Budget 2010 and Its Impact on Business Environment in Nigeria
By
Dr. Emmanuel Moore Abolo
(Chief Economist & Head, Group Market Risk Management)
Access Bank Plc.
Paper Presented at India Professional Forum on 19th June, 2010 at India House,
India High Commission, Lagos.
19 June, 2010
Our Philosophy
VISION
To transform our bank
into a world-class financial
services provider.
MISSION
To go beyond the ordinary,
to deliver the perceived impossible,
in the Quest for Excellence
BRAND DRIVER
The Quest For Excellence
2
Our Core Values
3
OUTLINE
POLICY THRUST OF THE 2010 BUDGET
KEY ASSUMPTIONS & TARGETS
HOW REALISTIC ARE THE ASSUMPTIONS?
OVERVIEW OF THE BUDGET
FINANCING THE DEFICIT
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT
Q3 MACROECONOMIC FORECASTS
CONCLUDING REMARKS
4
POLICY THRUST OF THE 2010 BUDGET
Strengthening
of remittances/
collections
from public
corporations,
parastatals
Provision of
physical
infrastructurepower and
transportation
Focus on highly
prioritized
projects which
can be brought
to quick
completion
Policy thrust
of the
budget
Addressing the
Niger Delta
problem
Investment in
human capital
development &
security
5
Completion of
ongoing
projects from
2009
Public-PrivatePartnership
(PPP) to
complement
Government’s
interventions in
key areas of the
economy
Provision of
enabling
environment for
non-oil sector
growth
KEY ASSUMPTIONS & TARGETS
Table: Highlights of the 2010 Budget (in comparison with 2007, 2008 & 2009)
Budget Highlights
Crude Oil Benchmark Price
Crude Oil Production Level(mbpd)
GDP Growth Rate Target (%)
Inflation Rate (%)
Exchange Rate (N/US$)
Joint Venture Cash Calls ($bn)
Total Expenditure (N'tr)
Total Revenue (N'tr)
Budget Deficit (N'tr)
Deficit to GDP (%)
2007
$40pb
2
7%
9%
126
4.5
2.3
1.8
0.5
2.9%
2008
$59pb
2.45
11%
8.5%
117
4.97
2.45
2.02
0.56
2.5%
2009
$45pb
2.29
8.9%
8.2%
125
5.0
3.10
1.77
1.1
4.0%
2010 Remarks
$67
Upward Trend
2.35
Upward Trend
5.47% Downward Trend
11.2
Upward Trend
150
Depreciating
7.0
Upward trend
4.61
Increasing
3.086
Increasing
1.52
Upward Trend
4.6%
Increasing
GDP (N'tr)
20.84
24.89
27.67
29.36
Increasing
41
20.04
27.74
40.2
Upward Trend
Capital Spending (% of total expenditure)
Source: Budget Office of the Federation
HOW REALISTIC ARE THE ASSUMPTIONS?
Assumptions
Comments
Benchmark oil price: US$67/barrel


Proving unrealistic given the recent downward trend of oil
price
President Goodluck Jonathan has sent a proposal to the
National Assembly to revise the US$67 per barrel oil
benchmark on which the budget is based
Bonny Light (Crude Oil) Prices (Jan ’08 - March ‘10)
160.00
140.00
$/barrel
120.00
100.00
80.00
60.00
40.00
2010 Oil Price Benchmark (US$67pb)
20.00
Source: EIA
7
Mar 10
Feb 10
Jan 10
Dec 09
Nov 09
Oct 09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
July-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
0.00
HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)?
Remarks
Assumptions
Oil Production: 2.35mb/d

Oil output was constrained for much of 2008 and up to Q2
2009, before the Amnesty Programme. Production declined to
about 1.68mbpd in June 09. Output has stayed above
1.82mbpd since Q3’09, bolstered by the Niger Delta peace
deal.

