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26 January 2016

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Buhari 2016 Budget: Not a Real Change

By Peluola Adewale

With Nigeria groaning under the dead weight of global capitalist crisis which is symptomized by the lowest oil price in 12 years, the 2016 budget appears to have arrived in coma.The oil price has plunged from $116 in July 2014 to less than $30 in January 2016. In addition, doomsday prediction that price could further slide to $20 now appears more likely than ever. However, at N6.08trillion proposed expenditure, this is the biggest budget in Nigeria’s history. It is even bigger than all the previous budgets at periods of high oil prices.

Nigeria’s economy has been slowing down since the outset of the slump in oil price in the third quarter of 2014 at a rate that raised a spectre of the economy plunging into recession. Apparently adopting Keynesian economics of countercyclical measures to stimulate a sluggish economy, Muhammadu Buhari government is proposing an expansionary budget with a huge borrowing.

This budget can appear very welcome to many working people and poor, although many will be deeply skeptical of what will actually be delivered. Partly this will be because of the utterly dismal record of previous administrations, at both federal and state levels, but also because they will rightly question how realistic is this budget in the light of global capitalist crisis that has not shown any sign of abating?

In reality this measure is an attempt at postponing the evil day. But, on a capitalist basis, if the deficit and public debt become unsustainable for the economy in the face of sustained low oil price, Buhari will unleash open austerity attacks.

Besides, even at present the overall capitalist program of Buhari government, together with global crisis of capitalism, means that the masses are not immune from the whip of capitalist attacks as shown by the recent increase in electricity tariff, planned introduction of tolls on highways, hike in kerosene price, possible fuel price hike later in the year, current foreign exchange crisis, wage-freeze despite rising inflation etc.

This means that the working masses must not let their guard off hoping that all will be well under Buhari government. Indeed given current inflation rate put at 9.4%, the leadership of labour movement should drop their lip service and immediately demand an increase in national minimum wage while at the same prepared to lead workers in struggles against wage cut and retrenchment, at both public and private sectors, as well as all capitalist attacks. Already, about 3000 workers have been sacked in Imo state which is controlled by the APC, the party of President Buhari.

Nevertheless, the proposed 2016 is a relative departure from the outgoing budget of 2015 prepared by the last government which has clear austerity elements. For instance the capital allocation was reduced from N1.1trn in 2014 to N634bn in 2015. This has been raised to N1.84trn in the proposed budget. Indeed, the budget for Ministry of Works including road constructions and repairs was cut from 100bn in 2014 to paltry N11bn in 2015. Besides, out of N100bn voted in 2014 just N50bn was released. This explains why construction firms have left sites since the last quarter of 2014 and laid off workers. But in the proposed budget over N244bn has been voted for road sector only. If implemented this means there would be some activities especially in the construction industry, though the overall infrastructural budget is relatively inadequate for the huge gap in the sector.

In other words, on a basis of capitalism, in a short term there appears only two options available to Buhari in the face of depressed oil price. One is to deepen the debt burden ostensibly to stimulate the economy. The other is to cut public spending or increase taxes especially VAT as suggested by IMF Managing Director Christine Lagarde while on visit in Nigeria or as contained in the last administration 2015-2017 Medium Term Expenditure Framework which prescribed increase in VAT from 5% to 10% by June 2015.

Non-Oil Revenue Budget?

For the first time in many years, this budget is expected to be largely financed with non-oil revenue. The expected oil revenue of N820bn is 21% of the budget revenue projection and 13% of the proposed expenditure. This should not give a false relief that Nigeria has been weaned of oil and there is no cause for worry over the depressed oil price. Nigeria being a largely import dependent economy is still much about oil. This is because oil accounts for well over 90 percent of the foreign exchange earnings and therefore drives the foreign exchange policy.

At a time of foreign exchange scarcity, this is an additional headache for the government. The non-oil sector contributes little to foreign exchange accretion. For instance, non-oil export earnings are not growing but actually on a decline. From $10.35 billion in 2014, non-oil export earnings have come down to $4.39 billion in 2015. Also Foreign Direct Investment (FDI) inflow fell by 27 percent to an estimated $3.4 billion in 2015..

This suggests that oil price through foreign exchange will seriously impact on the non-oil revenue targets in taxes and custom duties. Already, the capacity utilization of many companies has reportedly reduced as a result of foreign exchange crisis. This will have negative impact on the company profits.

The cost of foreign borrowing will also be influenced by the price of oil which is seen by foreign investors as the fundamental of Nigerian economy. The unanimous forecasts that the price of oil will remain relatively low for a long time, together with the recent raise of the interest rate in the United States, mean that Nigeria will face difficulty in its plan to borrow from the international capital market to partly finance the budget deficit. Out of projected N1.84trn borrowing in the budget, N900bn is expected from foreign sources.

