Nigerian Budget 2010

Paper Presented at India Professional Forum on 19th June, 2010 at India House, India High Commission, Lagos.

19 June, 2010

By

Dr. Emmanuel Moore Abolo (Chief Economist & Head, Group Market Risk Management)

Access Bank Plc.

Budget 2010 and Its Impact on Business Environment in Nigeria

Our Philosophy

To go beyond the ordinary,

to deliver the perceived impossible,

in the Quest for Excellence

To transform our bank

into a world-class financial

services provider.

The Quest For Excellence

M I S S I O NV I S I O N

BRAND DRIVER

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Our Core Values

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OUTLINE

POLICY THRUST OF THE 2010 BUDGET

KEY ASSUMPTIONS & TARGETS

HOW REALISTIC ARE THE ASSUMPTIONS?

OVERVIEW OF THE BUDGET

FINANCING THE DEFICIT

IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT

Q3 MACROECONOMIC FORECASTS

CONCLUDING REMARKS

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POLICY THRUST OF THE 2010 BUDGET

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KEY ASSUMPTIONS & TARGETS

Budget Highlights 2007 2008 2009 2010 RemarksCrude Oil Benchmark Price $40pb $59pb $45pb $67 Upward TrendCrude Oil Production Level(mbpd) 2 2.45 2.29 2.35 Upward TrendGDP Growth Rate Target (%) 7% 11% 8.9% 5.47% Downward TrendInflation Rate (%) 9% 8.5% 8.2% 11.2 Upward TrendExchange Rate (N/US$) 126 117 125 150 DepreciatingJoint Venture Cash Calls ($bn) 4.5 4.97 5.0 7.0 Upward trendTotal Expenditure (N'tr) 2.3 2.45 3.10 4.61 IncreasingTotal Revenue (N'tr) 1.8 2.02 1.77 3.086 IncreasingBudget Deficit (N'tr) 0.5 0.56 1.1 1.52 Upward TrendDeficit to GDP (%) 2.9% 2.5% 4.0% 4.6% Increasing

GDP (N'tr) 20.84 24.89 27.67 29.36 Increasing

Capital Spending (% of total expenditure) 41 20.04 27.74 40.2 Upward Trend

Table: Highlights of the 2010 Budget (in comparison with 2007, 2008 & 2009)

Source: Budget Office of the Federation

HOW REALISTIC ARE THE ASSUMPTIONS?

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Source: EIA

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HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)?

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2010 Growth Rate Target (5.47%)


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2010 Exchange Rate Target (N150/$)


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2010 Inflation Target (11.2%)


OVERVIEW OF THE BUDGET

Aggregate expenditure is N4.608 trillion (48.6% higher than the N3.10trn in 2009).

Expansionary budget meant to stimulate economy after the global credit crunch weakened economic growth. Also aimed at bridging the infrastructure gap.

Will push Nigeria beyond the 3% deficit target set under the 2007 fiscal responsibility act to 4.6% of GDP.

Aggregate expenditure comprises: Capital expenditure – N1.853trn Recurrent Expenditure – N2.077trn Statutory Transfers - N180.28bn Debt Service - N497.07bn

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Expenditure Allocation

About a third of the planned budget is non-recurrent spending targeting areas: critical infrastructure, the power sector and development of the Niger Delta, infrastructural development (works, housing, roads) & agric. development.

Following MDAs control significant portion of capital expenditure allocation: Works, Housing & Urban Dev-18% Power -13% Transport -12% Agric. & Water Resources- 10% FCT Administration- 10% Niger Delta-5%

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Capital Expenditure Allocation – N1.853trn

OVERVIEW OF THE BUDGET (cont’d.)

The underlying philosophy of the 2010 budget points the direction of capital spending this fiscal year:

i. Transform the socio-economic fortune of the Nigerian people through the full implementation of the Seven-Point Agenda; and

ii. Achieve long term vision of becoming one of the 20 top economies in the world by 2020 (Vision 20: 2020).

The budget allocation shows great focus on infrastructural projects and security. 14

1.Power and Energy 2. Food Security3. Wealth Creation – diversified production esp. in agric4. Transportation Sector5. Land Reforms6. Security7. Education Sector

Direction of Capital Spending


Focused mainly on agriculture, improvement in power supply, infrastructure, manufacturing, Niger Delta region and increasing other revenue sources.

