Hopes of a smoother budget passage

A senior Senate official has been quoted as saying that the FGN’s 2017-19 Medium Term Expenditure Framework could be ready for approval and passage as early as this week. The Senate would then move to consideration of the 2017 budget. This would be the fastest budget process for several years, bringing forward capital releases and therefore the FGN’s contribution to lifting the economy out of recession. The National Assembly supports the expansionary fiscal stance but is capable of delaying tactics.
Udo Udoma, the federal minister of budget and national planning, has made the point that the FGN’s proposal for 2017 of aggregate expenditure of N7.30trn is not expansionary relative to the figure of N6.06trn in the 2016 budget when we make an adjustment for the exchange rate.

It is, however, expansionary when we take the outturn of just N2.42trn in H1 2016 and make allowances for a pick-up in disbursements once the budget had been finally approved and signed off in May.

We support the FGN’s fiscal stance since monetary policy was unable to deliver due to the textbook focus on inflation and weak transmission mechanisms.

The FGN has shifted its average exchange-rate assumption for 2017 from N290 to N305 per US dollar in line with the interbank market. We may well doubt that this will prove the year’s average. That said, we cannot expect the FGN to assume a weaker rate than today’s since it does not have a formal objective and would be foolish to “show its hand” to the market.

Our final comment on the proposals today are related to borrowing. Within the financing of the projected N2.36trn deficit, the FGN is now to borrow N1.25trn and N1.07trn respectively from domestic and external sources rather than the earlier projections of N1.07trn and N1.34trn

This is inconsistent with the DMO’s medium term strategy of borrowing more externally than domestically in pursuit of a 40/60 mix in the FGN’s debt obligations. The yield on the July ’23 Eurobond of 6.9% compares favourably with more than 16.0% on a FGN naira bond of similar tenor. The comparison is better still when we note that most external financing is contracted on concessionary terms at +/-2.0%

However, the changes to the borrowing projections are realistic, given the difficulties the FGN has experienced securing external finance for its 2016 budget. These difficulties with the World Bank and the African Development Bank would be greatly diminished if the FGN accepted IMF loans. Such a step remains off the agenda, however.

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