Realistic, if Amnesty Programme succeeds.
Oil Production in Nigeria (Monthly Data) : Jan ‘08 – Feb ‘10
2.40
2.30
2.20
million bpd
2.10
2010 Oil Production Target (2.35mb/d)
2.00
1.90
1.80
1.70
1.60
1.50
1.40
Feb 10
Jan 10
Dec 09
Nov 09
Oct 09
Sep 09
Aug 09
Jul 09
Jun 09
May 09
Apr 09
Mar 09
Feb 09
Jan 09
Dec 08
Nov 08
Oct 08
Sep 08
Aug 08
Jul 08
Jun 08
May 08
Apr 08
Mar 08
Feb 08
Jan 08
1.30
Source: OPEC
8
HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)?
Assumptions
Comments

Target GDP growth rate: 5.47%


30
Q1 2010 GDP growth rate was 6.68% (driven by the non-oil sector)
and projected at 7.53% for the year.
The current reforms in key sectors of the economy will brighten
outlook.
Hence, target is realistic and achievable.
GDP Growth Rate
25
2010 Growth Rate Target (5.47%)
Average Rate
20
15
Real GDP
10
Oil GDP
5
Non-Oil GDP
0
2005
-5
-10
9
2006
2007
2008
2009
HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)?
Assumptions
Comments
Exchange rate (Official market): N150/US$

The N150/$1 exchange rate is in line with the CBN stance to
defend the Naira.

Depleting external reserves (currently $38.7bn) may not be
sufficient to maintain exchange rate stability in the near term.
Exchange Rate
Official
BDC
Parallel
165.00
N/$
160.00
155.00
150.00
10
Mar 25'10
Mar 18'10
Mar 05'10
Feb 25'10
Feb 18'10
Feb 11'10
Jan 22'10
Feb 04'10
Jan 15'10
Dec 31
Jan 08' 10
Dec 22
Dec 15
Dec 08
Dec 01
Nov 20
Nov 13
Nov 06
Oct 30
Oct 23
Oct 16
Oct 09
Oct 02
Sep 24
Sep 15
Sep 08
Sep 01
Aug 25
Aug 18
Aug 11
Aug 04
145.00
2010 Exchange Rate Target (N150/$)
HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)?
Assumptions
Target inflation rate: 11.2%
Comments

May 2010 inflation rate was 11%, down from 12.5% recorded in
April, 2010.

Realistic and achievable if the planned deregulation of petroleum
products does not come on stream.

