The document summarizes the key points of Nigeria's 2010 budget and its potential impact on the business environment. It outlines the budget's assumptions around oil prices, GDP growth, exchange rates and inflation. A large portion of the budget will fund infrastructure projects in power, transport and agriculture. This is expected to improve infrastructure and lower costs, though high inflation remains a risk. The budget also aims to increase non-oil revenues and boost security spending in the Niger Delta to support business and investment.

1. Paper Presented at India Professional Forum on 19 th June, 2010 at India House, India High Commission, Lagos. 19 June, 2010 By Dr. Emmanuel Moore Abolo (Chief Economist & Head, Group Market Risk Management) Access Bank Plc. Budget 2010 and Its Impact on Business Environment in Nigeria

2. Our Philosophy To go beyond the ordinary, to deliver the perceived impossible, in the Quest for Excellence To transform our bank into a world-class financial services provider. The Quest For Excellence M I S S I O N V I S I O N BRAND DRIVER

3. Our Core Values

4. OUTLINE POLICY THRUST OF THE 2010 BUDGET KEY ASSUMPTIONS & TARGETS HOW REALISTIC ARE THE ASSUMPTIONS? OVERVIEW OF THE BUDGET FINANCING THE DEFICIT IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT Q3 MACROECONOMIC FORECASTS CONCLUDING REMARKS

5. POLICY THRUST OF THE 2010 BUDGET

6. KEY ASSUMPTIONS & TARGETS Table: Highlights of the 2010 Budget (in comparison with 2007, 2008 & 2009) Source: Budget Office of the Federation Budget Highlights 2007 2008 2009 2010 Remarks Crude Oil Benchmark Price $40pb $59pb $45pb $67 Upward Trend Crude Oil Production Level(mbpd) 2 2.45 2.29 2.35 Upward Trend GDP Growth Rate Target (%) 7% 11% 8.9% 5.47% Downward Trend Inflation Rate (%) 9% 8.5% 8.2% 11.2 Upward Trend Exchange Rate (N/US$) 126 117 125 150 Depreciating Joint Venture Cash Calls ($bn) 4.5 4.97 5.0 7.0 Upward trend Total Expenditure (N'tr) 2.3 2.45 3.10 4.61 Increasing Total Revenue (N'tr) 1.8 2.02 1.77 3.086 Increasing Budget Deficit (N'tr) 0.5 0.56 1.1 1.52 Upward Trend Deficit to GDP (%) 2.9% 2.5% 4.0% 4.6% Increasing GDP (N'tr) 20.84 24.89 27.67 29.36 Increasing Capital Spending (% of total expenditure) 41 20.04 27.74 40.2 Upward Trend

7. HOW REALISTIC ARE THE ASSUMPTIONS? Source: EIA

8. HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)?

9. HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)? 2010 Growth Rate Target (5.47%)

10. HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)? 2010 Exchange Rate Target (N150/$)

11. HOW REALISTIC ARE THE ASSUMPTIONS (cont’d)? 2010 Inflation Target (11.2%)

12. OVERVIEW OF THE BUDGET Aggregate expenditure is N4.608 trillion (48 .6% higher than the N3.10trn in 2009). Expansionary budget meant to stimulate economy after the global credit crunch weakened economic growth. Also aimed at bridging the infrastructure gap. Will push Nigeria beyond the 3% deficit target set under the 2007 fiscal responsibility act to 4.6% of GDP. Aggregate expenditure comprises: Capital expenditure – N1.853trn Recurrent Expenditure – N2.077trn Statutory Transfers - N180.28bn Debt Service - N497.07bn Expenditure Allocation

13. About a third of the planned budget is non-recurrent spending targeting areas: critical infrastructure, the power sector and development of the Niger Delta, infrastructural development (works, housing, roads) & agric. development. Following MDAs control significant portion of capital expenditure allocation: Works, Housing & Urban Dev-18% Power -13% Transport -12% Agric. & Water Resources- 10% FCT Administration- 10% Niger Delta-5% OVERVIEW OF THE BUDGET (cont’d.) Capital Expenditure Allocation – N1.853trn

