How Do We Fund This Year’s Budget Deficit? By Ifeanyi Uddin
Having previously argued that by holding back the full pass through of lower crude oil prices in the international market to the price of fuel at our different filling stations, the incumbent administration was missing out on a chance to teach a useful lesson to the local consumer on the workings of the price mechanism, I ought to have welcomed government’s decision to reduce the pump price for fuel by N10 on the litre. Not so! I am not quite certain which the main spur for this decision was — the forthcoming general elections looked a sure candidate — but government once again missed another trick.
Why retain a putative subsidy of N2.84 on every litre of petrol in the new price regime? True, other countries (Indonesia, Egypt, Tunisia, India, etc. — it is a lengthening list) have taken advantage of the rapid drop in crude oil prices to lift the burden on their budgets from their different fuel price support programmes. The International Energy Agency (IEA) estimates the total value worldwide of such subsidies in 2013 at US$550bn. Thus, one could argue that we have sufficient examples to proceed by in this regard.
Still, it is hard to ignore how much harm lower oil prices mean for our economy. With non-oil income at less than a third of total revenue, lower oil prices mean that both at the national and sub-national levels, wage bills would be hard to foot this year. I recently read that close to 22 (of the 36 states and federal capital territory) have been unable to meet their public sector wage bills over the last three months. In addition, there are non-wage debts to consider. One estimate, which I was privy to last week, expects the national debt ― and this is only the federal government’s share ― to reach N9.8tn this year, from N7.9tn last year. Understandably, the provision for debt service in the 2015 appropriation bill exceeds the intended outlay on capital items.
Both political parties have been sloganeering hard ahead of the polls. “Change!” “Progress!” These are the new catchphrases. But how much “progress” may we make, how much “change” is possible when we do not have enough change in our budget to maintain current infrastructure levels? At this point, we are not even near being concerned with adding new capacity. We now fret most about keeping the decrepit infrastructure currently available in some useable state. Yet, you cannot halve the provision for capital items in this year’s budget (down to N634bn, inclusive of the SURE-P programme, from N1.6tn in the budget for 2014) and still mouth “Change!” and/or “Progress!”
But all of this is to nitpick, really. For the biggest shortcoming of the budget for this year is the size of the deficit. We are going to spend this year more than we will earn. Blame this on the oil price collapse. Depending on whom you talk to, the funding gap is anything in the region of N1tn to N2tn.
How do we pay for this, without hurting the economy even more? This is the question that the retention of the N2.84 per litre subsidy in the new price regime is either ignorant of, or indifferent to. It is easy to suppose that in designing the new petrol tariff policy makers were exercised by the debt-to-GDP, and deficit-to-GDP ratios.
However flattering these ratios may be, we cannot bank the GDP in one year. We would have to meet the resulting debt and financing obligations from monies earned. Truth, though, is that we have become so completely irresponsible (fiscally) that we could actually, in the course of the year, lean on the central bank to print all of this money. Would it, then, matter that we would be in violation of the fiscal responsibility act? Yes!
However, the act was not some exercise in political grandstanding. When the presses are primed to meet budget shortfalls, the planned effect is usually to drive domestic prices through the roof, and impoverish, thereby, significant sections of the local population. Of course, the naira would suffer collateral damage, too.
Better then to find less disruptive means of financing the deficit. With the yield on naira-denominated debt instruments (both sovereign and corporate) rising, external funding would currently be prohibitive. Indeed, I am not certain that portfolio investors having only recently fled the economy would come back through the external debt window.
We are left, therefore, with the option of funding the deficit through local means. I have heard suggested that the central bank could return domestic commercial banks’ funds currently sterilised through the cash reserve requirement on the condition that banks promptly return this into treasury bills and related government debt instruments.
Domestic money rates would, of course, go up as a result, hurting borrowers in the private sector. But that would only confirm the perennial worry over how large public sector borrowing requirements crowd out bank lending to the private sector.
At this point, we need all the legitimate monies we can find, including the N2.84 on every litre petrol price subsidy that government appears to want to glad-hand as part of its pre-election sweeteners.