The expansionary nature of 2010 budget may have negative
implications on the 11.2% target.
16.00
Inflation Rate (Y -Y)
14.00
12.00
10.00
8.00
2010 Inflation Target (11.2%)
6.00
4.00
2.00
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
0.00
2007
11
2008
2009
2010
OVERVIEW OF THE BUDGET
Expenditure Allocation
Aggregate expenditure is N4.608 trillion
(48.6% higher than the N3.10trn in
2009).
Expansionary budget meant to stimulate
economy after the global credit crunch
weakened economic growth. Also aimed
at bridging the infrastructure gap.
Will push Nigeria beyond the 3% deficit
target set under the 2007 fiscal
responsibility act to 4.6% of GDP.
Aggregate expenditure comprises:
 Capital expenditure – N1.853trn
 Recurrent Expenditure – N2.077trn
 Statutory Transfers - N180.28bn
 Debt Service - N497.07bn
12
Break Down of Expenditure
Recurrent
Expenditure
N2.08tn
(45%)
Capital
Expenditure
N1.85tn
(40%)
Debt
Servicing
N497.07bn
(11%)
Statutory
Transfers
N180.28bn
(4%)
OVERVIEW OF THE BUDGET (cont’d.)
Capital Expenditure Allocation – N1.853trn
About a third of the planned budget is nonrecurrent spending targeting areas: critical
infrastructure, the power sector and
development of the Niger Delta, infrastructural
development (works, housing, roads) & agric.
development.
Following MDAs control significant portion of
capital expenditure allocation:
 Works, Housing & Urban Dev-18%
 Power -13%
 Transport -12%
 Agric. & Water Resources- 10%
 FCT Administration- 10%
 Niger Delta-5%
13
Capital Expenditure Allocation
Agric. &
Water Res.
10%
FCT Admin.
10%
Other
MDAs
32%
Power
13%
Niger-Delta
5%
Works,
Housing &
Urban Dev.
18%
Transport
12%
OVERVIEW OF THE BUDGET (cont’d.)
Direction of Capital Spending
The underlying philosophy of the 2010 budget points the direction of capital spending
this fiscal year:
1.Power and Energy
2. Food Security
3. Wealth Creation – diversified
production esp. in agric
4. Transportation Sector
5. Land Reforms
6. Security
7. Education Sector
i.
ii.
14
Become one of the
top 20 economies in
the world by 2020
Seven Point Agenda
Underlying
philosophy of
2010 budget
Transform the socio-economic fortune of the Nigerian people through the full
implementation of the Seven-Point Agenda; and
Achieve long term vision of becoming one of the 20 top economies in the world
by 2020 (Vision 20: 2020).
OVERVIEW OF THE BUDGET (cont’d.)
Direction of Capital Spending (cont’d.)
Focused mainly on agriculture, improvement in power supply, infrastructure,
manufacturing, Niger Delta region and increasing other revenue sources.
Details of budget estimates further show that the following MDAs have the highest
sectoral allocation:
S/N
MDAs
2009
N’Billion
2010
N’Billion
% of Total
Expenditure
% Change
2009 vs 2010
1
2
3
4
5
6
7
8
9
Defence
Ministry of Works
Education
Federal Capital Territory
Police Formation
Power
Agric & Water Resources
Transport
Health
67
129.3
75.4
66.6
195.4
99.5
166.9
35.2
39.6
217.34
211.23
198.08
198.08
191.43
189.78
184.4
127.55
112.72
5.33%
5.18%
4.86%
4.86%
4.69%
4.65%
4.52%
3.13%
2.76%
224.4
63.4
162.7
197.4
-2
90.7
10.5
262.4
184.7
10
Niger Delta Ministry
77.12
90.91
2.23%
17.9
11
MDG
58.6
45.7
1.12%
-22
Strong focus on infrastructural development and construction
15
FINANCING THE DEFICIT
Fiscal balance of the budget is a deficit of
N1.52 trillion (or 4.66% of GDP).
Fiscal Deficit as % of GDP
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The deficit as a % of GDP is above IMF’s
acceptable limit of 3% and outside the WAMU
limit of 4%.
G20
-1.5
-2
-2.1
%
 2010 fiscal deficit projection for
countries of -6.9% (2009 was -7.9%)
 France
(-8.6%)
 India
(-10%)
 Japan
(-10.2%)
 Saudi Arabia (10%)
-1
-2.5
-3
-2.8
16
-2.9
-4
-4.0
-4.3
--4.6
-5
-5.5
Rationale for the deficit is to address serious
infrastructural gap issues, make key
investments in priority sectors & keep the
economy from contracting.
-2.1
-6
FINANCING THE DEFICIT (CONT'D.)
Deficit to be financed through:
Domestic
borrowing
(N897.3bln)
Bond issuance
(Federal Govt.
Bonds)
17
Sale of
government
property:
N9.56bln
Privatization
proceeds:
N107.2bln
FG’s
consolidated
share of the
proposed ECA
of 2010 (US$
2.1 Billion):
N309.13bln
International
bonds issuance
($500mln)
N75.0bln
Unspent
balances from
the 2009
budget
