15 December 2915, Lagos – Following increased pressure on revenue and the expenditure profile, the Federal Government has finally yielded to domestic and international pressures to remove fuel subsidy.
This is coming as crude oil prices hit a seven-year low with global reference crude, West Texas Intermediate and Brent trading yesterday at $34.7 and $36.7 per barrel respectively, effectively disrupting Nigeria’s $38 per barrel benchmark for 2016 budget.
The crash has resulted into about N1.45 trillion shortfall in the value of the projected oil output in the international market based on production target increased in the 2016 plan to 2.2 million barrel per day (mbpd), up from actual 1.9 mbpd in 2015.
On official exchange rate of N198/ $1 upon which the revenue projection was based, the value of the total budgeted oil output is $35.14 billion or N6.95 trillion but with the latest price development, the output would now yield $27.8 billion or N5.5 trillion.
The latest price shock is coming less than a week after the Federal Executive Council, FEC, approved the 2016 Medium Term Expenditure Framework, MTEF, which outlined government’s revenue as well as a deficit budget to be funded largely by the oil income.The 2016 budget is derived from the MTEF which is a three-year fiscal plan.
FG to introduce tougher economic measures
Also, the oil price crash was coming at the backdrop of a warning from ministers in charge of the economic ministries and chief executives of federal parastatals in the economy sector that Nigerians should prepare ahead for what it called more austere conditions in view of the strict economic policies being put in place by the President Muhammadu Buhari administration.
The federal executives, who gave the warnings when they appeared before the joint committees of the National Assembly on Finance to defend the 2016, 2017 and 2018 Medium Term Expenditure Framework and Fiscal Strategy Paper, MTEF & FSP, documents presented to the National Assembly by President Muhammadu Buhari are Ministers for Budget and National Planning, Udoma Udo Udoma; Finance, Mrs Kemi Adeosun and State for Petroleum Resource,Ibe Kachikwu; Governor, Central Bank of Nigeria, Godwin Emefiele and Executive Chairman, Federal Inland Revenue Service, FIRS, Babatunde Fowler.
To make the warning real, they disclosed that Federal Government would move fuel price from N87 to N97 per litre in 2016 while removing fuel subsidy, lamenting that excess of N1 trillion has been paid for fuel subsidy in 2015 alone.
2016 budget deficit to increase
With the latest crude oil price development, 2016 budget deficit would increase to about N2.7 trillion from N2.22 trillion, assuming government is able to meet its target of 2.2 mbpd, otherwise the deficit would be much higher.
Also, the development, according to economy analysts, would put more pressure on the external reserves and the exchange rate while forcing the government to resort to more borrowing, thereby increasing both its deficit-to-GDP ratio and debt-to-GDP ratio.
In the 2016 fiscal plan, deficit/GDP ratio was more than doubled to 2.2 per cent, from actual one per cent as at September 2015.
According to the 2016 fiscal plan, Federal Government would only have a marginally increased contribution from value added tax, VAT, at N67.7 billion in 2016, from N67.5 billion in 2015 while additional inflow of N350 billion is expected to come from misappropriated funds recoveries.
The deficit will necessitate borrowings worth N1.8 trillion of which domestic borrowing is fixed at N1.2 trillion while foreign borrowing is about N600 billion. If the oil price remains gloomy in the coming year borrowings would increase or the government would be forced to effect a further cut on expenditure.
Already, recurrent expenditure is projected to fall from 84 per cent in 2015 to 70 per cent in 2016 while capital expenditure is expected to increase from 16 per cent in 2015 to 30 per cent in 2016.
Harder times ahead, FG alerts Nigerians
The Federal Government had yesterday alerted Nigerians to prepare ahead for the tough economic conditions and policy responses it intends to roll out from next year just as it vowed to strictly monitor expenditure of all Ministries, Department and Agencies, MDAs to avoid wastes.
The Federal Government has also planned to reduce the personnel cost from N1.8 trillion to N100 billion as part of moves to reduce expenditure and save cost.
According to the minister, who appeared at the National Assembly, yesterday, attention would be given to Internally Generated Revenue, IGR, to fund the N6.1 trillion 2016 budget, adding that in 2016, it would remove fuel subsidy and reverse the earlier N10 per litre reduction effected by ex-President Goodluck Jonathan this year.
Speaking at the meeting, Udo Udoma, who noted that it was important that substantial reductions were made on the spending pattern if the expected change must come in, said: “In preparing the MTEF, we seek a dramatic shift from spending on recurrent to spending on capital aspect of the budget. It is going to be tighter for everybody. All non essential expenditure would be cut out. We will reduce the overheads by seven per cent.
“We are beginning a journey of change and change has to start with the clarity of purpose of where we are going.”
On the issue of N500 billion for Social Welfare Programme, Udoma said: “As at the time we were preparing the MTEF, we didn’t have the number and we didn’t want to put in anything that we are not 100 percent sure of. We are still going to relate with relevant agencies on the issue. We are making this arrangement because the NNPC and other stakeholders had advised against subsidy in 2016 although consultations are still ongoing in this regard.”
On sources of funding for the N6.1 trillion 2016 budget, the Budget and National Planning Minister, who disclosed that priority would be given to Internally Generated Revenue ,IGR, said: “We will also look at the accounts of agencies and sweep those surpluses that might not be on essential things that we want to focus on.”
Udoma, however, told the lawmakers that “ultimately we must borrow N1.8 trillion to fund this budget apart from all those adjustments we are trying to make.”