A preview of Nigeria’s 2016 Budget: Where will 6 trillion naira come from and how will the money be spent?

The 2016 Budget

The federal government of Nigeria plans to spend N6 trillion in 2016 (about $30b at current exchange rate) compared to N5 trillion in 2015 (about $26b at actual average rate of N190/$ or $30b at 2015 initial budgeted exchange rate of N165/$).

The combined effect of inflation which is currently over 9%, and the relative devaluation of the naira make the proposed budget for 2016 to be technically at the same level as 2015 in real terms. This notwithstanding, it will still be a big challenge to finance the budget under current economic conditions.

So where will the money come from?

While we await a detailed breakdown of the budget, the broad sources of fund will come from:

1. Taxes, especially from non-oil sources such as companies’ income taxes, VAT and personal income tax, fines and charges.
2. Revenue from oil - this will be significantly less than it has been in the past considering expected price in the region of $38 per barrel and a daily production of 2.2million barrels. This level in hinged partly on the expected passage of the Petroleum Industry Bill (PIB) but this might be too optimistic even if PIB is eventually passed into law the impact may not be felt in 2016 going by the low level of investors’ appetite and liquidity challenges. Less oil revenue also means that dollar income will decline and therefore there will be limited opportunity for extra naira in the event of further devaluation.
3. Borrowing – it is important to note that while Nigeria’s debt to GDP ratio of about 13% is below global benchmark, debt servicing cost accounted for over 25% of government revenue in 2015 indicating high debt burden and very limited scope for more borrowing unless revenue profile improves. The recent reduction of monetary policy rate from 13 to 11% should help but not significantly.
4. Efficiency savings through cost cutting and blocking of leakages. The Treasury Single Account (subject to review) and efficiency unit recently established by the ministry of finance should help.
5. Recovery of looted funds.
6. Grants – there is a proposal to spend about N500 billion on social welfare including conditional cash transfer of N5,000 monthly stipend to the most vulnerable, school feeding program and post-NYSC grants. Government expects that donor agencies will support the initiatives with grants.

How will the money be spent?

1. Recurrent expenditure – this is essentially payment of salaries and general expenses. If kept at 2015 level will be about N3 trillion
2. Capital expenditure – majorly for infrastructure, this will be about N1.5 trillion. While this is an improvement over prior year, real success will be measured based on actual implementation. In addition, government should create the right legal framework and conducive business environment to encourage private sector partnership in infrastructural development.
3. Debt service – depending on the level of borrowing required, this could be in the region of N1 trillion (N943b in 2015).
4. Conditional cash transfer (see item 6 under sources of fund above).
5. Subsidy – about N63 billion for petrol subsidy. Kerosene subsidy will be discontinued. In principle there should be no subsidy at $38 per barrel. According to PPPRA the subsidy as at today is about N6 so not a significant increase if subsidy is removed, that will make the pump price N93 compared to the subsidised amount of N87 which is not even available in some places.

Overall, the 2016 budget if properly implemented and complimented with robust monetary and fiscal policies should help reflate the economy. The zero-based budgeting approach will ensure that every expense item is justified rather than simply allocating funds based on past spending.

Perhaps a bigger challenge is with states that have very low internally generated revenue and are struggling to even pay salaries.

While it could be tempting to introduce new taxes or increase existing rates, government should be mindful that individuals and businesses are struggling and cannot afford more taxes. The strategy should be to increase the tax net and improve efficiency of collection. Hence, the new Bill at the National Assembly seeking to introduce a 5% National Security Tax should be discouraged as well as the proposal to increase education tax from 2% to 4%. The re-introduction of highway tolling should be carefully considered to ensure that the funds are used for the desired purpose. Technology can help with this.

Although it has become inevitable to collect more taxes, this should go hand-in-hand with provision of social services. A recent survey at a stakeholders’ event organised by PwC Nigeria shows that over 60% of respondents say the main reason they do not pay tax is lack of social services.