N330bln
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT
19
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT
Most Problematic Factors for Doing Business in Nigeria
Government Instability/Coups
Poor Public Health
Tax Regulations
Restrictive Labour Regulations
Tax Rates
Inadequate Educated Workforce
Poor Work Ethics in Labour Force
Foreign Currency Regulation
Inflation
Crime and Theft
Inefficient Governement Bureaucracy
Political Instability
Corruption
Inadequate Supply of Infrastructure
Access to Financing
0.7
2
2.2
2.2
2.6
3
3.7
4.4
4.7
4.8
5.8
8.6
12.4
21.2
21.5
0
5
10
15
Percent of Responses
Source: WEF Global Competitiveness Index, 2009-2010.
20
20
25
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
The 2010 budget will impact some of the key problematic factors in the business
environment:
• Inflation
•Institutions
21
• SME
Infrastructure
Security
Taxation
Interest
Rate
•
Exchange
Rate
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
S/N
Factor/Issue
Details
Implications
1
Infrastructure
 A major thrust of the 2010 budget
is the provision of physical
infrastructure (power and transport)
which accounts for 25% of capital
expenditure (N463 Billion).
Power sector reform, with emphasis on marketbased pricing will stimulate private sector
investment .
Government’s
efforts
towards
improving infrastructure supported
by central bank’s N500 billion power
sector fund.
$300
million
(N45
billion)
agreement with the World Bank for
the financing of gas supply for
power generation.
Inauguration of National
Regulatory Commission.
Improved power supply would lead to revival of
sectors such as textile and rubber/ tyre industries,
etc.
If successful, reforms and investments
infrastructure will lower operating cost
manufacturers in the near term.
in
to
We expect alternative funding for projects in the
power and transport sectors.
Orderly development of a competitive power
market , ensures efficient and adequate production
of electricity and promote competition.
 Establishment of Power Consumer Assistance
Fund to subsidize under- priviledged.
22
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
S/N
Variable/Issue
Details
Implications
2
Taxation
 Expected total revenue of N3.086
billion (about 36% increase from
2009) in the face of falling oil prices
could drive focus on non-oil
revenue.
Proposed VAT legislation may push rate from 5%
to 10%, as being proposed by the FIRS.
Drive for higher non-oil revenue is
likely to raise expected revenue
from the Customs Service and the
Federal Inland Revenue Service
(FIRS).
Thus, new National Tax policy has
been approved by government to
increase indirect tax (especially
VAT) and reduce direct taxes.
Presidential Task Force on Tariffs
and Fiscal Incentives has been set
up to develop a blueprint to
implement a new tariff and incentive
regime.
23
New businesses are also to notify and register
with the FIRS within 15 days of commencing
business.
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
S/N
Variable/Issue
Details
Implications
3
Interest Rate
 Expected increase in liquidity
arising from expansionary nature of
the
budget
and
continued
guarantee of interbank lending may
help keep interbank rates low.
Interest rates will experience mixed effects:
Special
interventions
by
government and CBN through credit
schemes to specific sectors would
improve liquidity and moderate
lending rate.
Establishment of the Asset Mgt. Company
(AMCON) expected to take toxic assets off banks’
balance sheets will boost liquidity and help
moderate interest rates.
However,
high
operating
cost
due
to
infrastructural dearth may continue to hamper
credit flow and keep lending rate high .
Rising liquidity may worsen risk to inflation,
leading to higher interest rate in the medium term.
Higher domestic debt financing could increase
interest rate and lead to crowding-out of the
private sector.
24
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
S/N
Variable/Issue
Details
4
Security
 Amnesty programme focus
the budget.
Implications
of
Budget
seeks
to
boost
investment in the region with a
proposed expenditure of N90.91b,
up from N77.12b in 2009.
Though expenditure on police
formations is expected to decline
from N195.4b to N191.43.
25
 Reduced incidence of robbery and kidnapping.
