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2019 budget: Debt service casts doubt on financing infrastructure

Economic experts at Lagos Chamber of Commerce and Industry (LCCI) have expressed concern over the ability of the 2019 budget to finance infrastructure investment. In…

Economic experts at Lagos Chamber of Commerce and Industry (LCCI) have expressed concern over the ability of the 2019 budget to finance infrastructure investment.

In a business and economic review for 2018 and outlook for 2019, the experts led by the LCCI Director General, Muda Yusuf, raised doubt over N8.8 trillion budget, insisting that debt service to revenue ratio of 31 per cent; and debt service to capital expenditure ratio of 75 per cent in the budget proposal are on the high side with implication on the country’s ability to deliver infrastructure investments.

The Debt Management Office (DMO) had put the nation’s total debt stock (federal, FCT and states) at N22.38 trillion, about $73.21 billion as at June 30, 2018.

“We are concerned about the fast-growing public debt profile and the country’s fiscal sustainability in the medium term,” they said.

They noted that with the limited progress in the ongoing effort to diversify government revenue sources, the performance of the oil and gas sector would remain a critical factor that would shape the outlook for the economy in 2019. The Federal Government has pegged this year’s budget on $60 per barrel for 2.3 million barrels per day.

According to estimates by Capital Economics analysts, every $10-per-barrel fall in oil prices will cause a 3-5% decline of GDP in most of the Gulf economies, and a slowdown of 1.5-2% of GDP in Russia and Nigeria on an annualised basis.

“The outlook will therefore depend to a large extent on developments in the oil and gas sector and the political will to undertake far-reaching reforms, beginning with the oil and gas sector,” it showed.

After 18 consecutive months of decline, inflation rate began to rise in August 2018 with headline inflation of 11.2 per cent  in October 2018 compared to 15.13% in January 2018 and 18.7% in January 2017. Following the diminished high base effect in August 2018, the country is likely to see headline inflation trending up in the early part of 2019,” they noted.

Policy rate normalization in the United States of America, which led to the US FED hike in policy rate triggered capital flow reversals. The contagion effect spread across emerging economies, including Nigeria, with foreign investment outflows leading to pressures in the forex market. Consequently, in a bid to support the value of the Naira, the CBN sustained its intervention in the forex market.

The economists noted that the sharp fall in oil prices, if sustained could lead to new pressures on the naira exchange rate as well as  worries about the sustainability of current frequency of interventions by the Central Bank of Nigeria (CBN) to stabilise the market.

“The improvement in liquidity and relative stability in the forex market witnessed by businesses in 2018 may be threatened if oil price declines continues. This will have profound impact on the prices of imported goods and services leading to a rise in the level of inflation. The fiscal operations of government would be adversely affected.  This may further escalate the deficit in the budget,” they also noted

The experts urged the Federal Government to, as a matter of urgency, remove the discriminatory VAT imposed on locally sourced LPG, while imported LPG does not attract VAT, which offered weak incentive regime; to facilitate the penetration and use of LPG in the country; passage of the Petroleum Industry Bill (PIB); adding that as the downstream sector as currently constituted is unstructured and largely uncompetitive and needs the country to align its laws to the new global reality and need for regulation covering renewable energy.

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