The details are yet
to be filled in, but Presidency documents on the outlines of the
federal government’s budget for next year suggest that the output
growth number is the most realistic of the estimates on which the
budget is based. At 7%, the assumption for GDP growth is
uncontroversial. The economy has grown at this pace for like three
years now, it’s almost become the trend growth rate. Moreover, against
the general performance of most other economies, it is an impressive
rate. The only problem is that output growth in the country no longer
has a relationship with any other sector of the economy. Imagine that
only six years has passed since the government designed its flagship
poverty reduction strategy – the National Economic Empowerment and
Development Strategy (NEEDS) – where it described an annual growth rate
of 7% – 8% as a “poverty reducing growth rate”.
Anecdotal evidence
suggests that in the last four years, the incidence of poverty has
worsened, despite our having held growth at close to the NEEDS target
for like three years. Why is this so? Because the annual investment
rate in the country (a little over 16%) is still way below the minimum
“of about 30 percent of GDP”, required to bring about the needed
change? Or because of the continued absence of linkages between GDP
growth and fiscal revenues? Whatever the answer to this question, the
latter possibility in particular forces us to confront existing worries
about what exactly official bean counters count when they do their
output numbers.
Unfortunately, the
lack of faith over domestic official statistics does not end there. The
fundamentals of the proposed appropriations for 2011 repeat a number of
them. Take the main source of official revenue for instance. The new
appropriations assume an oil output target of 2.3mbd, and an oil price
benchmark of US$65 per barrel. Within the current dynamics of the oil
industry, this is understandable: oil prices on the international
markets are pushing hard against the US$100 per barrel mark; and
domestic oil production (excluding condensates) is currently above the
2.2mbd mark. However, if we have learnt anything at all from our almost
forty years of dependence on oil sales as the major component of the
revenue side of our fiscal operations, it is that the market is too
volatile to usefully anchor anything but near-term projections on.
Until recently for
instance, a supply shock was the most likely explanation for movements
in international oil prices. And because OPEC controlled a major part
of global reserves and production capacity, the cartel’s price fixing
did matter. All that has changed however. Suddenly, there’s China.
Today, oil prices are driven more by demand from emerging economies
than by the old supply considerations. Increased demand has meant
higher prices, the new price levels have attracted marginal oil fields;
and OPEC’s ability to affect prices by tinkering with production has
diminished considerably. Then there is the weather. How much of changed
weather conditions is the result of global warming? What are the
implications of a warmer climate on the demand for heating, and hence
for oil? All told, the oil price model has too many exogenous variables
to be useful for serious planning.
Responding to this
reality, in 2004, the Obasanjo administration set about trying to
constrain spending by moving revenue from crude oil sales onto the
budget in accordance with a reference price. Tied to a cap on the
non-oil deficit, that administration’s fiscal policy was able to rack
up savings in what was christened the excess crude account. When three
years later, the Umaru Yar’Adua administration enshrined the oil
price-based fiscal rule into the Fiscal Responsibility Act, there was a
sense of government trying to immure itself against the volatility of
oil prices.
So much has changed
since then, though. Government has cleaned out the excess crude
account. The budget deficit as a share of domestic output is running
riot. The rise in domestic spending that has fuelled the deficit is not
creating a sustainable basis for public expenditure (too much of the
spending is on salaries and overheads).
Add in possible adverse shocks to the economy’s outlook from the
general elections scheduled for next year, and it made sense to have
wished for a budget based on more conservative assumptions, especially
one that sought to consolidate government’s fiscal position.
