Despite the
revenue shortfall, occasioned by the oil slump at the global arena, the Federal
Government can still perform wonders with this year budget. According to Alhaji
Remi Bello, the President of Lagos Chamber of Commerce and Industry (LCCI),
government can do this if it cuts its coat according to its cloth. He advised that
a sincere commitment to austerity measures, cost reduction and economic
diversification is the magic wand needed to achieve this feat.
Hear him: “Times like these call for
utmost prudence and curbing of leakages.The prevailing economic situation
necessitates that the budget should be structured to ensure cost savings,
optimal revenue generation, fiscal efficiency and curbing of fiscal leakages.
The budget at this time should also seek to create an enabling environment and
stimulate investments to ensure the diversification of the economy.” At a briefing in
Lagos where Bello articulated the position of his chamber on the Appropriation
Bill, he also warned politicians to behave themselves during the forthcoming
elections, political and social instability could send wrong signals to
investors.
Excerpts:
Over-optimistic
budget
The 2015 budget is very significant,
coming especially at a time when the economy is facing profound revenue shocks
arising from the slump in the global oil price. The budget is also important
because it is coming in an election year and therefore has transitional
significance. We note and commend the scenario approach to the budget adopted
in the light of the volatility of the global oil price.
The prevailing economic condition
necessitates that the budget should be structured to ensure cost savings,
optimal revenue generation, fiscal efficiency and curbing of fiscal leakages.
The budget at this time should also seek to create an enabling environment and
stimulate investments to ensure the diversification of the economy.
We also note the benchmark of $65
per barrel proposed by the Executive(arm of government). We submit that given
the current reality of the global oil market, this benchmark assumption is too
optimistic. The fundamentals of supply and demand in the oil market cannot
support this benchmark in the short to medium term; currently it is at less
than $50 per barrel. The benchmark
therefore should be brought close to current global oil market reality,
somewhere between $40 -$45 per barrel. Ideally, the benchmark should be
significantly below the actual price in other to create room for possible
savings and adjustments for volatility shocks.
We note the production benchmark of
2.278million barrels per day prescribed in the Appropriation Bill. Again, this assumption appears
optimistic having regard to the persistent oil theft which had continued
unabated in recent years. The quantity of oil theft has been estimated at about
400,000 barrels per day. There is
also the divestment by the major oil companies and sluggish investment in
exploration as a result of policy uncertainties and security concerns.
In recent years, oil output has
ranged between 1.8million to two million barrels per day. The oil production
benchmark should therefore be guided by this experience.
Subsidy
The biggest burden on government treasury
in the country is the appropriation for Petroleum Subsidy. In the 2015 budget,
N200 billion was proposed as subsidy for PMS (Premium Motor Spirit or petrol); in 2014 it was
N971billion. This is a decrease of about 80 per cent. We welcome this development.
However, we note the provision of
N91billion for kerosene subsidy in 2015. We submit that provision of this sum
is difficult to justify. Besides the global oil price dropping to below $50 per
barrel, there is no longer any justification for budgetary provisions for
petroleum products subsidy. We urge the National Assembly to take this into
account in its deliberations on the 2015 Appropriation Bill. Times like these
call for utmost prudence and curbing of leakages.
You will recollect when the oil
price was that high, the argument then was that the landing cost of both the
Premium Motor Spirit (PMS), or petrol, and diesel was far higher than the price
it was being sold. That was how we came about subsidy; that is, somebody has to
come up and make up for the difference in your buying and selling if you are
selling at lower price while you are buying at higher cost. That was how
subsidy came into being. And when you look at the components cost, the biggest
of it is the price of the crude itself. When it is being converted, you then
get your landing cost. If the price of the crude before was $100 per barrel,
and now you are having it less than 50 per cent of that, definitely your
landing cost must have come down. So there is no subsidy again.That is the argument.That is how that call for subsidy removal is
very logical. It is a simple mathematics.
Debt service
We are deeply concerned over the
growing budgetary appropriation for debt service. The amount has grown from
N712billion in 2014 to N943billion in 2015. This is even more disturbing when
compared to budgetary appropriation of N93.66billion for infrastructure and
N633billion for capital projects. This relativity does not reflect our
development priorities and the urgent need to fix the huge deficit in
infrastructure. This also raises the concern about the growing domestic debt
and the burden it imposes on the economy.
