The Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu has given reasons why the 2016 budget proposal of the Federal Republic of Nigeria will be difficult to implement.
Chukwu was speaking in an interview with Primetime Reporters in his office in Lagos recently said that a budget predicated on $38 per barrel when the oil price was between $28 and $30 per barrel would be difficult to implement.
He contended that this was so because if government was unable to achieve its price target which was very unlikely as it stood presently, then the revenue projection of about $820 billion which was what the Federal Government had budgeted as oil revenue in the 2016 budget proposal would also be difficult to realize more so with the fact that Nigeria now had a very precarious situation in the Niger-Delta evidenced in the blown up of oil pipelines in the recent past which he said would in turn affect volume of production.
He disclosed that while Nigeria is currently producing 1.8 million barrels per day, the 2016 budget proposal was predicated on 2.2 million barrels per day.
According to him,” So, it also means that it may be difficult for the government to realize its volume target. When you have a negative volume variance and negative price variance, then certainly you are not going to meet your revenue target and if government is unable to meet that revenue target, it could affect a lot of other factors in the budget.
“There is a budget provision of N1.45 trillion for tax revenue that is going to come from customs and excise duty and other corporate taxes. Unfortunately, in as much as those taxes are not derived directly from oil proceeds since they are creations of foreign exchange; indirectly affect the ability of Nigerians to import goods.
“So, if you are having low foreign exchange earnings, you are also going to have low import transactions which will affect customs and excise duty collection and as long as you have low trade activities, you are going to have a reduced economic activity which will affect every other corporate tax. So, even the budget of N1.45 trillion that has been provided as a tripping revenue from taxes may be difficult to achieve.
He continued, “There is another element there which may look very optimistic, there is a N1.51 trillion which the government described as independent sources and that is going to come from savings from more efficient implementation of the Fiscal Responsibility Act, I think that is quite optimistic, to realize N1.5 trillion from such revenue earning may be attainable. So, if you look at the total revenue projection of N3.86 trillion, it might be herculean for government to realize. Of course, if you are unable to realize your revenue projections, it becomes very difficult for to implement your expenditure projections unless you have to borrow additionally.
“If you look at the borrowing of N1.84 trillion that the government has projected which was the basis for derived N1.47 trillion of debt service provisions, if you increase that further, you are going to constrain, because you don’t have a schedule of additional debt service. A debt service obligation of N1.47 trillion is already 38% of your projected revenue of N3.86 trillion, if you strip that projected revenue off, the adjustment may just come as a result of low oil price, low volume production, inability to realize independent revenue sources and lower tax revenue, you may end up with a debt service obligation of 68% your projected revenue. That is not sustainable.
“So, for me, the main thing we should be looking at when we want to assess our capacity to borrow is our capacity to meet up with our debt repayment obligation and not necessarily because of the size of the balanced sheet or because of what they call the size of GDP because our GDP structure is such that government revenue is derived from the GDP signs”.
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