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Why Nigeria’s 2016 Budget Is Unsustainable – Think Tank

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Buhari

An International Thinktank has been writing on why Nigeria’s 2016 budget is unsustainable. In STRATFOR’S Analysisthe Buhari administration has continued several of its predecessor’s policies. For example, Buhari has continued to subsidize the price of fuel in the country (currently $1.67 per gallon). With Nigeria importing gasoline and diesel at international prices and selling it at a loss at home, subsidies historically have cost Abuja an estimated $5 billion. The Global Intelligence outfit concluded that Nigeria will ultimately need to devalue its currency and possibly reduce fuel subsidies as prices rise, but it will likely do so slowly. 

Summary

Nigeria is debating its budget for 2016 — currently being presented at 6.08 trillion naira ($30.5 billion). It is also pursuing several options to cover its estimated 2.22 trillion naira budget deficit as Abuja contends with low oil prices. Abuja is also believed to be looking to the World Bank and the African Development Bank for loans of around $3.5 billion. Although Nigeria has been quick to say that it is not pursuing an “emergency” loan, Abuja nonetheless will have a difficult financial year in 2016.

Oil prices are unlikely to recover and the Central Bank of Nigeria’s foreign reserves have fallen by 28 percent since Oct. 1, 2014, sinking to its current decades-low level of $28 billion. Without a near-term rise in oil prices, many of Nigeria’s policies are simply unsustainable. Until prices inch back up, which could happen in 2017, Abuja will be forced to make painful financial adjustments, some of which are already in the works — though at a very slow pace to avoid rattling public confidence.

Analysis

When President Muhammadu Buhari took office in May 2015, he inherited a government whose sole source of hard currency came from oil. Prior to the collapse in oil prices, oil accounted for 70 percent of the government’s revenue and 95 percent of the its export revenue. One of his core objectives was to limit the impact of low oil prices on the public. His support base is largely the northern half of the country — a region that has historically been poorer than southern Nigeria, where the country’s oil wealth in the Niger Delta and the strong economic center of Lagos are located.

In doing so, the Buhari administration has continued several of its predecessor’s policies. First, Buhari has continued to subsidize the price of fuel in the country (currently $1.67 per gallon). With Nigeria importing gasoline and diesel at international prices and selling it at a loss at home, subsidies historically have cost Abuja an estimated $5 billion. But global oil prices have fallen so far that Nigeria no longer needs a large subsidy to keep its domestic prices low.

Second, Buhari has continued the foreign exchange regime that effectively pegs the naira to the dollar at a rate of 197 to one. Former President Goodluck Jonathan introduced the fixed exchange prior to elections after the naira plunged from 165 to the dollar in September 2014 to 204 in the middle of February 2015. The policy aimed to ensure that the price of imports would not go up. But despite growing depreciating forces on the naira, Buhari has fervently defended the currency and has said devaluation is not likely.

Finally, the president pushed for a strong budget for 2016. Despite falling oil prices, Nigeria’s 2016 budget is 21.6 percent larger than it was in 2015, largely because of capital expenditures, its share rising from 11 percent in 2015 to 30 percent in 2016. Most of this budget will go into sectors such as public works, housing, power sector development and other related areas. The stimulus, which likely depends on Buhari achieving external budget support through international loans, would likely bring jobs and tangible benefits to local governments.

All of this is Buhari’s attempt to cater to the average Nigerian. Continued job growth, low fuel prices and a strong naira limiting increases in prices on imports will be the basis of success for the economic plan. Moreover, Nigeria’s economy is still likely to grow somewhere around 3 percent in 2016, despite low prices for oil, which only represents about one-tenth of Nigeria’s overall gross domestic product.

However, maintaining the currency peg at its current levels cannot be sustained in the long run. The unofficial market — or black market — rate for the naira has reached 300 per dollar, forcing the central bank to intervene to keep the currency fixed at its desired levels. Speculation on the peg has been a problem as well. In August, Abuja banned banks from taking foreign currency cash deposits. Banks had been issuing dollars at the parallel rate, depreciating the naira and prompting Abuja to take greater control over foreign currency available domestically, contributing to a steady decline in Nigeria’s foreign exchange reserves as it defended the naira’s peg.

In addition, the budget deficit was calculated with an oil price of $38 per barrel for the year. Already, we have seen prices at times fall below $30 and several attacks have caused pipeline outages in the Niger Delta region. Of course, Abuja’s projected revenue goals are still attainable, but as prices remain below $38, it will only strain Nigeria’s finances as it goes to lending markets — whether they are domestic or foreign — to balance the rest of the budget. Finally, Abuja’s stimulus package is likely to increase imports of equipment and other materials to help physically build the infrastructure, sending even more foreign currency out of the country to finance those imports.

Nigeria will ultimately need to devalue its currency and possibly reduce fuel subsidies as prices rise, but it will likely do so slowly. Moreover, Nigeria is unlikely to devalue the naira by a substantial amount. Still, the Buhari administration will continue to seek solutions. On Jan. 11 the central bank removed its ban on foreign currency deposits in banks, making it easier to access foreign currency at parallel rates. It will ease the burden on the central bank’s foreign exchange reserves while slightly diminishing the relevancy of the official rate, just one difficult decision the government has to make, though there are many more to come.


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