According to the Financial Times the cost of borrowing in dollars has surged for developing countries due to the slump in commodities prices. Nigeria will pay much higher for Eurobond than what obtained in 2013 when it borrowed $1bn ($500m 5-year bond and $500m 10-year bond) from the market. Already, the yield on the 5-year bond, for instance, has risen from 5.38% to 8.5%. Sustained low oil price could mean that government would have to forgo some public spending on social services in order to service the debt.

However in addition to Eurobond, the Minister of Finance Kemi Adeosun told Financial Times that Nigeria had applied for budget support from the World Bank and the African Development Bank, adding that some other funding was likely to come from “export support projects” with “a couple of Exim [government or semi-government agency] banks” (Financial Times (London), January 13, 2016.

Perhaps, the foreign lenders and investors would wait for the verdict of an IMF team who are in the country to assess whether its borrowing costs are sustainable before agreeing terms with Nigeria.

It is not likely that the government will have problem raising the projected domestic borrowing of N984bn. There are over N5trn worth of pension funds that can be tapped while banks, for quick and easy profit, readily invest in treasury bills and short-term bonds rather than lending money to manufacturers or small scale enterprises.

Scary oil outlook

Indeed the outlook of oil in 2016 is very bleak. The oil market which is already glutted has been further flooded by the US following the resumption of oil exports after the lift of the 40-year ban. Iran will resume sales after the lift of sanction and add to the oil inventory. Already, Iran is reportedly planning to sell at discount in order to win back its customers. On the demand side, there is still slowdown in China while Europe has not fully emerged from the global financial crisis of 2008/09. The so-called emerging markets have not set up to the plate, thereby dashing the hope hitherto reposed in them by capitalist strategists. Stronger dollar has also added to the woe of the oil price.

As a result there are grim forecasts from financial institutions like IMF and Morgan Stanley expecting the price to plunge to as low as $20 per barrel. This would be a disaster for a country like Nigeria whose cost of production of oil on offshore fields is put between $25 and $30 per barrel. Indeed only the Middle East countries would be able to continue production at the price among the OPEC members (CNN Money, November 24, 2015). Therefore Nigeria may have to shut down production especially offshore if oil price is sustained below $30.

However, there is a less scary outlook from the United States’ Energy Information Administration which forecasts that Brent crude oil prices will average $40 per barrel (b) in 2016 and $50/b in 2017. Ordinarily this should be hurray for Buhari government which benchmarks the budget at $38. But Nigeria problem is deeper. The country’s light sweet crude is competing for market share with North Sea oil such that there were many unsold cargos for instance in November 2015. There is also a report than Nigeria may lose South African market to Iran. In other words, Nigeria may not be able to sell a minimum of 2.2 million per day as expected by the budget. This of course will reduce the expected oil revenue even if oil is sold at the benchmark of $38.

Since the price of oil and volume sold will impact not only oil revenue but also the non-oil revenue, the budget revenue expectations may not be met. Hence, there is likely to be an increase in the deficit that will require more borrowing to finance the budget. And this is already happening! On Thursday 21st January, the Minister of Finance announced in an article the plan to increase the budget deficit from N2.2 trillion (2.16 percent of GDP) to N3 trillion (3 percent of GDP) “if oil prices fall further”. This will mean that Buhari government will either heighten the debt burden or abandon the full implementation of the budget including the planned recruitment of 500,000 teachers. Either way, the masses will be made to pay for the crisis if not in the short or medium term but definitely in the long term.

PDP's Hypocrisy

It is instructive to stress that the opposition Peoples Democratic Party (PDP) is hypocritical in its condemnation of 2016 budget especially on the borrowing. The current debt overhang of Nigeria which would make the new borrowing an extreme burden for the economy in short and long terms was largely created by the successive PDP governments.

After gifting Paris Club $12bn under the guise of debt relief in 2004, the external debt was reduced to $3bn while domestic debt was $10.3bn making a total debt stock of $13.3bn. But as of June 2015 the total debt stock had risen by over $50bn to $63.81bn (N12.11trn) comprising $10.32bn external debt and $53.49bn (10.09trn) domestic debt. This is despite high prices of oil over the period which was the longest oil boom in Nigeria’s history except the short lived low price during 2008/2009 global financial crisis. However, 17% of the federal government external debt is actually owed by the 36 states with the APC state of Lagos having the lion share.

