Nigeria’s 2016 federal budget totals approximately $31bn out of which an estimated $10bn will be borrowed within the country and in the international financial market. Crude oil revenues are benchmarked at $38/barrel and the budget represents a 40 per cent increase year-on-year from 2015.
Over at least the last decade, 70 per cent to 90 per cent of Nigeria’s federal budget had been spent on servicing recurrent expenditure obligations, especially the salaries of public sector workers and government overheads. By comparison, the 2016 budget allocates approximately $10bn for capital investments out of which a little over $2bn is earmarked for the Ministry of Power, Works and Housing and slightly less than a billion dollars for the transportation ministry.
Critics have identified four critical issues around the proposed budget. One, the ability of the Federal Government of Nigeria to raise $10bn in loans; two, the crowding out of the private sector in the country’s capital and credit markets; three, a cost of borrowing from global financial and credit markets that is one of the highest in the world and expected to increase in 2016, as the US Federal Reserve Bank hikes its Federal Funds rate; and four, the risks of lending to an economy that accrues 90 per cent of its hard currency from crude oil, in a relatively weak global economy with a crude oil supply overhang.
Infrastructure spending is a globally tested and successful strategy for job creation, though a majority of jobs created by such an investment are lost upon completion of a project. Nigeria does not have an institutional environment that is attractive to massive foreign direct investment or lots of private public partnerships. On the other hand, even though there is no consensus on the official rate, it is clear that economic growth is low, and more importantly, that the high rate of unemployment of young adults is a definitely causative factor to the Boko Haram situation, the ongoing agitations for an independence referendum in the South-East zone and a sense of dis-function and alienation. In essence, Nigeria has no good option for job creation, than the successful implementation of fiscal stimulus.
For Nigeria, the key success factors for a successful stimulus injection, include the identification of shovel-ready projects, adequate financial resources and capabilities such as the ability to negotiate fair contract prices with well-specified deliverables based on clear timelines, proficient monitoring of contract/project implementation, closure of loopholes through which a massive amount of money can be illegally expropriated, and a willingness to crackdown on corruption in a massive way.
Potential projects are abundant, given the country’s infrastructure deficit, but aside from a few current projects, such as the reconstruction of the major Lagos-Ibadan Expressway, it is unclear how many will be shovel-ready in 2016. In addition, it is unclear if thorough an economic impact analysis is available to determine the sustainability of jobs creation from any particular infrastructure project. Likewise, it is unclear if government bureaucrats have the knowledge and capacity to negotiate tough but fairly priced contract terms.
The problem of project financing is compounded by the need to import almost all intermediate inputs for constructing roads, bridges, houses, railroads and other critical public goods infrastructure. This is a function of a long-term failure of a country that has abundant deposits of important commodities and industrial minerals such as iron ore, bitumen, crude oil, and natural gas to invest in the capability to create value added intermediate products. As such, basic commodities like iron rods, industrial chemicals, lubricants, gasoline and even nails will have to be imported.
Recognising this massive challenge, the use of use naira-denominated ATM cards overseas has been suspended: In the recent oil boom years, a Nigerian could spend up to $50,000 on an overseas trip using their ATM card. The import of several goods has been prohibited and the naira has been devalued. A Treasury Single Account policy that mandates government ministries and agencies to deposit revenues into an account domiciled in the country’s Central bank is operational.
Whether the measures to conserve foreign reserves, expected near term revenues from crude oil sales and financing from foreign borrowings will be enough to fully implement the capital budget is very doubtful. Clearly, the country would be in a significantly better position if it had the capacity to manufacture intermediate inputs. The will to negotiate fair contract as well as the capability to effectively supervise contractors on infrastructure projects is also in doubt.
Budgets are not perfect instruments, but the proficient implementation of a well-crafted reflationary federal budget will create thousands of urgently needed jobs in the near term. To underpin the near term job impact of fiscal stimulus, there needs to be heavy investment into an educational system that is aligned with the creation of knowledge, skills and competencies that are required to translate the country’s areas of comparative advantage into medium and long term sources of competitiveness as well as a diligent effort to transform the country’s business environment into one that is more attractive and competitive for foreign direct investment. Otherwise, as roads are built and contractors move off site, there will be insufficient leverage to sustain job creation.
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