Budget 2015: New Adjustments and Analysts’ Vote of Confidence

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The downward review of the oil price benchmark, the approval of a higher exchange rate and other adjustments in the 2015 budget, as announced by the Senate recently can allay the fears already created by the persistent oil price shock and the attendant strains on the Nigerian economy, reports Festus Akanbi

As attention shifted away from the postponed general elections, the Senate last week, after rigorous parleys with officials of the Finance Ministry and Budget Office slashed the oil benchmark for the 2015 budget from $65 per barrel to $52. It also announced an upward review of the exchange rate from N165 to N190 to a dollar, in tandem with the recent adjustment in the rate of the naira against the dollar at THE FOREIGN EXCHANGE MARKET.

The federal government had made a final proposal of $65 per barrel of crude oil to the lawmakers after two reviews.
The Minister of Finance, Ngozi Okonjo-Iweala, had in December 2014 presented the 2015 budget to the lawmakers based on a speculated oil production figure of 2.2 million barrels per day. At its closed door session last Tuesday, the Senate said its decision was due to the fact that the current oil price in the international market was between $60 and $62.

As it is, the oil price shocks and the attendant strains on the economy have dawned on the lawmakers who reportedly admitted that Nigeria would have to borrow in order to meet some of its obligations this year. The severity of the situation is also underscored by the realisation that most of the budgetary allocations to various sectors would have to be adjusted to reflect the true state of revenue expectations.

Another major highlight of the negotiations was the executive volunteering a 25 per cent cut in the State House budget.
An initial agreement of N115 billion was also reached as the National Assembly budget, which is N35 billion or 23 per cent short of the lawmakers’ regular N150 billion annual budget.
But THISDAY gathered that while majority of the lawmakers supported the cut in the National Assembly’s budget, some have kicked against it because they do not want to lose their privileges.

Interestingly, the league of economic analysts who had criticised the government for the rather ambitious position during the presentation of the budget last year, are back, but this time with commendation for both the executive and the legislative arms for responding to the reality in global economy.

More Realistic Approach

According to Managing Director of Financial Derivatives Company, Mr. Bismarck Rewane, the new adjustments to the budget appear more realistic and are capable of allaying the people’s fears to a large extent.

Speaking with THISDAY last week, Rewane said, “I think these projections are more realistic now than what we had before. It is a move in the right direction. A $52 oil benchmark is more realistic.”

Pointing out that the new benchmark does not give the nation’s economy enough buffer, Rewane recalled that “Venezuela, Iran and Angola are using $40 per barrel benchmark, but personally, I believe that $52 per barrel is adequate as a benchmark but it doesn’t give much of a cushion.”

He believes that “The exchange rate of N190 is a dramatic move but I think N200 to a dollar would have been a better price but it is definitely commendable. It is very realistic, this is a move that should have been done much earlier but I’m quite pleased for moving in this direction.”

For the Chief Executive, Proshare Nigeria, Mr, Olufemi Awoyemi, “The drop in oil price simply means we have less in foreign reserves and FOREIGN EXCHANGE to go round and government needs to devalue the currency so that it can have more naira to meet its responsibility.” He said that is why analysts believe the price has to move up again.

Time to Encourage Exporters
“Secondly, because Nigeria has a diversified economy, the people need not worry even if the exchange rate gets to N250 or even N300. In fact, it makes it more compelling for us to find the ability to MAKE MORE MONEY for companies which are in exports for example, since they will have to produce locally because it doesn’t make sense for them to import anymore.

“So the higher the devaluation in terms of the exchange rate, the better for the Nigerian economy at the end of the day. The key question is this; every country is making its own currency weaker against the dollar, why should we make ours stronger?

“When you have a high exchange rate, what is going to happen? Import materials are the only things that carry the cost. If we are not importing but producing locally, it doesn’t make any meaning to us. What only get expensive are the things which you import. So what the government should do is to focus on policies which support local production. So whatever we lose in the next two years, we will gain them back later. Like some analysts believe, dollar is going to move up again and exchange rate is going to widen again.”