Worse still, in addition to the steeping rise in debt stock since Paris Club “debt relief”, a humongous sum was spent to service the debt over the period by the federal government. For instance, according to Debt Management Office (DMO) data about $21bn was spent to service both foreign and domestic debts between 2010 and 2014 alone. In the 2015 budget, the last one prepared by the PDP, N943bn was budgeted for debt service. This was much higher than N634bn allocated as the total capital expenditure. Indeed the study of past budgets reveals that while more than amounts budgeted are actually spent on debt service, only a fraction of capital allocation is released year in year out by the government. For instance in 2014, a sum of N941.67 was paid for debt service as against N712n budgeted while N587.61bn was released out of the capital vote of N1.12trn. This means that more money was used to service debt than on total capital spending also in 2014.

Therefore, apart from the fact that the country did not have fiscal buffers even at the outset of the current global capitalist crisis in the third quarter of 2014 despite many years of high oil price, the economy was offloaded with heavy debt.

Deepening the Debt Burden

However, the fact that the Buhari government will continue the ruinous way of borrowing, albeit faced with reduced oil revenue and low fiscal buffers, shows that on a basis of capitalism there is no fundamental difference between the APC and PDP. It also shows that a fundamental solution to the current economic crisis cannot be found within the confines of capitalism.

In other words, Buhari’s government will deepen the debt peonage or enslavement of Nigeria to financial vampires. For instance, Buhari government has proposed N1.475trn for debt service. Though it is an obligation from past debts incurred by the previous governments, the amount is more than twice the proposed spending on infrastructure, i.e. works, power, housing, transportation and water resources, which have a total sum of N672.4bn. This also suggests that with a new borrowing of at least N1.84trn to be added to the debt overhang, a larger chunk of the resources would be voted for debt service at the expense of critical infrastructure and vital social service in the coming period under Buhari government.

In the past nothing fundamental could be shown for the huge borrowing, this may not be different under Buhari government. In other words, it is not given that even if all the expected revenues including borrowing are generated they would be judiciously spent. Already the contract sums of many projects in the budget might have been inflated, given what is believed to obtain in Lagos state which seems to be the model of Buhari government. Besides, many of the projects will be executed on a basis of public private partnership. Therefore, on a basis of profit-first contract system Buhari may not be able to deliver on his promise to provide infrastructure development, even though it is limited.

Socialist Alternative

This is why socialists do not just call for adequate spending on infrastructure and social services but also add that projects and expenses, from conception to execution, must be subjected to a democratic control of elected representatives of working people including relevant professionals. However, this measure is not possible under a capitalist government.

A socialist government, expectedly run with a principle of democratic control and management, could spend only a fraction of what Buhari government has budgeted, with little or no borrowing, to finance infrastructure development and social services. Under a socialist government, works departments will be equipped to the extent of being able to execute major projects. This will eliminate profit that constitutes a huge part of a typical contract sum.

The personnel expenditure will be drastically reduced by putting the salaries and allowances of all political office holders and top government functionaries within the wage structure of civil service. No pension or severance allowance will be paid to any political office holder.

The overhead cost of the ministries, departments and agencies including the presidency will be drastically reduced by bringing the lifestyle of public officers to the level of average working people and subjecting procurement to strict democratic control. For instance, there are many outrageous items in the budget of the presidency that keep the cost of governance high contrary to the “efficiency” mantra of Buhari government.

Debt service will be drastically reduced by nationalizing big banks and pension fund firms to whom the majority of local public debts is owed. This means that no interest will be paid on the debt while part of the debt will also be cancelled. This will free up resources for development. Pension funds administrators make huge profit from the contributory pension of workers by buying government bond and treasury bills without any significant gain to the workers.

Besides, nationalization of big banks under a democratic control would guarantee reduction in cost of funds such that cheap credit will be given to manufacturers and small businesses at low interest rate.The oil industry will be nationalized under a democratic control and management by the working people in order to increase oil proceeds to the public coffers. For instance, huge profit and administrative expenses account for more than half of the cost of crude oil production. Democratic control of oil industry will also free up huge oil revenue that is usually lost to feeding the fat cat bureaucracy in the NNPC - the national oil company.

The key to rescuing working people and transforming their lives lies in the public ownership and democratic planning of the use and development of Nigeria’s huge natural and human resources. There are no technical barriers to achieve a rapid increase in living standards; the barriers are the capitalist system and its private profit motivated economy.

Therefore, it would require a mass revolutionary movement to enthrone a working peoples’ government that can implement the enunciated programs as the immediate steps while ultimately aiming at the complete transformation of the country along socialist lines with the support of working class people internationally. Socialist planning will help rid society of the periodic economic crises that are permanent feature of capitalism.

Surely, on a basis of capitalism especially in crisis, Buhari government cannot provide a real change in economy and wellbeing of working people and the poor. As a result many people would become disillusioned. Among them some would begin a search for a better alternative outside capitalism. This lot will be won to socialist ideas and the struggle for a working people government on a socialist program.