Details of budget estimates further show that the following MDAs have the highest sectoral allocation:

Strong focus on infrastructural development and construction15


Direction of Capital Spending (cont’d.)

FINANCING THE DEFICIT

Fiscal balance of the budget is a deficit of N1.52 trillion (or 4.66% of GDP).

The deficit as a % of GDP is above IMF’s acceptable limit of 3% and outside the WAMU limit of 4%.

2010 fiscal deficit projection for G20 countries of -6.9% (2009 was -7.9%)

France (-8.6%) India (-10%) Japan (-10.2%) Saudi Arabia (10%)

Rationale for the deficit is to address serious infrastructural gap issues, make key investments in priority sectors & keep the economy from contracting.

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FINANCING THE DEFICIT (CONT'D.)

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Deficit to be financed through:


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Source: WEF Global Competitiveness Index, 2009-2010.

IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)

The 2010 budget will impact some of the key problematic factors in the business environment:

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S/N Factor/Issue Details Implications

1 Infrastructure A major thrust of the 2010 budget is the provision of physical infrastructure (power and transport) which accounts for 25% of capital expenditure (N463 Billion).

Government’s efforts towards improving infrastructure supported by central bank’s N500 billion power sector fund.

$300 million (N45 billion) agreement with the World Bank for the financing of gas supply for power generation.

Inauguration of National Regulatory Commission.

Power sector reform, with emphasis on market-based pricing will stimulate private sector investment .

Improved power supply would lead to revival of sectors such as textile and rubber/ tyre industries, etc.

If successful, reforms and investments in infrastructure will lower operating cost to manufacturers in the near term.

We expect alternative funding for projects in the power and transport sectors.

Orderly development of a competitive power market , ensures efficient and adequate production of electricity and promote competition.

Establishment of Power Consumer Assistance Fund to subsidize under- priviledged.


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S/N Variable/Issue Details Implications

2 Taxation Expected total revenue of N3.086 billion (about 36% increase from 2009) in the face of falling oil prices could drive focus on non-oil revenue.

Drive for higher non-oil revenue is likely to raise expected revenue from the Customs Service and the Federal Inland Revenue Service (FIRS).

Thus, new National Tax policy has been approved by government to increase indirect tax (especially VAT) and reduce direct taxes.

Presidential Task Force on Tariffs and Fiscal Incentives has been set up to develop a blueprint to implement a new tariff and incentive regime.

Proposed VAT legislation may push rate from 5% to 10%, as being proposed by the FIRS.

New businesses are also to notify and register with the FIRS within 15 days of commencing business.


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3 Interest Rate Expected increase in liquidity arising from expansionary nature of the budget and continued guarantee of interbank lending may help keep interbank rates low.

Special interventions by government and CBN through credit schemes to specific sectors would improve liquidity and moderate lending rate.

Interest rates will experience mixed effects:

Establishment of the Asset Mgt. Company (AMCON) expected to take toxic assets off banks’ balance sheets will boost liquidity and help moderate interest rates.

However, high operating cost due to infrastructural dearth may continue to hamper credit flow and keep lending rate high .

Rising liquidity may worsen risk to inflation, leading to higher interest rate in the medium term.

Higher domestic debt financing could increase interest rate and lead to crowding-out of the private sector.


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4 Security Amnesty programme focus of the budget.

Budget seeks to boost investment in the region with a proposed expenditure of N90.91b, up from N77.12b in 2009.

Though expenditure on police formations is expected to decline from N195.4b to N191.43.

Reduced incidence of robbery and kidnapping.

Improved security will sustain higher crude oil output.

Improved security that will boost foreign direct investment (FDI).


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5 Exchange Rate Benchmark exchange rate of N150/$ seems conservative in the face of gradual recovery in the global oil demand.

However, sovereign debt crisis in Europe, which continues to curb oil demand, may push oil prices towards (or below) the benchmark.

Volatile nature of oil prices (which feeds into the exchange rate) will make short term opportunities unpredictable.

