to find long term funding and financial resources to tackle the problem. With the state of dilapidated power supply Nationwide, we are budgeting N206 Billion or $542 Million to Capital projects under the Power Ministry. How will this solve the problems of electricity, energy and power supply in Nigeria? That is the pattern across the board on this budget and it is very worrisome indeed!
What are the prospects of the 2021 budget estimate to Nigeria? It is not exactly known how the Federal Government intends to effect any change in the current economic challenges with this budget. The Budget itself fails to provide the impetus that is required to instigate or stimulate the prospect for an improved economic situation by the end of 2021. The pertinent question then is what is the essence of a budget when it is almost seemingly dead on arrival? I have personally touched base with several other professionals and analyst to underscore my thought process and it seems that most analysts are holding the same view. There is considerable missing link to enable anyone understand what the current budget intends to achieve and what is achievable.
1. The size of the budget again is grossly inadequate to solve any problem. This is largely due to revenue shortages, but we surely need to be creative to find additional sources of revenue. The budget is based on $40 per barrel Oil benchmark with the oil market still very fragile and could possibly move in any direction during the year. There would be a major change in global energy policies and politics with a new regime in the White House in the USA. That will dictate the direction of Oil prices in the new year. With no other sources of revenue other than internally generate taxes, the budget may currently hold a deep 64% hole in deficit gaps. Where are the funds to fill that gap going to come from? Excessive increase in taxation across the board itself negates and kills production hence it is largely inappropriate to tap into the taxation sources in a recessed economy to fund budget in the first place. That is counterproductive and will exacerbate the fiscal and macroeconomic imbalance in the economy. The alternative from past reactions is to borrow funds which became predominantly the preoccupation of the Federal Government throughout last year to fund the 2020 Budget. It obviously remains unsustainable to rely on debts to finance annual budgets.
2. The budget estimates that debts servicing will take approximately Naira 3.3 trillion. The Government needs to reconsider dispensing such a large sum for debt servicing when there is visible shortage of revenue to fund core economy stimulations. The Debt Management Office (DMO) needs to figure out strategies to renegotiate these debts and/or recapitalize them. There are even avenues to trade the debts somewhat to release necessary cash to assist cushion revenue potentials. I am looking at a strategy that will work for the Federal Government to take any of the above steps to reduce that debt servicing burden by half. That will assist release about Naira 1.7 trillion to fund other capital projects. That will be a starting point amongst several other debt management mechanisms that can be deployed at this time.
3. Nigeria’s economy is facing new challenges which most analysts may not have taken into consideration and it appears the Government may be downplaying its significance. This primarily deals with the increasing spate of insecurity in Nigeria. In the last 10 Years, the increasing level of insecurity in Nigeria has continued to create an unwarranted decline in economic activities. In the last two years, it has reached the level that it should be listed as one of the major constraints to attaining the necessary economic growth rate that is desirable for the country. Similar to erratic power supply, the increasing level of insecurity in Nigeria is currently accounting for over $85 Billion in GDP. With possible $2 Billion investment to fix and tackle the insecurity problems, Nigeria will save and earn over $85 Billion in GDP annually. This is an emergency investment that needs to occur to stop the wanton drift in the economy due to the increasing insecurity across the country.
4. In the attempt to find non-traditional sources of funds to finance the budget and help fund palliative measures to get the economy out of the current recession, Nigeria should attempt to create necessary ESCHEAT Law that ultimately will enable the Federal Government to tap into the over Naira 14 trillion idle in the illicit cash funds. Escheat Laws in countries where they are administered, are essentially laws created to transfer abandoned and seized properties into a dedicated Account which the Government can easily borrow from without any interest. Nigeria is reputed to be holding over Naira 14 trillion in that asset category. The Nigerian case is even more compelling when it is realized that the composition of such liquid funds in Nigeria includes illicit and illegal transfer of Government funds into such accounts by many Ministries and MDAs over the past 50 Years. Such funds are in depository and can be harnessed through the creation of Escheat law to capture those funds and the Government can borrow from it to cushion budget funding. I have provided the details of how this works in the past and it remains a veritable source of securing funds to finance the budget especially to fund capital projects.
In the final analysis, we can keep going on to identify the grey areas of Nigeria’s 2021 National Budget. The underlining reason for this, is primarily to look at other perspectives of how we can collectively instigate ideas to get the right mix of economic strategies in place to help push the Nigerian economy out of the woods. The science of Economies is very complex, and I have avoided getting into issues relating to specific macro and micro economic measures that should be pursued in this process. We know that somehow the right mix of such measures goes a long way to assist the Government in its effort to strike a definitive balance in the economic management. That would have taken us to a deep look at the monetary policies, Fiscal policies, Foreign exchange policies, prices and inflation policies and other measures that work to assist in the functioning of the economic system.
It does appear that the Federal Government is hapless on how to tackle the economic challenges facing Nigeria. But the Government to its credit has taken several measures that are supposed to instigate more robust economic fortunes, but the Covid-19 pandemic, coupled with other self-inflicted problems in Nigeria may have demeaned those efforts. It is not certain that by the end of 2021, the country will be in better shape as the fight against the global economic problems created by the pandemic continues to affect several countries around the world.
Dr. Bello is Principal Partner/CEO- Afrique Capital and Equity Funds Ltd, New York, USA, President, Nigerians in Diaspora, New Jersey chapter and Chairman, Steering Committee of the proposed Nigeria Federal Credit Union.
