Budget Delay: Impact on Private Sector

The Federal Government’s budget is the lifeline of any economy. Government fiscal dynamics remains a major gauge of business confidence. It is likened to the mother ship from which all the small boats sail. Government spending on contractors, import bills, wages and allowances triggers other multiplier effects across the broad spectrum which translates into increased activities across the sectors. This cascaded right through the entire value chain down to the small businesses that get contracts for supplies and even to the food hawker who has to serve the needs of the construction workers on site.

This scenario resonates even amongst stronger economies. We recollect how the fiscal cliff threatened to shut down the American economy last year because Congress and the Obama administration were warring over the extension of the credit lines for budgetary funding. The management of the crisis eventually resulted in a downgrade of America’s credit ratings by S&P for the first time in over 70 years.

If government fiscal framework represents such a major lifeline in the affairs of the economy, it now behoves on the managers of the nation’s treasury to ensure the prompt release and implementation of the government’s budget. Adapting a well known legal truism, we can infer that “budget delayed is budget denied.” This becomes more pertinent when one considers that unspent government budgetary allocations are returned to the national treasury.

Nigeria’s Budget Performance and Implementation Review (1999-Date)
Since the return of Nigeria to democracy in 1999, the country has barely implemented any of its budgets fully within any fiscal year. Apology for inability to implement previous year budgets has become a regular feature of almost all presidential budget speech to the joint houses of the national assembly since 2000. Unfortunately, as a result of the weaknesses of the traditional line item budgeting approach being used, new projects are easily inserted in each year’s budget while uncompleted projects in the previous year become abandoned. The government estimated that there are over 6,000 of such uncompleted and/or abandoned projects existing across the country as at December 2012.  

The budget outlines government’s current fiscal policies which in turn shape the socio economic outlook of the country within the fiscal year upon which investment decision are made. The sustained failure of government to implement the budget in this respect over the years may have resulted in increasing weaker effect of fiscal policies in Nigeria.

Budgets are used by the electorates to measure campaign promises made by politicians. In this respect, under the current democratic dispensation, it would be hard to conclude that any regime has fully lived up to such promises having failed to fully implement the budget each year, especially the capital expenditure portion of the annual appropriation act.

Private Sector –The Worst Hit
The private sector is always in anticipation of the Federal Government budget. The budget determines what will be the likely Government expenditures; what will be the likely interest rates and what will be the likely exchange rates. Budget outlines government’s current fiscal policies. These policies in turn shape the socio-economic outlook for the year. With this, investment options and directions are made. When these expectations are delayed, it creates fiscal uncertainties. The effective and timely execution of quarterly and annual work plans is certainly more difficult if funds are not released.

Private sector players doing business with government agencies and institutions still find it a challenging exercise because of late payment for jobs done, non-payment for jobs done  in some cases and disregard for contractual agreements. This is added to the problem of dwindling sales, weak consumer demand, high cost of fund, dumping of substandard products at ridiculous prices in the market and unethical practices in the importation process. It is important to address these concerns if the desired synergy between the Public and Private Sector is to flourish.

Over the years, budget delays and poor implementation by the executive arm of government at the local, state, and federal levels have sabotaged key public infrastructure. This sad development has unfortunately led to a steady increase in the cost of doing business in Nigeria. Foreign investors are being scared away. Several multi-national companies either have relocated to neighbouring countries or are contemplating doing so. Nigeria has painfully missed several opportunities of being a preferred country of destination for international investors.

Details of the survey finding:
Impact of delay budget approval and implementation on the private sectors
From trade and professional associations’ perspective, delay budget approval and poor implementation paralysed business activities in the private sectors. Many companies operate skeletally because of uncertainty associated with delay in budget approval. It is pretty difficult to predict unannounced budget in terms of import duties, tariffs, sectoral allocation and policy on importation of certain raw materials.

In the same vein, respondents interviewed in the private sectors said that they usually encounter low patronage, decline turnover, low profitability, inability to have access to adequate fund/loan, ineffective planning and sometimes incur losses.

About 40% of the respondents pointed out that their businesses don’t flourish even after the budget has been approved in the third or fourth quarters of the year. To them, approval of budget is a mere pronouncement as the bottom-line lies on prompt and proper implementation.

A number of players in the agricultural sector interviewed lamented that the Federal Government does not pay serious attention to agricultural sector by releasing the full allocation to the sector, and even when the allocation is partially released the real practitioners do not get it.

It was noted that the agricultural practitioners were mandated to form an association to enable them benefit from the allocation and have easy access to fund/loan from the financial institutions. In spite of this, they do not get anything as the fund/loan meant for the sector is being diverted for political use or it gets to wrong hands that use the fund/loan for personal engagements.

Impact of delay budget approval and poor implementation on profitability and market share
A cross section of the companies interviewed expressed with deep regret that delay budget approval and poor implementation almost erode their profit and market share because of low patronage and high cost of operations, especially in acquiring raw materials.  

It was mentioned that they are just struggling to operate and break even with the hope that business will improve after budget approval and proper implementation.

Coping with delay in Federal Government budget approval and implementation
Findings from the survey pointed out that most companies put in place various measures and strategies to cope with the delay budget approval and poor implementation. Some of the strategies are as follows:

  • Effective planning based on past antecedent
  • Optimum utilisation of available resources
  • Waste control
  • Cut down on cost of operations
  • Aggressive marketing and promotional campaigns
  • Fall back on personal savings to finance the company
  • Relying on parent companies abroad
  • Tactically delay implementation of company budget until Federal Government approves the national budget

Exchange rate takes a priority across key sectors of the economy based on the interviews with representative companies. Inflation was also given high consideration as it affects disposable income.  Other indicators mentioned were fiscal deficit, sectoral allocation and GDP growth.

From the trade/professional associations angle, monetary/fiscal policies, sectoral allocations, exchange rate, fiscal deficit, international crude oil benchmark price and production volume were considered to be the key aspects of the Federal Government budget that private sectors care more about.  

Key factors responsible for delay in Federal Government budget approval and implementation in Nigeria
Delay budget approval and implementation in Nigeria depends on a number of factors that cannot be exhaustive. Interactions with the industry leaders and players espoused the following points:

  • Bureaucracy in the public sector and government
  • Political differences
  • Corruption
  • Self and group interests
  • Over dependant on crude oil
  • Tribalism/cultural influences
  • Interference from non-government functionaries
  • Late preparation
  • Failure to learn from past mistakes.
myfinancialintelligence.com