A second, larger dose of fiscal expansion

The president yesterday submitted the 2017 budget to a sitting of both houses of the National Assembly. Nigeria’s exit from recession depends upon its expansionary fiscal stance, and the monetary policy committee will not play a supporting role unless it performs an about-turn from its communiqué in November. The headline figure in the budget is total FGN spending of N7.30trn (US$23.9bn), compared with N6.06trn in the 2016 budget and, more significantly, an outturn of N2.42trn in H1 2016.
The underlying assumptions are average crude production of 2.2 mbpd, an average crude price of US$42.5/b and an average exchange rate of N305 per USD (the current interbank rate).

Not for the first time, an outperformance on the oil price may compensate for an underperformance on production. The FGN may pursue an “engagement with the oil producing communities” but will surely have to compromise with the various parties responsible for the sabotage.

FGN budgets tend to work with the exchange rate in effect at the time of submission, and for good reasons. The rate is, of course, effectively administered and not the floating model envisaged in June. We have to move to a flexible arrangement if the FGN’s economic vision is to be realized and we doubt very much that the rate would then remain at N305.

Our watchlist for 2017 and beyond includes the standard VAT rate of 5%, the mounting burden of debt service, the external/domestic mix of FGN borrowing, its personnel costs and disbursements under its flagship social interventions.

Among events outside the FGN’s control, we have to single out the impact of the Trump presidency on US interest rates and on the Chinese economy in addition to the oil price.

We welcome the relatively early submission of the budget to the assembly. We also recall the suggestions from the federal finance ministry that the regrettable delay in the final sign-off on this year’s budget (to May) was balanced by important procedural victories at the expense of the legislature, and hope that these successes are visible in 2017. The assembly has a track record of pursuing its institutional agenda ahead of the policies of the political parties in whose names its senators and representatives have been elected.

Our note today is based upon local media coverage of the president’s submission of the budget yesterday, and upon the 2017-19 Medium Term Expenditure Framework and Fiscal Strategy Paper on the Budget Office of the Federation website (and dated August).

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