WITH more borrowings by the federal government, the troubled Nigerian entrepreneurs will soon realize that the federal government may not yield to their request for tax break and suspension of a 50 percent increase in VAT rate till year-end among other demands since it is, like other African countries, equally eyeing palliatives from abroad as well as debt waivers and forgiveness.
By Goddy Ikeh
Budget preparations, implementation and approvals in Nigerian have always been problematic and often associated with cases of padding, delays in passage and most importantly low level of implementation. But what makes the 2020 budget different from several others before it is that it is being executed at a time that the Coronavirus has hit the nation’s economy so hard and it is threatening to plunge the economy into brutal recession soon. With the oil price dipping below $20 per barrel, which is less than the new benchmark of $25 for a barrel, the budget is based.
In a space of one month, the government had to review the reference price of crude oil for the 2020 budget from $57 per barrel approved in December 2019 to $30 and subsequently to $25 per barrel. Although there are signs of gradual price recovery to about $35 per barrel, but its sustainability is still doubtful in the face of low demand for crude oil in the international oil market due largely to the damaging effects of Covid-19 pandemic on the global economy.
Following the decline in receipts from crude oil sales, the Federal Executive Council, FEC, on Wednesday, May 13, revised the 2020 Budget from N10.594 trillion signed into law by President Muhammadu Buhari to N10.523 trillion. The FEC also approved the amendment of the Medium Term Expenditure Framework, MTEF, for 2020-2022.
According to the minister of finance and national planning, Zainab Ahmed, the federal government has undertaken cuts to revenue-related expenditures for the Nigerian National Petroleum Corporation, NNPC, for several projects included in the 2020 Appropriation Act passed by the National Assembly in December, 2019.
In addition, the finance minister stated that the FEC also approved crude oil production at 1.94 million barrels per day and an exchange rate of N360 to $1. On financing the budget deficit of over N5 trillion, Ahmed said: The deficit to this budget is N5.365 trillion and this will be financed by both domestic as well as foreign borrowing. The foreign borrowing we are doing for 2020 are all concessionary loans from the International
Monetary Fund, IMF, which have already been approved and have crystallized, from the World Bank, Islamic Development as well as the Afrexim Bank. President Buhari has also requested for approval from the National Assembly for a $5.513 billion loan to finance the deficit in the 2020 budget and support critical projects from the states and federal government.
According to Buhari, the loan will be raised from external and internal sources, with $3.4bn expected from the IMF, $1.5 from the World Bank, $500m from the African Development Bank, and $113m from the Islamic Development Bank.
Another measure being initiated to manage the economy during this pandemic is prioritization of made in Nigeria products. President Buhari has already set up an economic stimulus committee, chaired by the vice president to develop 12 months economic stimulus plan. According to Ahmed, the president has given approval that spending as much as possible should be made in Nigeria on goods and products that are produced in locally so that it saves foreign exchange and helps to grow the economy.
The Central Bank of Nigeria, CBN, has also come up with some interventions that will impact positively on the economy during the pandemic. For instance, the Governor of the CBN on Thursday, May 28, announced the reduction of its monetary policy rate to 12.5 percent as part of efforts to combat the economic effects of the coronavirus pandemic. The previous rate was 13.50 percent.
However, the apex bank retained its Cash Reserve Ratio (CRR) at 27.5 percent and Liquidity Ratio (LR) at 30 Percent. The MPR, which is the interest rate at which CBN lends to the commercial banks and also the benchmark against which other lending rates in the economy are pegged, will make lending cheaper and helps to further stimulate the economy.
Already, the Nigerian entrepreneurs, who are members of the organized private sector are making several demands from the federal government to enable them remain in business and save millions of jobs that are being threatened due to the effects of the lockdown on their businesses. Some of the demands include the provision of adequate stimulus and intervention to preserve their investments and that more than 54 percent of business owners want banks to reduce interest rate and give moratorium on loans, while 29 percent want a reduction in tax liabilities and 17 percent want waivers on import duties and demurrages.
The Lagos Chamber of Commerce and Industry, LCCI, which made the presentation on behalf of the businesses, also made a case for “a year tax break for healthcare and pharmaceutical companies, airlines, manufacturers, agro-processors, SMEs and hospitality players as well as the temporary suspension of a 50 percent increase in VAT rate till year-end, while “P.A.Y.E tax should be suspended for the next six months.
According to the chamber, these measures will help boost the purchasing power and aggregate demand and stimulate the economy. The completion of critical infrastructure projects nationwide was also on their demand, improvement in the power sector as well as the diversification of the economy.
Therefore there is need for collaboration between the government and the private sector in order to come up with effective and workable interventions to save jobs and manage the traumatized post Covid-19 Nigerian economy.
Unfortunately, these demands are being made on the federal government with a lean purse, which is seeking, like many other African countries, for loans and palliatives from the West and some multilateral institutions as well as debt waivers and forgiveness in order to handle post Covid-19 distortions of its economy.
However, some economics and analysts believe that the nation can still ride through the storm despite that challenges posed by the Covid-19 pandemic on the nation’s economy, For instance, Bismarck Rewane applauded the reduction of the MPR from 13.5 to 12.5 by the CBN. He believes that the move will boost liquidity in the system, but added that it may compound the already inflationary trand in the economy.
Speaking on Channels Television news on Thursday, May 28, Rewane said that Nigerians should be ready to contend with high food prices, rising inflation and high unemployment,
He also said that the economy would experience negative growth and the economy might plunge into recession after the second the quarter of this year. He was, however, optimistic that the economy would rebound in 2021 if the necessary infrastructure and policies were put in place to stimulate and save the economy from total collapse.
In his submission on the looming recession, an economist, Adori Ochai, says that it is the duty of the government to create an enabling environment that will encourage Nigerians to create wealth. “My problem is not on what Nigerians should expect, but on the impact of the budget-slashing by the government. Reducing the budget means reducing the impact it will have on Nigerians.
“I believe that the best way to overcome the recession is to borrow to finance the economy because as it is today, the economy cannot generate enough capital to fund the day-to-day running of the government and execute development projects,” he said.
On federal government’s borrowing plans, Ochai noted that borrowing to fund capital expenditures like infrastructural development is a good idea. He, however, frowns at spending the money on recurrent expenditures like payment of salaries and funding the lifestyle of the politicians.
Ochai is in favour of pumping more money into the economy and that such a move will “create opportunities for people thereby increasing their income and purchasing power”.
On the role of the CBN, in retooling the economy, Ochai says that the apex bank has a big role to play in this situation as they have been doing. “I expect them to do more now. First, they have to work with the banks to reduce the cost of borrowing. And the recent reduction of the MPR by the CBN shows that they understand the situation on the ground because this will enable the banks to make funds available for the private sector and manufacturers to increase production. Increased production will lead to the creation of more job opportunities and more wealth for the people,” he said.
Although the state of the economy now looks gloomy, especially with the looming recession, some economists believe that it may rebound in 2021 if the necessary infrastructure and right policies are put in place by the federal government.
– June 1, 2020 @ 09:00 GMT /