Link:

http://blogs.ft.com/beyond-brics/2011/12/13/nigerias-budget-only-surface-deep/#axzz1gRHqR1DP

Nigeria’s budget: only surface deep
December 13, 2011 4:55 pm by David Keohane

Goodluck Jonathan, Nigeria’s president, presented his country’s 2012 budget on Tuesday and while on the surface there are some positive numbers, dig a bit deeper and the picture gets murkier.
Nigeria’s projected fiscal deficit of 2.8 per cent in 2012 would make many developed nations jealous but it is predicated on what Razia Khan, head of African research for Standard Chartered, told beyondbrics were some “very optimistic assumptions” – which Nigeria, only recently been moved to a stable outlook by the ratings agencies, can ill afford.

Jonathan said the country would spend N4.749tn ($29.29bn) next year, an increase of 6 per cent from 2011. That might not sound too drastic but it adds up to an increase of nearly 50 per cent in real terms since 2009. The economy will grow by nearly 7 per cent this year, mostly driven by the non-oil economy. As Khan said: “If Nigeria can’t get it right in the good times , when can it get it right?”

Nigeria’s budget does contain some marginal positives to go with its narrowing budget deficit.
Jonathan is proposing to bring down the cost of maintaining government – which has been running at nearly three quarters of the national budget – to a still intimidating 72 per cent. Good, if rather underwhelming, news that doesn’t open much room for much-needed infrastructure spending.
Another positive: the benchmark oil price, on which budget estimates are based, has been reduced from $75 a barrel to $70. With 90 per cent of export earnings generated by oil, this denotes a more conservative fiscal outlook – though it does leave the country exposed if production doesn’t meet an optimistic production target of 2.48m barrels per day (up from 2.3m bpd this year).

Yvonne Mhango of Rennaisance Capital remained upbeat, saying in an emailed note to clients:
[Nigeria's] public debt is very low with domestic debt at 16.4 percent and external debt at around 2.2 percent, so there is room, in our view, to borrow for the budget. The budget oil price is conservative in our view – we project an oil price of $100-110 per barrel in 2012 – so they should be able to meet their targets, if they stick to the fiscal programme.

In contrast, Khan argues:
The nominal growth projection – real GDP growth of 7.2% and inflation of 9.5% may not differ much from the consensus, but the point is that Nigeria is still hugely dependent on oil revenue – and not domestically generated revenue – for the financing of its budget. Until this changes (and we would like to see more detail of revenue raising measures), forecasts of domestic growth are almost redundant – with little impact on eventual budget outcomes…

Should budget projections disappoint, the FX rate may have to take the strain. The monetary authorities will need to do even more to offset the liquidity impact of increased spending, and preserve some measure of price stability.

Then there is the much discussed fuel subsidy, which ministers have hinted will be abolished in 2012. In the FT’s annual special report on Nigeria Lamido Sanusi, central bank governor, said the cost of the subsidy was just over $16bn, fractionally more than the state’s entire earnings from oil revenues this year.
However, even General Sani Abacha, the most ruthless of Nigeria’s former military dictators, withdrew his own attempt at lowering the subsidy in response to public outcry. A recent opinion poll found that 87 per cent of Nigerians still, unsurprisingly, oppose scraping the subsidy. With no mention of the subsidy in the budget, they will have to wait a little longer to discover its fate.