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Building on a Shaky Foundation




Dear Speculators,

The value of Naira has changed, the price of crude oil has appreciated significantly from January last year but nothing really has changed in the way Nigerian government carelessly plans and budget for the year ahead. 

A budget is too important to be built on a shaky foundation. The 2017 budget is far too important considering the current economic recession in Nigeria. Keynes strategy of an expansive fiscal policy during economic slowdowns seems to be the country's favoured approach to pulling the economy out of recession. It's a goldilocks strategy considering it pushes Nigeria further into debt at a time when the cost of borrowing in the country is too high but the benefit of increased spending in the country is too important to ignore.

Budget estimates for 2017 will see Nigeria spending beyond N7.4 trillion, a 21 percent increase to last year record spending which was still unable to prevent the country from entering a recession. Crude oil price benchmark is $44.50 but today's crude oil price is only $49, leaving very little safety room for the country in a situation where new information about an oil glut causes an oil price shock which pushes crude oil price below $45. Remember crude oil revenue accounts for over 70 percent of federal government revenue, so any price shock that causes oil price to drop to $44 or below will force Nigeria to accrue more debt to fund its record budget.

Another discomfort is why the country is always over ambitious when estimating its proposed daily crude oil production as 2.2 million barrels per day when it only averaged daily production of 1.9 million bpd in the past year. Wishful estimates won't get us far. It is better to underestimate and end up with savings than to overestimate and end up with debt. 

Finally, we wrote a piece earlier this year about the potential confusion Central Bank can create by allowing multiple exchange rates in a country which is now materializing. Nigeria is proposing to apply an exchange rate figure of 305 N/$ which is almost a 20 percent discount of the rate CBN is selling dollar to Nigerian banks. Whether the budget will be used to subsidize the dollar further or the wealth of Nigeria will be thrown out the window using accounting tricks is yet to be seen. The exchange rate should be more reflective of the NAFEX price and not the inter-bank rate since Nigeria does not in anyway appear to be a bank.

Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

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