Weaker oil prices fuelling dwindling reserves could lead to marginal depreciation of the naira.

6 Inflation Expansionary nature of the budget would exert inflationary pressure.

Planned deregulation of the petroleum sector could worsen the situation.

Higher operating cost likely to feed through market prices and reduce competitiveness of small firms.

Depressed stock market as real return on investments turn negative.

Push interest rates up, given the sensitivity of interest rates to inflation (especially when monetary authorities try to stem inflation).


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7 SME Credit schemes established:

- N200b for SMEs

-N200b Commercial Agricultural Credit Scheme (CACS)

Long tenored

Expansion and capacity building.

Augment working capital, medium term expansion of SMEs.

Take position to access these funds to boost operational capacity.

Relationship with Access Bank will serve as an advantage as Access Bank enjoys an industry-wide reputation for competencies in project and structured finance, as well as risk management.

8 Institutions Constitutional and electoral reforms are expected to further stabilize the polity, if successfully implemented.

Contribute to improving critical areas such as land use, intellectual property rights, transparency and strengthening of institutions.

Q3 MACROECONOMIC FORECAST

‘’Forecast is a riddle wrapped in a mystery inside an enigma’’ – Winston Churchill

‘’The best way to forecast is to create it’’

– Michael Gelb

Official Exchange Rate (N/US$) BDC Exchange Rate(N/US$) Interbank Exchange Rate(N/US$)

Month

Best Case

Scenario

Most Likely

Scenario

Worst Case

Scenario

Best Case

Scenario

Most Likely

Scenario

Worst Case

Scenario

Best Case

Scenario

Most Likely

Scenario

Worst Case

Scenario

July 148.89 149.11 149.22 152.63 153.35 154.07 150.59 150.95 151.32

August 149.28 149.34 149.44 152.86 153.58 154.30 150.82 151.18 151.55

Sept 149.93 150.00 150.09 153.51 154.23 155.00 151.47 151.84 152.20

Inter-bank 30-day (%) Inter-bank 90-day (%) Savings Rate (%) Time Deposit Rate (%)

Month

Best Case Scenario

Most Likely Scenario

Worst Case Scenario

Best Case

Scenario

Most Likely

Scenario

Worst Case

Scenario

Best Case

Scenario

Most Likely

Scenario

Worst Case

Scenario

Best Case

Scenario

Most Likely

Scenario

Worst Case

Scenario

July 8 8.09 8.21 7.79 7.97 8.19 2.77 2.83 2.87 8.55 8.62 8.68

August 7.6 7.7 7.81 7.86 8.05 8.27 2.59 2.65 2.69 8.37 8.44 8.50

Sept 5.36 5.46 5.57 7.99 8.17 8.39 2.23 2.29 2.33 8.01 8.08 8.14

Maximum Lending Rate (%) Inflation Rate (%) Crude Oil Price (US$ per barrel)

MonthBest Case Scenario


Worst Case Scenario

Best Case Scenario

Most Likely

ScenarioWorst Case

ScenarioBest Case Scenario


Worst Case Scenario

July 18.47 18.65 18.73 11.03 12.78 15.85 76.72 74.20 70.90

August 18.28 18.47 18.55 11.97 13.35 15.70 74.92 72.41 69.10

Sept 17.93 18.11 18.18 12.00 13.85 15.77 72.44 71.83 66.21

Q3 MACROECONOMIC FORECAST

Disclaimer: These forecasts are not those of Access Bank but are entirely those of the author

CONCLUDING REMARKSRaising expenditure in 2010 over and above that of 2009 (to boost infrastructural development), albeit at huge deficit, would catalyze the economy;

Energy crisis is one of the greatest challenges facing businesses in this country. The budget should get it right to reduce production costs, inter alia;

Issue of multiplicity of taxes and levies should be given top priority.

Overall, the budget would improve the business environment and propel strong economic growth.

However: The budget is as good as its effective implementation. Action, not words, would

be needed to deliver the budget; The business environment is a function of both endogenous and exogenous

factors: ‘’unks unks’’ We can take control of our destiny and DELIVER YES WE CAN!

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Thank You

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Nigerian Budget 2010

Education

Transcript of Nigerian Budget 2010