Nigerian “Budget of Change”…How much can it achieve? — Afrinvest

LAGOS, Nigeria, Capital Markets in Africa: 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 the 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. However, recent data published by the National Bureau of Statistics (NBS) as well as other macro indicators (Q1:2016 GDP: -0.36%, Q1:2016 Unemployment Rate: 12.1%, April Inflation Rate: 13.7%, sustained pressure on parallel market FX rate: N350/US$1.00 and External reserves: US$26.6bn) reflects the impact of the delay in the budget passage as well as the weak monetary policy response on macroeconomic aggregates. The lack of economic impulse for most of H1:2016 signals that recession stares the economy in the face.

To hasten infrastructural development and reflate the economy, the Buhari led administration sought to employ a new approach to budget formation and implementation. 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 characterised with a 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 in our latest Flash Note; How much can the “budget of change” achieve?

As the month of May winds out, there is a mixed bag of performances across regions. The major determinants of market performance in the month were hinged on the state of the US economy and a possible rate hike as well as the expectations of the BREXIT referendum. These factors are expected to take precedence at the June FOMC meeting scheduled for 14th and 15th of June. The Nigerian All Share Index was the best performing Index in month of May rising 15.3% MTD, followed by the India BSE (+4.1%) and the US NASDAQ (+2.9%) while the worst performing were the Brazil Ibovespa (-8.2%), China Shanghai Composite (-4.0%) and the Kenya NSE (-3.5%)