How would you analyse the proposed budget for this year?
The government has given us a draft of this year’s budget; it has yet to be passed into law. I am waiting to see when this will happen, even though everyone is in politics mood. At some point, the National Assembly has to sit and pass it into law. But clearly, the N3.6tn proposed budget for 2015 shows only a 3.4 per cent decline in top-line revenue for the Federal Government, compared to the 2014 budget.
My biggest challenge with that number is that it seems not to reflect what is on ground, as accurately as it should. The oil benchmark for the budget has been pegged at $65 per barrel of crude oil, but the price of oil is currently below $50 per barrel. Also, the consensus opinion from many analysts today suggests that the oil price is going to trade around $40 to $50 per barrel and may become the new stabilised environment.
What then happens to Nigeria if oil price remains below $50 per barrel for most part of this year?
If you recalibrate the budget at say $45 per barrel, you will find out that we have a shortfall of N1tn in revenue. And that N1tn is a lot of drop from the oil revenue as well as the tax revenue coming from the oil sector of the economy. Without going into much too much of details, it is not a linear relationship between the drop in oil price and the nation’s revenue. For example if oil price is at $100 per barrel and you sold one million barrel, the government does not actually get $100m; the government gets something around $40m because there is cost of production. There is cost sharing between the government and the companies involved in oil production. These companies are into various joint-venture agreements and production-sharing partnerships with the government and other private companies. So what comes to the government is about $40m after the deduction of the production cost.
However, when the price drops from $100 per barrel to around $50 (bearing in mind that there is a cost of production that does not go down), the drop in government revenue is very significant; it could be as much as 70 per cent. This is because as the oil price is dropping, the cost of production is still flat. This has an impact on what the government will get from oil revenue and by implication the amount to be shared by the three tiers of government.
This is why we feel that the budget is probably not reflective of what the current environment suggests. In the same budget, you see a domestic borrowing of N570bn, which is similar to what the government planned to borrow last year, although it ended up borrowing about N1tn. Given that we estimate about N1tn funding gap in the revenue, we estimate that there may be about N2tn additional borrowing this year to make up for the shortfall; but the government won’t put it there yet.
What is your take on the sharp drop in capital expenditure in the budget?
Capital expenditure has fallen from N1.1tn last year to N633bn this year. The difficulty with the capital expenditure this year is that there are so many programmes that are outside the control of the government. An example is the elections coming up in February. If Jonathan wins, he will be sworn into office in May. That means the cabinet he currently has are probably handicapped because they won’t have time to do much between now and May because of the noise around politics. If he gets sworn into office in May, he needs two to three months to get his new cabinet together; by that time, we are in August. That means that this year’s capital expenditure is just there in numbers. The government won’t probably spend much in that area.
What are your areas of concerns in the budget?
I’m raising an eyebrow on things like SURE-P in the budget; it means there is still an element of subsidy in the 2015 budget. Why should we be having subsidy given the current price of oil? This is probably an excellent time for the government to deregulate the downstream sector of the oil industry. At $54 per barrel of crude oil, the petrol price will fall below the N97 per litre. That is just on the PMS side; by the time we go to the prices of diesel and kerosene, you will be amazed at the difference. Amazingly, the prices of diesel and kerosene are still selling around N130 and N150 per litre, when actual cost of production going by the international standards would suggest that they should be around N70 or N80 per litre. If I was in government, I would have used the opportunity of the decline in oil price to deregulate the whole sector and let Nigerians benefit from such a fall. And I can tell you, anybody that brings such news at this time will probably win the vote of many Nigerians. On the other side, the authorities are keeping the subsidy because they are still unsure where the price of oil is heading to. May be they are saying let us not do anything too hastily and just keep the situation as it is.
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Source: Businessnews.com.ng
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