As a percentage of revenue, the debt
service provision is over 25 per cent. As a percentage of infrastructure
budget, it is 906 per cent; as a percentage of capital budget, it is 148 per
cent. The trouble is that the bulk
of the debts [mainly domestic] were incurred for recurrent spending and the
high cost of running government business.
They were not incurred for developmental purposes. This makes the servicing even more
burdensome on the economy and the citizens.
We would like to caution once more
to avoid relating debt to the re-based GDP in determining the borrowing the
nation’s threshold. This is because a large component of the re-based GDP are
not revenue generating. If the current trend of debt accumulation continues, it
is only a matter of time for debt service provision to completely crowd-out
capital expenditure in the budget.
You know, like we’ve been always
saying, debt is not the problem, but the use we are making of debt. If you look at it, Fiscal
Responsibility Act is very clear about debt service. If you look at Section 14,
15 or so, it specifically spells out the percentage that should be used to
service debt, especially debt incurred for special projects, not the type we
have presently- a situation where debt is being incurred for other purposes; A
debt you can not even substantiate. If you look at the structure of the budget,
you will see that capital expenditure has gone down, while the current
expenditure is going up. You and I know that government revenue is from crude
oil. And since its price is going down( in the world market), the structure
shows recurrent expenditure has been going up. Last year, it was 60 per cent.
If the revenue should go down and you are not cutting your expenditure,
definitely, you need to run it from somewhere. That is why we are incurring
debt-(due to) cost of funds and debt servicing. And if you look at it, debt is
an upfront payment that you pay; it is not something that you say you will pay
later. That provision we have in the budget is real-that is the most
unfortunate thing about it. It is not an expenditure you will say I can cut.
You have already incurred the debt. And another unfortunate side of it is that
it is not being used for investment or developmental purposes.
So when you asked about what
percentage or proportion of the budget that should be committed to debt
servicing, there is no hard and fast rule about that. What you are using it for
and the structure of the economy itself is the specific answer to your
question.
Expenditure
structure
The expenditure structure in the
2015 budget is as follows: Total expenditure is N4, 357.96billion as against
N4, 724.69billion in 2014. This is a reduction of 8.4 per cent. Recurrent
expenditure is N2,616billion as against N2,468billion in 2014, an increase of 6
per cent, while capital expenditure is N633.53billion as against N1,553billion
in 2014, a reduction of 59.2 per cent. Personnel cost is N1,836billion as
against N1,727billion in 2014, an increase of 6.3 per cent. Service Wide Votes
– N348.69billion as against N301.81billion in 2014, an increase of 15.5 per
cent. CRF Pensions is N231billion as against N187.45billion in 2014, an increase
of 23.5 per cent. Infrastructure Expenditure is N93.3billion.
The concern about the structure of
the appropriation is that it is at variance with the urgent imperative of
economic diversification and austerity measures. Economic diversification requires a critical mass of
investment in infrastructure. The following facts are worthy of note: While the
total budget decreased by 8.4 per cent, recurrent budget increased by 5.66 per
cent; capital expenditure dropped by 59 per cent [when compared with 2014] to
N633.53billion, which is less than 15 per cent of the total budget.
In
spite of the pronouncement of the austerity measure, personnel cost increased
by 6.3 per cent. Also, in spite of the pronouncement on fiscal prudence and
call for sacrifice, the contentious Service Wide Votes increased from
N301.84billion to N348.69billion in 2015, an increase of 15 per cent. A sincere
commitment to the regime of austerity measures, cost reduction and economic
diversification calls for a major review of the expenditure structure by the
National Assembly.
Deepening revenue
We share the concern of the
government on the need to diversify and deepen its revenue base. Government
should intensify efforts in the following areas: remittances by MDAs
(Ministries, Departments and Agencies) to federation account; improving tax
administration to enhance compliance; addressing fiscal leakages and corruption
and reducing the cost of governance in all tiers and levels of government.
We further submit that; emphasis
should be on efficiency of tax administration, not imposition of new taxes or
fees on investors ; taxation should reflect the ability to pay in order to meet
the desired distributive role.