 Improved security will sustain higher crude oil
output.
 Improved security that will boost foreign direct
investment (FDI).
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
S/N
Variable/Issue
Details
Implications
5
Exchange Rate
 Benchmark exchange rate of
N150/$ seems conservative in the
face of gradual recovery in the
global oil demand.
 Volatile nature of oil prices (which feeds into the
exchange rate) will make short term opportunities
unpredictable.
However, sovereign debt crisis in
Europe, which continues to curb
oil demand, may push oil prices
towards (or below) the benchmark.
6
Inflation
Weaker oil prices fuelling dwindling reserves
could lead to marginal depreciation of the naira.
 Expansionary nature of the
budget would exert inflationary
pressure.
 Higher operating cost likely to feed through
market prices and reduce competitiveness of small
firms.
Planned deregulation of the
petroleum sector could worsen
the situation.
Depressed stock market as real return on
investments turn negative.
Push interest rates up, given the sensitivity of
interest rates to inflation (especially when
monetary authorities try to stem inflation).
26
IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D)
S/N
Variable/Issue
Details
Implications
7
SME
 Credit schemes established:
 Expansion and capacity building.
- N200b for SMEs
Augment working
expansion of SMEs.
-N200b Commercial Agricultural
Credit Scheme (CACS)
Take position to access these funds to boost
operational capacity.
 Long tenored
Relationship with Access Bank will serve as an
advantage as Access Bank enjoys an industrywide reputation for competencies in project and
structured finance, as well as risk management.
Constitutional and
electoral
reforms are expected to further
stabilize the polity, if successfully
implemented.
 Contribute to improving critical areas such as
land
use,
intellectual
property
rights,
transparency and strengthening of institutions.
8
27
Institutions
capital,
medium
term
Q3 MACROECONOMIC FORECAST
‘’Forecast is a riddle wrapped in a mystery inside an enigma’’
– Winston Churchill
‘’The best way to forecast is to create it’’
– Michael Gelb
Q3 MACROECONOMIC FORECAST
Official Exchange Rate (N/US$)
BDC Exchange Rate(N/US$)
Interbank Exchange Rate(N/US$)
Month
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
July
148.89
149.11
149.22
152.63
153.35
154.07
150.59
150.95
151.32
August
149.28
149.34
149.44
152.86
153.58
154.30
150.82
151.18
151.55
Sept
149.93
150.00
150.09
153.51
154.23
155.00
151.47
151.84
152.20
Inter-bank 30-day (%)
Inter-bank 90-day (%)
Savings Rate (%)
Time Deposit Rate (%)
Month
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
Best
Case
Scenario
Most
Likely
Scenario
Worst
Case
Scenario
July
8
8.09
8.21
7.79
7.97
8.19
2.77
2.83
2.87
8.55
8.62
8.68
August
7.6
7.7
7.81
7.86
8.05
8.27
2.59
2.65
2.69
8.37
8.44
8.50
Sept
5.36
5.46
5.57
7.99
8.17
8.39
2.23
2.29
2.33
8.01
8.08
8.14
Maximum Lending Rate (%)
Inflation Rate (%)
Crude Oil Price (US$ per barrel)
Month
Best Case
Scenario
Most Likely
Scenario
Worst Case
Scenario
Best Case
Scenario
Most
Likely
Scenario
Worst Case
Scenario
Best Case
Scenario
Most Likely
Scenario
Worst Case
Scenario
July
18.47
18.65
18.73
11.03
12.78
15.85
76.72
74.20
70.90
August
18.28
18.47
18.55
11.97
13.35
15.70
74.92
72.41
69.10
Sept
17.93
18.11
18.18
12.00
13.85
15.77
72.44
71.83
66.21
Disclaimer: These forecasts are not those of Access Bank but are entirely those of the author
CONCLUDING REMARKS
Raising expenditure in 2010 over and above that of 2009 (to boost infrastructural
development), albeit at huge deficit, would catalyze the economy;
Energy crisis is one of the greatest challenges facing businesses in this country.
The budget should get it right to reduce production costs, inter alia;
Issue of multiplicity of taxes and levies should be given top priority.
Overall, the budget would improve the business environment and propel strong
economic growth.
However:
 The budget is as good as its effective implementation. Action, not words,
would be needed to deliver the budget;
 The business environment is a function of both endogenous and exogenous
factors: ‘’unks unks’’
 We can take control of our destiny and DELIVER
 YES WE CAN!
31
Thank You