Last week, we dealt with the format of the budget and suggested ways in which the budget could be presented by our financial managers to our lawmakers and to the public to inform them of how the budget is being executed and how, during the course of the year, actual revenues and expenditures compare with the budget and the same period in the previous year. Today, we will deal in some detail with the revenue side of the FY 2016 budget (July 1, 2015 – June 30, 2016).
Budgets, as I explained last week, are based on assumptions—-assumptions about what will happen in the future. The FY 2016 budget is no exception. On the revenue side, one of the key assumptions is how the economy will perform. Will it expand, stay the same, or shrink? Gross Domestic Product (GDP) is one of the universal measures of economic performance. Below is a small table showing how the Liberian economy has grown over the last 2 years and what assumptions are made in the FY 2016 budget about how our economy will grow in 2016.
Year Projection Results
2014 5.9% 0.7%
2015 6.8% 0.9%
As you can see from the table, we missed the mark by a long shot in the last two years. We projected GDP growth in 2014 of 5.9%; we achieved actual growth of less than 1%. Again, in 2015 we projected growth of 6.8%; we achieved actual growth of less than 1%. So, why in the world do we expect a experience what I call the “hockey stick” effect in 2016, i.e. to attain growth of 5.7%?
The reason for the poor growth in 2014 and 2015 no doubt had a great deal to do with Ebola. Our financial managers could not have anticipated that. But we now have the benefit of 20:20 hindsight. So, why should we repeat the mistake of projecting pie-in-the-sky growth for 2016?
For those of you who have played field hockey, as I did in my elementary school years in an English prep school, the shape of a hockey stick is such that it bends in almost a U shape. Unless something truly miraculous happens this year, why should we believe that our economy will shift from growth of less than 1% to almost 6% in the course of just one year, like a hockey stick? Somebody must be smoking some good kpaan to believe that.
On its website, the Ministry of Finance & Development Planning still has the draft budget for FY 2016, which shows total revenue of $604 million. But the director of the Legislative Budget Office tells me that the figure is now $622 million. Where the extra $18 million is expected to come from I do not know. But what I do know is that the draft budget anticipates tax revenues to increase by almost 20%. If that is based on the hockey stick, then God help us.
The budget framework paper anticipates a sharp drop in non-tax revenue, that is, things like royalties from sales of iron ore and other commodities. The reason for that is not hard to fathom. The price of two of our biggest export commodities—-iron ore and rubber—has fallen out of bed. As revealed in the accompanying table, the price of iron ore has fallen by 45% since 2013; rubber, by almost 65%. Arcelor Mittal has suspended its $2 billion Phase II project, by which it had intended to triple iron production from 5 million tons per year to 15 million tons per year.
2013 2015 USD %
Iron ore $/mt 135.4 74.0 -61.4 -45
Rubber cts/lb 126.8 73.5 -47.3 -64
The plan was to build a concentrator plant up at the mine site in Nimba, new laydown area and automated shiploading facilities in Buchanan. This project was expected to employ thousands of people, expatriate and local, all of whom would have been earning taxable income. Other people, providing goods and/or services to the project, would also have been earning taxable income from Arcelor Mittal, the multiplier effect. But all of that is now on hold until the price of iron ore picks up.
Arcelor Mittal is not the only company affected. All of the other three majors—China Union, Putu Mining and Western Cluster are similarly affected. If their iron shipments are down, then the revenue GOL gets from royalties on those shipments will also be down. The same story goes for rubber and gold (gold price is now severely depressed).
Next week we will take an excursion through the GOL expenditure budget. That promises to be a very interesting ride.
The writer is a certified public accountant and a businessman. He can be reached at