We
advise against imposition of excessive fees and charges on businesses in the
name of expanding revenue from non-oil sector of the economy.
A period like this calls for
economic stimulus to reinvigorate the economy and expand the frontiers of the
non-oil economy. Government and
its agencies should therefore refrain from policy choices that could further
stifle investments.
Sustainability
Fiscal sustainability calls for a
review of expenditure at all levels of government. It is easier to cut spending than to raise revenue. We implore the National Assembly to
take a critical look at the following areas in order to curb leakages and
ensure cost reduction in government spending: fuel importation and the inherent
subsidy issues; total eradication of kerosene subsidy will bring a saving of
N91billion; rigorous review of budgetary provisions for the following: service
wide votes, pensions, capital supplementation, gratuity administration,
presidential amnesty budget, catering and allied procurements, welfare
packages, travels, honorarium and
other overhead expenses. We affirm that there is a need to
proactively restructure the appropriation bill to reflect the true spirit of
austerity and prudence.
Forthcoming election
The political transition process has
far reaching implications for the economy. Political and social stability are critical factors
driving investors’ confidence. The quality of the electoral process and the
conduct of the major players in the political space are most critical at this
time. We reiterate the need for
the key institutions in the transition process to be above board – INEC,
security agencies and the Judiciary. They should be non-partisan, and should be
seen to be so. This is necessary to earn the confidence of the citizens and
the stakeholders in the electoral process. We call on the political players to conduct themselves with
the highest level of responsibility and civility. They should as well avoid acts of desperation and violence.
We welcome the Abuja Accord that abhors violence in the electioneering process
before, during and after the election.
Meanwhile, we are worried about the
risk of disenfranchisement of millions of eligible voters because of the
logistics of the distribution of the Permanent Voters’ Card [PVC]. Many eligible voters are yet to get the
PVCs despite rigorous efforts to do so.
There is clearly a major failure of logistics. This has implications for
the credibility of the forthcoming elections. We therefore support the proposal that INEC should allow the
use of the temporary voters card in the circumstances. This will reduce the risk of
disenfranchising a too many eligible citizens.
Economy
As at mid-January, oil price had
dropped below $50 per barrel. We
have made comments on the implications of the unfolding scenario. It is however worth repeating that the
current global and domestic economic conditions portend profound challenges for
the private sector. There will be
pressures on costs driven by the depreciating naira; there will be structural
shifts in demand and competitiveness in favour of high local content. There
will also be erosion of profit margins across many sectors. The emerging weak
public sector cash flow will affect general liquidity condition in the economy,
but segments driven by public sector patronage will be more impacted.
The economy is inherently resilient
by virtue of its size, the very creative and resourceful informal sector, the
enterprising nature of the citizens, the large market and the huge natural
resource endowment. We hope that this would have a moderating effect on the
current macroeconomic shocks. The
robust internal dynamics of the domestic economy should be harnessed to
mitigate the current challenges.
It is a great opportunity to reconstruct the economy to be
more inward looking and more resourceful.
It is also a great opportunity to curb leakages, rent seeking
opportunities and create an environment that rewards value creation. We hope that the economy will also
benefit from lower energy prices as been experienced in other parts of the
world. It is a great opportunity
as well to liberate the downstream oil sector from the shackles of oppressive
regulation, corruption and patronage.
This is the time to allow the private sector to take full charge of the
sector and unleash the huge potentials that exist in the sector. This year is
unique and significant in some ways.
It is an election year and it is also a year when the economy will
witness major adjustments driven by developments in the external sector. As in all situations there will be
winners and losers. But clearly it
is an opportunity to move the economy in the right and a more sustainable
direction.
Federalism
Times like these call for
innovation, creativity and competition by the sub national governments. One of the biggest constraints to
economic advancement and economic diversification is the quasi-federal system
of government. It has entrenched
the culture of dependence on the centre for too long. A true federal system is needed to harness the energies and
resourcefulness of the sub national governments. We are hoping that this will be on the political reform
agenda in the new political dispensation.
The sub-optimal performance of the states has been perpetuated by over
centralisation.
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