A Play-It-Safe Budget: Nigeria's Budget for 2005, Announced Early in Order to Speed Up Implementation, Has Chosen to Err on the Safe Side-Despite the High Crude Prices. Neil Ford Analyses the Figures

Article excerpt

Economies heavily dependent upon oil exports to generate government revenues face a common problem in deciding their spending plans. Revenues tend to fluctuate widely from year to year according to changes in crude prices, so the governments of major oil powers must predict the direction of crude prices over the coming year to determine how much they will be able to spend.

With oil prices remaining stubbornly around $50 a barrel, the Nigerian government therefore faced an interesting dilemma in drawing up next year's budget.

The government of President Olusegun Obasanjo has spent the past five years trying to reform a stagnant economy and modernise the country's ageing infrastructure with relatively few resources, whilst at the same time struggling with the massive foreign debt that had been built up by previous administrations.

It might therefore be expected that the government would seize upon the buoyancy of oil prices to base its spending plans for fiscal year 2005 on a barrel price of $30-40 in order to boost capital spending and perhaps even reduce the national debt.

Few analysts would be bold enough to predict average oil prices of $50 a barrel during 2005 but it would not seem unreasonable to envisage prices drifting between $30 and $40 for some time to come.

However, when the Obasanjo government published its budgetary plans for 2005 in October this year, it based its calculations upon a $27 barrel average, up just $2 from the $25 used to calculate last year's budget, and $6 from the $21 average that was used as the baseline in two years ago.


The federal government expects its outgoings next year to total N1.6 trillion. This includes N544bn for capital projects, up from just N350bn in 2004, while health and education were allocated 5.5% and 8.3% of national expenditure respectively.

Total revenues are expected to amount to N3.6 trillion, although much of this will then be redistributed to state governments. The extent of both Nigeria's dependence upon oil revenues and the lack of development in other areas of the economy are highlighted by the fact that crude oil sales should generate N1.6 trillion, while just N503bn is expected to be raised from non-oil taxation. The rest of the revenue will come from oil and gas related activities.


Despite oil production of around 2.7m barrels a day (b/d), the highest figure in Nigeria's history, the government still expects a deficit of N314bn for the year, although it admits that income not included in the budgetary plans is likely to act as a counterbalance. According to the government, oil revenues over and above expectations should cover at least half of the deficit, while privatisation income and recovered overseas monies should make up the difference.

While the federal government's conservative oil price expectation should indeed allow oil income to cover some or the entire shortfall, the other two expected income streams seem less reliable.

Privatisation revenues rarely arrive when expected because most Nigerian privatisation programmes have taken a great deal longer than scheduled, while the struggle to return money illegally taken out of the country by previous regimes cannot be guaranteed to succeed within the next fiscal year. If oil prices fall markedly, it is possible that the government may have to resort to borrowing to cover the shortfall.

In the past, the National Assembly has debated the budget for so long that part of the relevant financial year had passed before it could be implemented. This time, the PDP's national chairman, Audu Ogbeh, told the National Assembly that the budget had been presented "two months ahead of schedule. We are hoping that all being well, you will have this budget ready for early next year, so that the programmes and policies of this administration can continue to be implemented. …