Nigerian President Muhammadu Buhari presented plans to lawmakers to boost the nation’s spending by 20 percent next year in a bid to revive an economy set for its first full-year contraction in more than two decades.
Buhari asked lawmakers to allow the government to spend 7.3 trillion naira ($23 billion) in 2017, compared with this year’s budget of 6.1 trillion naira. The proposal is based on a projected price of $42.50 per barrel of oil, the West African economy’s biggest revenue earner, and targets a deficit of 2.36 trillion naira or 2.18 percent of gross domestic product.
The 2017 budget will be of “recovery and growth,” Buhari told lawmakers Wednesday in the capital, Abuja. It’s intended to “pull the economy out of recession as quickly as possible.”
The lawmakers will have to approve the proposals before they can be implemented.
Lower prices of crude, coupled with declining output after militants blew up pipelines in the Niger River delta, contributed to the oil industry contracting by 22 percent in the third quarter, according to data from the National Bureau of Statistics. That, and the delayed implementation of the 2016 budget and shortages of power and foreign currency, contributed to the economy contracting in the first nine months of 2016. GDP will probably shrink by 1.7 percent for the year, according to the International Monetary Fund.
“We continue to face the most challenging economic situation in the history of our nation,” Buhari said. “Nearly every home and nearly every business in Nigeria is affected one way or the other.”
The government plans to spend one third of the budget on capital projects including building roads, rail, and improving power supply in order to enhance the business environment, boost agriculture and factory output, according to Buhari. The power, works and housing ministry was allocated the biggest share of 529 billion naira followed by 262 billion naira for transport.
“Spending more on infrastructure to boost manufacturing is good, but that will be determined by how well they implement the projects,” Pabina Yinkere, Lagos-based head of research at Vetiva Capital Management Ltd., said by phone. Increasing manufacturing output “will however mainly depend on government genuinely implementing an appropriate foreign-currency policy so as to attract investments.”
Although the Central Bank of Nigeria removed a currency peg in place for more than a year in June, and caused the naira to lose about 40 percent its value against the U.S dollar, it continued to bar the importers of 41 items it deemed non-essential from using the official foreign- currency market. That has helped to sustain a parallel market where the exchange rate is about 450 naira against the dollar compared to 305 naira that’s used for the budget.
“The exchange rate issue is serious and matters,” Yinkere said. “Whereas next year’s budget looks expansionary in nominal terms, it’s actually contractionary in real terms given the exchange rate last year.”
Buhari plans to borrow 2.32 trillion naira to plug next year’s budget deficit, 46 percent of which will be foreign debt, and will spend 1.66 trillion naira on debt servicing.
“The debt service is excruciating,” said Bismarck Rewane, chief executive officer of the Lagos-based Financial Derivatives Co. “Therefore something has to be done about the interest-rate environment.”
Nigeria’s central bank last month left its benchmark interest rate at a record high of 14 percent as inflation reached 18.3 percent in October. Budget and National Planning Minister Udo Udoma told lawmakers on Tuesday that the government cut its 2017 economic growth forecast by half a percentage point to 2.5 percent because of the weak economy.
Aware that successful implementation of the budget will require improved and sustained oil output, Buhari has pledged to engage communities in the Niger delta to seek an end to militant attacks targeting the oil and gas industry.
“The budget relies on a variety of overly optimistic assumptions,” John Ashbourne, an economist at London-based Capital Economics, said in an e-mailed note. “Given the scale of the violence in the oil-producing Niger Delta, we doubt that the government will succeed in boosting output to its target of 2.2 million barrels per day.”