By Olatunde Vincent Adeyemi MBA, ACIB.
It is no longer news that the Nation’s 2017 budget which was passed by the National Assembly (NASS) on the 11th of May 2017 has been signed into law by Acting President Yemi Osinbajo on Monday, 12th June, 2017. Since the budget came into force, several scholars and luminaries in the Nigerian economic landscape have blessed us with the benefits of their insights and thoughts on the document which will largely dictate the economic prosperity of our country for the next 12 months (although the budget relates to the fiscal year 2017 ending in December, by provisions of Clause 11 of the Appropriation Bill 2017, it can run for a course of 12 months starting from the date it is assented into law). This article seeks to highlight the impacts the 2017 Budget, as signed into law, may likely have (directly or indirectly) on the Nigerian Banking Industry.
In this regard, a brief summary of the Appropriation Bill 2017 (budget) will be necessary in order to provide context for this article. The total budget size is N7.44tn out of which N2.17tn (representing 30%) has been earmarked for Capital expenditures and the balance of N5.27tn (representing 70%) is for Recurrent expenditures. Of this amount, N2.98tn is for Non-Debt Recurrent expenses, N1.84tn for Debt Servicing, N434bn for Statutory Transfers & N177bn is for Sinking Fund towards maturing bonds. The Federal Government (FG) also expects to make N5.08tn revenue to fund the budget in this fiscal year while the balance will be financed via a mixture of both local and foreign debts.
Budget Highlights & Implications
- This is the highest budget in Nigeria’s history! While it can be argued that this is so due to higher exchange rates, it may also be seen as a reflection of the strong desire of the FG to bring Nigeria out of recession. From several statements credited to those in authority, it is clear that the government’s notion is to “spend our way out of recession”. Although, expansionary moves like this may stimulate consumer demands & hence production, it must be clearly understood that the expected result might not be realized if cost of production continues in the same direction as consumer earnings. Unfortunately, this appears to be the case for now as cost of power, raw materials & other inputs necessary for production remain relatively high. For the banking industry, this means about N7.44tn may be passing through the system to “oil” the engine. However, it is doubtful if this will improve liquidity significantly due to other conflicting monetary policies by the Apex Bank.
- Also, the 2017 budget is the first time our nation will allocate 30% of the budget to Capital Expenditure. This is quite commendable. Reasons for this may include some of those already presented above but more importantly, it is an indication of the realization of the critical infrastructural deficits in the country. It leaves much to be desired that for a country of estimated 180million people, there have been little or no meaningful-new infrastructure since the 1980s! Moreso, Nigeria is still at the level where the political performance of our leaders is evaluated based on the number of infrastructures that can be credited to their tenure. On the whole, it is laudable for the Government to choose to do this now. The sheer size of capital budgets (N2.17tn) is a huge opportunity for the banking industry! It is expected that Ministries, Departments & Agencies (MDAs) of government will begin to roll-out contracts soon. Already, the Honourable Minister of Finance had recently signaled the release of N350bn. Usually in compliance with the Procurement Act & other extant policies, these contracts will involve issuing of Tender Guarantees, Advanced Payments Guarantees (APGs), Performance Bonds e.t.c. Banks can facilitate the infrastructural growth of the country by doing these for deserving customers, while also earning some handsome fees in the process. In addition, since disbursements for such contracts are usually done to contractors in tranches based on milestones attained, a huge opportunity is available to banks here for bridge-financing. However, in doing this, it is expected that banks will be discerning to anticipate all issues that may arise in financing government contracts and take necessary steps in form of loan conditioning & pricing to hedge themselves.
- The 2017 budget is understandably expansionary in nature. Out of the N7.44tn to be spent, the government hopes to fund N5.08tn from both Oil & Non-Oil sources whereas the balance of N2.36tn is to be borrowed from both local & international sources. While the logic for government’s participation in the domestic debt market is well-understood, it is however counter-productive for the government to remain the dominant player in this market. This the government has been doing, going by the spate of Treasury Bills issuances and interest rates as high as 23% effective yield on the 364-day paper! It appears the government is in a stiff competition with private users for scarce funds- thereby crowding them out. Unfortunately, this particular move is at variance with the Central Bank of Nigeria’s initiatives to develop the real economy. This is because rather than do real business with their funds and carry the risks, investors will gladly give same to the government and earn a risk & tax-free income (recently, this may be as high as 18%!). For the banking sector, this act of the FG is starving the system of funds needed to buoy banks’ liquidity. I opine that it is not in the nation’s overall interest to allow this trend to continue for too long. Within the allowable limits of the Debt/GDP & Debt/Revenue ratios, foreign loans may be better as this will be injecting fresh funds into the system, thus improving liquidity.
- The FG also hope to realize about N1.37tn from non-oil sources. This is in line with the government’s resolve to diversify the economy in the face of dwindling oil prices. It also underscores the level of stability & depth surfacing in our systems- particularly, the tax system. The tax net is widening and the authorities are poised to widen it the more going by recent initiatives to recruit about 7,500 Community Tax Liaison Officers via the N-POWER Scheme and the tax amnesty recently declared through the Voluntary Asset and Income Declaration Scheme (VAIDS). By all standards, this is a good move as it will ensure that a few tax payers (put at 14million people by FIRS) don’t continue to carry the burden of about 70million economically active Nigerians. Little wonder Nigeria’s Tax/GDP ratio is one of the lowest in the world at just 6%! Although banks have partnered with tax authorities in the area of collection, the anticipated upsurge in the number of tax payers and remittances, going by these FG’s initiatives, calls for banks to upgrade their Collections infrastructures to be able to support these new level of compliance. All forms of system hitch that may further discourage timely tax-compliance must be eliminated or significantly reduced in line with the government’s goal while compliance to the Tax Collection Guidelines as agreed with the relevant tax authorities must be improved upon. This is to ensure that the banks continue to prove themselves as worthy partners to the Government whilst also reducing operational losses due to fines/penalties from infractions.
- Government intends to spend N350bn on Special Intervention schemes (e.g N-POWER in 2017). This means a lot of unemployed youths will be engaged for agricultural purposes, teaching, tax advocacy e.t.c. This presents a huge opportunity for financial inclusion as some of these people may not have prior active banking relationships. Discerning banks will also be looking at the prospects of designing a fit-for-class range of consumer products (liability, digital & asset) for these new entrants into the labour market. This credit creation will also, in no small way, help to create a multiplier effect around the N350bn to be expended. This way, banks will be playing a critical role in stimulating demands that will contribute to the Nation’s gradual but imminent ascent out of recession.
Clearly, the 2017 Appropriation Budget has been aptly tagged the Budget of Economic Recovery and Growth. It suffices to state that the major thrusts and underlining assumptions of the Bill reveal the firm resolution of the government to achieve this goal. Since the banking industry is the wheel of the economy, it is our collective duty to ensure there are no clogs in the wheel on our way to achieving these lofty goals. However, this we must do in a way that not only preserves the stability of the system but also improves upon same. It is my hope that the thoughts presented above will stimulate discussions and propel relevant stakeholders into actions necessary for the realization of this objective.
Nigerian Banking Industry……. Trust and Honesty!
About The Author: Tunde Adeyemi is a versatile Nigerian banker with over a decade experience in the industry. He is also an Associate of the Chartered Institute of Bankers of Nigeria (CIBN). He wrote in from Lagos, Nigeria.