Friday, 16 November 2018

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Investors Lose N146.2bn to Massive Sell-off

By Dr Timothy Okon and Prof Niyi Ayoola-Daniels

(See THISDAY Newspaper 13th Dec 2015)

While pegging oil benchmark at $38 per barrels in the budget, the government also projected to borrow, from the domestic borrowing window, N1.2 trillion in 2016 and N635 billion from the foreign borrowing window.

But Ayoola-Daniel and Okon in their insight told the paper that the government’s revenue outlook appears weak if it would depend entirely on oil earnings which are dwindling.

They noted that such expansionary budget puts in the hands of the government huge economic challenges that may overwhelm it if not properly managed, adding that its decision to vote N500 billion for social welfare and maintain subsidy on fuel were uneconomical.
In his explanations, Okon said: “Even without regards to benchmark, the oil price is going to be what it will be. First and foremost, our view is that the revenue outlook if it is dependent on oil is weak. There is an abundance of oil in the world and it will have an impact on prices.”

“Government’s revenue outlook might not turn out to what they are expecting because of this abundance of oil in the market at the moment. That will for the foreseeable future be the case.

“The second point is that the budget is expansionary and what that means is that if they are going to borrow N2.22 trillion, the problem with that borrowing is that it could easily crowd out investment by especially private sector investments and we know that there is a strong correlation with private sector investment and employment,” Okon added.

He noted that: “Government’s investment does not necessarily translate into employment except in two specific areas. I refer you to the great American depression where the government embarked on a significant infrastructure built programme where most of the interstate highways were built and that employed a lot of people.

“If the government budget is targeted at infrastructure, if the increased spending is to address infrastructure, then that would be translating into employment more directly and so if you take any of the roads that needs repairs and rebuilding, people who will have jobs and people who have been laid off by the construction companies would be called back to work and that directly would impact employment.”

Speaking further, he stated that: “The second area of intervention that would lead to job is again related to rebuilding our schools in areas where we have situations like in the north east. If you are going to spend money to do that, that would re-energise the economy.

“But other than that, the key thing about managing deficit is that overwhelming government borrowing can crowd out private borrowing who would want to borrow to invest and they ultimately provide sustainable jobs.”

Recently, a market report of the Organisation of Petroleum Exporting Countries (OPEC) showed that its reference basket for oil price in November stood at $34.80/b, Nigeria however pegged its budget price at $38/b. Analysts have posited that the oil market would have a difficult 2016. 

“That is the challenge that we see. Then of course, the deficit might be more than what they are forecasting because we are not sure if there will be increases in VAT so that government revenues will go up; subsidy would not be removed as well, we are in a situation where we are not clear whether the revenue side has been completely covered and if that has not been, the deficit might be larger than the N2.22 trillion,” Okon said.

Also, the World Bank recently asked the government to take off subsidy on petrol, which is currently weighing heavily on its pockets. IIPELP in buttressing this said that it would be difficult for the government to take all these and still function.

“Two things that the Buhari administration needs to consider is that the Nigerian Stock Exchange went up to a high level in April 2 of 2015, all of that gain were as a result of the elections which were announced, but all of that has been lost and that means that the confidence people had in the economy have now gone down.

“Part of the lack of confidence in the economy is the insistence on having subsidy because that is what is triggering the private sector to think that we are not going to have sound economic policy in place,” Okon explained.

He further advised: “The second is the devaluation of the currency. There is already a wide spread between the CBN rate and the parallel market rate. We need to deal with that issue and I will explain in simple terms what devaluation will do: devaluation will mean that for every dollar the government spends, it gets more naira for it, and that can actually help to deal with the deficit since we are dependent on oil in terms of government revenue.”

Okon explained that: “This expansionary budget might result to inflation going up and I suspect that government needs to evolve a better management of the deficit because the revenue outlook is negative except clearly they state what they will do on the revenue side which may include increase in the VAT; implementing the road tax which is in the books and that will help in road rehabilitation and then deal with the tax evasion issues which is quite prevalent.”

He also spoke on the projected expenditure of N500 billion for social welfare, as well as the capacity of the government to implement the budget volume.

According to him: “We know that there is this social spending of N500 billion for feeding people, we think that it is far better to spend N500 billion fixing the infrastructure and creating employment and that will have a better impact on the people. The state should not directly be getting into these programmes because it will encourage graft and may end up being mismanaged.”

“We also think that we need the capacity to spend N6.007 trillion. You have to have the infrastructure of people who can implement a budget of N6 trillion. It is often very difficult to even at the federal level for a N1 trillion capital budget to be implemented in a year and that is what many times the national assembly complains about.

“So clearly, there is a challenge there, we need to see in the budget upping of the capital budget above recurrent expenditure and even at that, there are significant issues on how you spend such budget in a year,” Okon added.

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