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Nigeria's 2012 Budget: Consolidation, Growth and Employment?

Nigeria's 2012 budget, announced this week, seeks macro-economic prudence alongside increased expenditure.
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Let the good times roll? President Goodluck Jonathan (pictured) announced Nigeria's 2012 budget this week.

President Goodluck Jonathan presented the 2012 budget to the Nigerian Senate this week. Tagged ‘The Budget of Fiscal Consolidation, Inclusive Growth and Job Creation’, it aims to create an environment of fiscal prudence in Africa’s third largest economy – which may overtake Egypt soon to become second – while at the same time increasing government spending.

Jonathan said Nigeria’s gross domestic product will grow by 7.2% in 2012 buoyed by growth in the non-oil sectors, such as retail trade, finance and construction. Capital spending is set to rise to N1.32 trillion ($8.1 billion) in 2012 from N1.005 trillion ($6.4 billion) in 2011. The potential pitfalls in the budget are contained in estimated oil production output being pegged at 2.48million barrels per day (mpbd), which, if not met, leaves little room for economic manoeuvre. The running cost of government still remains bloated at a staggering 72% - down 3% from last year - of the overall budget. Finance minister Ngozi Okonjo-Iweala has promised to reduce this to 67% by 2015. There was also no mention of the impending fuel subsidy removal, which could signal the beginning of the end of government subsidy for petroleum on which an estimated N1.2 trillion ($7.3 billion) was spent in 2011.

Sunny outlooks?

Much was expected from Jonathan’s budget presentation due to the hope placed in the new reform-minded economic team headed by former World Bank technocrat Ngozi Okonjo-Iweala. Nigeria's economic outlook was upgraded by Fitch Ratings earlier this year from negative to stable, based on the country’s “strong growth, low public debt and strong external balance sheet." This gave the budget presentation added importance for consolidating perceived gains and providing an economic roadmap for the year ahead in order to enhance Nigeria’s development indicators.

The total expenditure of the 2012 budget stands at N4.749 trillion ($29.29 billion), in comparison to N4.48 trillion ($27.5 billion) in 2011, representing a 6% increase. While the bulk of budget spending is allocated to the cost of running the government, it is intended that agencies and parastatals that have overlapping functions will be merged in order to cut costs. The exchange rate has been marked at N155 to the US dollar, and inflation is projected to keep just below double digits at 9.5%. Nigeria’s public and domestic debt also remains low, amounting to 16.4% and 2.2% respectively.

Oil optimism?

Much has been said about the estimated 2012 oil production figures of 2.48mbpd – up on 2009 and 2010, but below the 2005 peak of 2.63mbpd – captured in the budget alongside the benchmark price of $70 per barrel. The production estimate is viewed as somewhat optimistic in the light of a potential double-dip recession in advanced economies, but with the relative peace now sustaining in the Niger Delta and the government’s thrust to increase production, the figures may well prove sustainable.

However, the savings from oil must be managed prudently, with additional earnings from the difference between the benchmark price and global price of oil currently being lodged in the controversial Excess Crude Account (ECA). The ECA has shrunk from $20 billion in 2007 to $4.2 billion as of the end of November this year. The newly created Sovereign Wealth Fund (SWF) is set to replace the ECA, with the government intending to use it as a vehicle to fund domestic infrastructure investments rather than share the proceeds between the three tiers of government.

Jonathan made no mention of the impending fuel subsidy removal. The subsidy is normally included in the budget, with N240 billion ($1.47 billion) set aside for payment in 2011. The amount paid out so far this year has risen to N1.2 trillion ($7.3 billion). In a move aimed at calming the frenzy around the subsidy removal, Okonjo-Iweala said Jonathan “is consulting widely on the subsidy issue. He has been consulting with various stakeholders in the country, including private sector operators, students, religious leaders and others, and his decision will be made public at the end." The removal of the subsidy is facing severe challenges, notably from civil society. The general secretary of the Nigerian Labour Congress, Owei Lakemfathe, said: “The exclusion of fuel subsidy in the budget is not only tragic, but also a declaration of war on the Nigerian people. Thus, the Nigerian people will have no choice but to confront this challenge.”

Departmental distribution

There were no surprises in the ministerial allocation figures. Jonathan's focuses are well known: security, education, works and power.

Security challenges have become glaringly obvious in the wake of Boko Haram’s frequent attacks on increasingly prominent targets, and it was anticipated that security would receive a generous allocation or N922billion – approximately $5.2 billion. The government intends to channel such extensive funds into the improvement and efficiency of agencies such as the Ministry of Police Affairs, the Ministry of the Interior, the Office of the National Security Advisor and all other security agencies. However, as the US is now acknowledging after a House of Representatives sub-committee report on Boko Haram, “the environment is ripe for recruitment” in northern Nigeria due to a combustible mix of poverty, joblessness and lack of education. “It’s important for the government to look at how to redress these social-economic indicators in the north. Pick any one you want, whether it be health, literacy or access to clean water, the situation is really appalling,” US Ambassador Terrence McCulley said in an interview about Boko Haram.

Education is allotted N400 billion ($2.45 billion) from the budgetary allocation, reversing a trend of decline in investment in the sector. Nigeria’s education system, once the pride of Africa, has slipped into a regression made evident by the country’s dismal showing in the 2011 West African Examinations Council's exams – 31% of just over 1.5 million candidates passed the West African Senior School Certificate Examination while the high fees price many out of the system in the first place. The three tiers of education are inefficient and understaffed, with strikes a regular occurrence, and this has had an adverse effect on school-leavers who are left with little or no prospects. With a burgeoning population, much improvement is needed to ensure that millions of school-leavers in the coming years are prepared for entry into the job market.

The remainder of the budget is filled by the Ministry of Works receiving N180billion ($1.1 billion), Power N161billion ($989 million) and Agriculture N79billion ($485million). The rest is shared between Aviation with N49 billion ($381 million), Transport N54 billion ($331 million), Lands and Housing (N26 billion, $159 million), Science and Technology N30.8 billion ($189 million), the Niger Delta N59 billion ($362m), the Federal Capital Territory N45.6 billion ($280 million) and Communication Technology N18 billion ($110 million).

Actions over words

Yvonne Mhango, sub-Saharan economist at Renaissance Capital provided a positive outlook for the backbone of the budget. “Public debt is very low with domestic debt at 16.4% and external debt at around 2.2%, so there is room, in our view, to borrow for the budget,” she said. “The budget oil price is conservative in our view – we project an oil price of $100-110 per barrel in 2012 – so they should be able to meet their targets, if they stick to the fiscal programme."

But while it seems the budget attempts to adhere to its tagline of ‘Fiscal Consolidation, Inclusive Growth and Job Creation’, it has become familiar for actions to fall short of words. For this not to be the case this time round, tightening up saving mechanisms, decreasing the cost of government, and pushing through power, energy and agricultural sector reforms alongside promoting industrialisation and manufacturing will be key.

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