Moody’s: Nigeria’s 2018 Capital Budget Unrealisable

WINDOW STORY

• FG underreporting Nigeria’s debt level, analysts warn

By Obinna Chima

As the federal government prepares to commence the implementation of its 2018 budget, Moody’s Investors Services Limited, one of the leading global rating agencies, has stated that the capital expenditure portion of the fiscal plan is unrealisable.

Moody’s Senior Analytical Advisor for Africa and the institution’s leading analyst for the region, Aurélien Mali, said this in a chat with THISDAY and pointed out that at most, only about 50 per cent of the capital expenditure could be implemented.

Nigeria’s 2018 Appropriation Act of N9.12 trillion was signed into law about three weeks ago. It provides N2.01 trillion for debt service, N3.51 trillion for recurrent expenditure and N2.87 trillion for capital expenditure, up from N2.36 trillion in 2017.

The capital spending accounted for 31.5 per cent of total federal government expenditure in 2018.

According to Mali, the perennial delays in passing the country’s budget for three years in a row was a demonstration of the institutional weakness in the country.

He said, “Budget is very important for allocation of resources and infrastructure development in the economy. So, delays to such an extent, three years in a row, is very unfortunate.

“To be perfectly clear, it was a large budget, but everybody knows that even though in nominal terms the capital expenditure increased, it is going to be under-realised and around 50 per cent mostly.

“So, the numbers are big, but the reality is that the budget objective is going to be lower than expected in terms of revenue. So, that mechanism is not efficient enough to drive development in Nigeria.”

According to him, for the budget to be used as a tool for stimulating economic growth, implementation of capital expenditure has to be at about 90 per cent.

Commenting on a recent Brookings Institution report that revealed that Nigeria had overtaken India as the country with the highest number of extremely poor persons in the world, Mali said alleviating poverty in Nigeria would be very difficult as long as the country’s Gross Domestic Product (GDP) remains below its demographic trend.

He said, “As long as Nigeria continues to grow below six per cent, the poverty level is not going to change, and the standard of living is not going to improve.

“So, you will continue to have income inequality that will continue to increase and overall it is going to be difficult to improve GDP per capita. There is still fragility in Nigeria’s economic recovery.

“While in Nigeria it seems the situation has stabilised, the reliance on hydrocarbon in the country would still pose challenges over the medium term if some reforms are not implemented.

“The revenue generation capacity will still be a weakness because the non-oil revenue remains weak in Nigeria.”

Meanwhile, analysts at FSDH Merchant Bank Limited have argued that considering the foreign exchange differential in the system, the Debt Management Office (DMO) has been under-reporting the country’s debt level.

Providing insights into a report titled, ‘Public Debt Vulnerable to Exchange Rate Movements,’ released by his firm at the weekend, the

Head of Research at FSDH Merchant Bank, Ayodele Akinwunmi, maintained that while the DMO uses N305 to a dollar to calculate the country’s debt level, the widely accepted rate in the foreign exchange market is N360 to a dollar.

Akinwunmi explained, “We are aware that the last Eurobond that the federal government borrowed, they did not convert the dollars to naira at N305 to a dollar. It was converted to naira at about N340 to a dollar.

“So, for example, if you have $1 billion that you converted at about N305 to a dollar, you will be reporting that you have N305 billion debt. But if you had converted it at N340 to a dollar, it means you have N340 billion debt.

“But we all know that the ruling exchange rate we have in the market today is in the region of N360 to a dollar. So, if you convert it at N360 to a dollar, it means you are under-reporting the debt by about N55 billion.

“So, when we looked at the total external debts that we have in dollars and we used N360 to a dollar, it means that the debt should have increased by about N1.2 trillion. So, rather than reporting total debt of N22 trillion, it should have been over N23 trillion.”

He added, “The International Monetary Fund and World Bank have been saying we should harmonise our exchange rate. So, if we are going to harmonise our exchange rate, there is no way we are going to go back to N305 to a dollar. Banks are not converting their assets at N305 to a dollar.”

The FSDH report anticipated that interest rates and yields in the global financial market would increase further as the normalisation of monetary policy in advanced countries continues. This development was expected to have two major implications.

According to the report, firstly, countries or corporates that plan to raise money from the international debt market may pay higher interest rates because of rising yields.

Secondly, countries in emerging markets may adjust the yields on their fixed income securities to sustain the interests of investors, both local and foreign, in the instruments.

The United States Federal Reserve increased interest rate by 25 basis points to 1.75 per cent to two per cent at its June 2018 meeting.