14. The underlying philosophy of the 2010 budget points the direction of capital spending this fiscal year: Transform the socio-economic fortune of the Nigerian people through the full implementation of the Seven-Point Agenda; and Achieve long term vision of becoming one of the 20 top economies in the world by 2020 (Vision 20: 2020). The budget allocation shows great focus on infrastructural projects and security. OVERVIEW OF THE BUDGET (cont’d.) 1.Power and Energy 2. Food Security 3. Wealth Creation – diversified production esp. in agric 4. Transportation Sector 5. Land Reforms 6. Security 7. Education Sector Direction of Capital Spending

15. Focused mainly on agriculture, improvement in power supply, infrastructure, manufacturing, Niger Delta region and increasing other revenue sources. Details of budget estimates further show that the following MDAs have the highest sectoral allocation: Strong focus on infrastructural development and construction OVERVIEW OF THE BUDGET (cont’d.) Direction of Capital Spending (cont’d.)

16. FINANCING THE DEFICIT Fiscal balance of the budget is a deficit of N1.52 trillion (or 4.66% of GDP). The deficit as a % of GDP is above IMF’s acceptable limit of 3% and outside the WAMU limit of 4%. 2010 fiscal deficit projection for G20 countries of -6.9% (2009 was -7.9%) France (-8.6%) India (-10%) Japan (-10.2%) Saudi Arabia (10%) Rationale for the deficit is to address serious infrastructural gap issues, make key investments in priority sectors & keep the economy from contracting.

17. FINANCING THE DEFICIT (CONT'D.) Deficit to be financed through:

19. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT

20. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT Source: WEF Global Competitiveness Index, 2009-2010.

21. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) The 2010 budget will impact some of the key problematic factors in the business environment:

22. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) S/N Factor/Issue Details Implications 1 Infrastructure A major thrust of the 2010 budget is the provision of physical infrastructure (power and transport) which accounts for 25% of capital expenditure (N463 Billion). Government’s efforts towards improving infrastructure supported by central bank’s N500 billion power sector fund. $300 million (N45 billion) agreement with the World Bank for the financing of gas supply for power generation. Inauguration of National Regulatory Commission. Power sector reform, with emphasis on market-based pricing will stimulate private sector investment . Improved power supply would lead to revival of sectors such as textile and rubber/ tyre industries, etc. If successful, reforms and investments in infrastructure will lower operating cost to manufacturers in the near term. We expect alternative funding for projects in the power and transport sectors. Orderly development of a competitive power market , ensures efficient and adequate production of electricity and promote competition. Establishment of Power Consumer Assistance Fund to subsidize under- priviledged.

23. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) S/N Variable/Issue Details Implications 2 Taxation Expected total revenue of N3.086 billion (about 36% increase from 2009) in the face of falling oil prices could drive focus on non-oil revenue. Drive for higher non-oil revenue is likely to raise expected revenue from the Customs Service and the Federal Inland Revenue Service (FIRS). Thus, new National Tax policy has been approved by government to increase indirect tax (especially VAT) and reduce direct taxes. Presidential Task Force on Tariffs and Fiscal Incentives has been set up to develop a blueprint to implement a new tariff and incentive regime. Proposed VAT legislation may push rate from 5% to 10%, as being proposed by the FIRS. New businesses are also to notify and register with the FIRS within 15 days of commencing business.

24. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) S/N Variable/Issue Details Implications 3 Interest Rate Expected increase in liquidity arising from expansionary nature of the budget and continued guarantee of interbank lending may help keep interbank rates low. Special interventions by government and CBN through credit schemes to specific sectors would improve liquidity and moderate lending rate. Interest rates will experience mixed effects: Establishment of the Asset Mgt. Company (AMCON) expected to take toxic assets off banks’ balance sheets will boost liquidity and help moderate interest rates. However, high operating cost due to infrastructural dearth may continue to hamper credit flow and keep lending rate high . Rising liquidity may worsen risk to inflation, leading to higher interest rate in the medium term. Higher domestic debt financing could increase interest rate and lead to crowding-out of the private sector.

25. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) S/N Variable/Issue Details Implications 4 Security Amnesty programme focus of the budget. Budget seeks to boost investment in the region with a proposed expenditure of N90.91b, up from N77.12b in 2009. Though expenditure on police formations is expected to decline from N195.4b to N191.43. Reduced incidence of robbery and kidnapping. Improved security will sustain higher crude oil output. Improved security that will boost foreign direct investment (FDI).

26. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) S/N Variable/Issue Details Implications 5 Exchange Rate Benchmark exchange rate of N150/$ seems conservative in the face of gradual recovery in the global oil demand. However, sovereign debt crisis in Europe, which continues to curb oil demand, may push oil prices towards (or below) the benchmark. Volatile nature of oil prices (which feeds into the exchange rate) will make short term opportunities unpredictable. Weaker oil prices fuelling dwindling reserves could lead to marginal depreciation of the naira. 6 Inflation Expansionary nature of the budget would exert inflationary pressure. Planned deregulation of the petroleum sector could worsen the situation. Higher operating cost likely to feed through market prices and reduce competitiveness of small firms. Depressed stock market as real return on investments turn negative. Push interest rates up, given the sensitivity of interest rates to inflation (especially when monetary authorities try to stem inflation).

27. IMPACT OF BUDGET ON THE NIGERIAN BUSINESS ENVIRONMENT (CONT'D) S/N Variable/Issue Details Implications 7 SME Credit schemes established: - N200b for SMEs -N200b Commercial Agricultural Credit Scheme (CACS) Long tenored Expansion and capacity building. Augment working capital, medium term expansion of SMEs. Take position to access these funds to boost operational capacity. Relationship with Access Bank will serve as an advantage as Access Bank enjoys an industry-wide reputation for competencies in project and structured finance, as well as risk management. 8 Institutions Constitutional and electoral reforms are expected to further stabilize the polity, if successfully implemented. Contribute to improving critical areas such as land use, intellectual property rights, transparency and strengthening of institutions.

29. ‘’ Forecast is a riddle wrapped in a mystery inside an enigma’’ – Winston Churchill ‘’ The best way to forecast is to create it’’ – Michael Gelb Q3 MACROECONOMIC FORECAST

30. Q3 MACROECONOMIC FORECAST Disclaimer: These forecasts are not those of Access Bank but are entirely those of the author Official Exchange Rate (N/US$) BDC Exchange Rate(N/US$) Interbank Exchange Rate(N/US$) Month Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario July 148.89 149.11 149.22 152.63 153.35 154.07 150.59 150.95 151.32 August 149.28 149.34 149.44 152.86 153.58 154.30 150.82 151.18 151.55 Sept 149.93 150.00 150.09 153.51 154.23 155.00 151.47 151.84 152.20 Inter-bank 30-day (%) Inter-bank 90-day (%) Savings Rate (%) Time Deposit Rate (%) Month Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario July 8 8.09 8.21 7.79 7.97 8.19 2.77 2.83 2.87 8.55 8.62 8.68 August 7.6 7.7 7.81 7.86 8.05 8.27 2.59 2.65 2.69 8.37 8.44 8.50 Sept 5.36 5.46 5.57 7.99 8.17 8.39 2.23 2.29 2.33 8.01 8.08 8.14 Maximum Lending Rate (%) Inflation Rate (%) Crude Oil Price (US$ per barrel) Month Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario Best Case Scenario Most Likely Scenario Worst Case Scenario July 18.47 18.65 18.73 11.03 12.78 15.85 76.72 74.20 70.90 August 18.28 18.47 18.55 11.97 13.35 15.70 74.92 72.41 69.10 Sept 17.93 18.11 18.18 12.00 13.85 15.77 72.44 71.83 66.21

31. CONCLUDING REMARKS Raising expenditure in 2010 over and above that of 2009 (to boost infrastructural development), albeit at huge deficit, would catalyze the economy; Energy crisis is one of the greatest challenges facing businesses in this country. The budget should get it right to reduce production costs, inter alia; Issue of multiplicity of taxes and levies should be given top priority. Overall, the budget would improve the business environment and propel strong economic growth. However: The budget is as good as its effective implementation. Action, not words, would be needed to deliver the budget; The business environment is a function of both endogenous and exogenous factors: ‘’unks unks’’ We can take control of our destiny and DELIVER YES WE CAN!

33. Thank You