Article: The 2017 Budget Through The Lens Of Capital Markets
Posted: 30/May/2017

It is that time of the year again for the chattering classes and financial anoraks to get into prolonged squabbles over the budget, its presentation, the number crunching elements and implementation. At over N7tn, we are told the budget is the highest ever presented before the National Assembly. In the past week, the airwaves have been filled with pundits and experts inside and outside the corridors of power telling us who gains and who loses. Several column inches have been devoted to general and specific issues in the papers around the budget as well. The online coverage is no less engrossing.

The Ministry for Budget and National Planning, for instance, has published details of the budget running to one thousand and five hundred pages long, in addition to those of  a series of other online experts. Despite the pervasive hoo-ha, I am not entirely convinced that the majority of citizens in this country feel connected to, or engaged with the budget talk at all. What, after all, is the point of budgets amidst daily power failure, dilapidated road network, crumbling school buildings, hospitals with little or no equipment, and of course, rising unemployment? The question makes many people wonder: What is the budget aimed at if not for the continued financing of wages and salaries of government employees and politicians?
 
​First and foremost, let us put the big numbers in a bit of a perspective. Seven trillion naira seems a huge sum indeed, but it is not that much considering the extent of the country’s needs. Nigeria has a borrowing gap of at least N14tn just to fulfil basic needs. We consume what we do not produce and produce what we do not consume, so the total sum of the budget is still a drop in the ocean regardless.

The main reason why people are indifferent to the budget talk is perhaps the fact that there is a déjà vu feel to it all. Budgets come and budgets go with little or no apparent changes to the people’s daily life. I know a lot of people who have wondered in private conversations why we should not simply have just two items: power and road infrastructure for the entire national budget.  And declare an economic emergency to bring these to fruition if need be. Any political party that succeeds at those two alone will be re-elected in perpetuity in this country.

Well, putting aside these initial observations, I could not help but ruminate on how the budget relates to Nigeria’s capital market on this column, this week, despite my own misgivings about adding to the media frenzy surrounding it. As the regular reader of this column would know, it has a bias for financial and economic law; it is the prism through which public policy is dissected here.

In this wise, the major player in the budget talk is the capital market. Given that there is such a huge funding gap in it, conventional wisdom tells us that the void should be filled by either borrowing (opposed to by the majority), or taxation (a major disincentive to investment).

Companies and private individuals, not government, form the bulk of the wealth creators in any economy. To start or strengthen an existing business, an entrepreneur needs capital, and where does that come from? It comes from either personal savings, inheritance, or gratuitous donations from friends and family. Failing that, the option for most people is to raise debt through bank loans, which is paid back over a period of time. For over 70 per cent of businesses in this country, these are the two main sources of financing open to them. That situation, of itself, is unsustainable for the largest companies; the power houses of industrial production in this country. Consequently, the large companies, whose turnover runs into billions and trillions annually, go to capital markets to raise funds by selling their shares in return for dividends. People who put money into capital markets are not just shareholders; a large proportion are institutional investors like pension funds and insurance houses. So, what entices them to invest? The short answer is, of course, a healthy return on their investment. What then is their main focus on the budget talk?

Investors look out for growth and the potential for growth as a way of maximising profits. They take a long hard look at the macro-economic environment in which they have invested or are about to invest. They want to see a commitment to lower taxation, deregulation, and lower (or manageable) inflation. In the 1980s, this view of the market became prominently known as “supply side” economics. It is unabashed in its advocacy of business interest. Lay-offs, downsizing, and the like are by-products of this view of economic activity and it is all in the name of efficiency and productivity.

That view of the economy has now become the orthodox, that is, mainstream in international capital markets. When one hears of market operators in this country pledging to “partner” with the government in achieving growth, it sends a shudder down the spine. After all, the Nigerian economy everyone agrees, needs “reflating”, that is to say money to pump into the economy to create jobs, boost demand and education; a heavy dose of the old Keynesian economics. It is diametrically opposed to the view of capital and the markets. Politicians therefore need to strike a careful balance between social and capital imperatives. Policymakers cannot move too far in one direction without jeopardising the other.

Nigeria is not alone in facing down this dilemma though. Political leaders around the world are having to wrestle with similar problems all the times. The election of Donald Trump in the USA was largely premised on the perception of his “pro-business” manifesto, which his administration is trying to pursue despite the difficulties it is having in other areas.

So too is the election of President Emmanuel Macron of France, last week, who has vowed to reform the French economy along the lines of supply-side economics. In this country, however, it is not entirely clear what manifesto the country voted for other than the “change” mantra of the All Progressives Congress of the current administration. The ballot in this country is often offered on a platter to anyone strong enough to get rid of an incumbent loathed by the public.

A party’s economic agenda ought to be clear and unambiguous prior to voting. Blank cheques to politicians must cease. Vote first, ask questions later mentality must end on our shores for the long term benefit of all of us.
PUNCH.