Awoyemi said there is no need to lose sleep over the 2015 budget. “The budget is just a statement of expenditure because in a budget like that of 2015 that has 30 per cent vote on capital expenditure, you can’t fund any development around that one because the whole thing is all about expenditure so people should really not bother about the budget since 70 per cent of the budget goes to expenditure. That won’t do anything,” he said, regretting that “we couldn’t meet the revenue target in the past five years, even at the period of oil boom.”
Speaking in the same vein, a research associate with BGL Plc, Mr. Olufemi Ademola, expressed the belief that the new threshold is better and that if the budget is well managed, the nation might not need to go borrowing.
Manageable Budget

He said, “I think it is better to a  certain extent, it is something we can manage with. We had done a scenario analysis in the past looking at different prices and what to be expected, our suggestions then was that they should be looking at $50 dollars as oil price benchmark and N180 as exchange rate and that if they did that one, they should be covered to a large extent.
Now that they have fixed $52 per barrel and an exchange rate of N190, it will give them a big leverage to the fact that we don’t need to borrow anything extra outside of that N170 billion they planned to borrow but they will have some more money.”

Ademola said the exchange rate of N190 is still okay, saying although the CBN has already yanked off the official exchange rate. “I expect the market to recover too and when the election is over and there is no crisis, there won’t be any reason to panic. I think it is a better speculation than the previous benchmarks. It is something that is easily achievable than what we had before,” he stated.
A source told THISDAY that several senators who spoke at the closed-door session, expressed concern over the state of the economy, regretting that the nation would have to resort to borrowing to finance some projects.
The federal government had on December 17 laid a budget of N4.357 trillion predicated on a $65 per barrel oil benchmark and an exchange rate of N165 to one dollar for the 2015 fiscal year.

The document also consisted of N2.622 trillion for recurrent expenditure, N627 billion for capital expenditure and N3.602 trillion as the government’s revenue target in 2015.
Despite dwindling oil revenue at the time, the federal government stuck to the $65 per barrel oil benchmark proposed for the 2015 budget as contained in the revised Medium Term Expenditure Framework (MTEF) which it re-submitted to the National Assembly on December 2.
Prior to reducing the oil benchmark to $65 a barrel, the federal government had reviewed the oil benchmark from $78 to $73 per barrel on November 18.

The Senate’s approval of the $52 oil benchmark, THISDAY learnt, may not be unrelated to the agreement reached by the executive arm of government and the National Assembly to settle for the new benchmark following weeks of negotiations between them.
Both arms of government had been meeting to find an agreeable benchmark but disagreements over some budget details have lingered.
A source privy to the negotiations disclosed that while the executive had proposed $50 per barrel, the lawmakers rooted for $55 per barrel, after which both parties were said to have finally agreed on $52 per barrel.

Dip in the National Account

The Accountant General of the Federation, Jonah Otunla, who confirmed the strings of losses to the oil price shock said the country suffered a substantial loss in revenue of about $77.53 million (about N13.025 billion) in November last year as a result of the massive drop in crude oil price at the international oil market.

He said the loss dropped to about $52.34 million (about N8.79 billion) in December, in addition to a 33 per cent decrease in the volume of export of the country’s oil for the two months, which translated to a loss of about $159.88 million (about N26.9billion).

Consequently, the AGF said the trend in declining oil revenues had continued during the month of January 2015, which saw gross revenue for the month decreasing by about N73.94 billion, from N490.03 billion in December 2014 to N416.096 billion.

He also attributed the declining revenue situation to the continued shutdown of some oil production facilities, which resulted in the shut-in of operations on some oil export trunk and pipelines at various export terminals.

Revenue yields from non-oil sources, he noted, also performed poorly below 2014 budgetary estimates by about N54.624 billion (about N165.323 billion as against N110.699 billion that was realised.)

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