Paper presented at the SOFEE Economic Conference Presidential Hotel, Port-Harcourt 8th May 2012 By Dr.

Alex Otti Group Managing Director/CEO Diamond Bank Plc

Outline

Budget Highlights Projected Impact on Macro economic variables Pillars of 2012 Federal Government Budget Fiscal Policy Direction in 2012 Value added by Financial Services Sector Highlights of 2012 Rivers State Government Budget League of State GDP Top 25% GDP Ranking, Federal and State Budgets Advantages for Rivers State Recommendations for the State Diamond Banks support for 2012 budget Conclusion
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Budget Highlights
2012 2011

Budget benchmark price per barrel

Crude Oil - Price Per barrel

- Daily Production (bpd) Annual Revenue to FGN (Nb) Expenditure Profile (Nb) - Recurrent - Capital - Debt Service - Statutory Transfers Total Expenditure Budget Deficit
Source: Federal Government of Nigeria 2012 Appropriation Bill Debt Management Office 2012 Budget Analysis by PriceWaterhouseCoopers

$72
2.48m 3,748

$70
2.3m 3,343

2,432 1,284 560 372 4,648 900 2,423 1,148 495 418 4,484 1,141

of oil was increased to $72. FG plans to increase production by 65.7 million barrels of oil in 2012. Annual Revenue accruable to the Federal Government is projected to increase by 12.11% in 2012. This is driven mostly by anticipated earnings from Oil. Annual expenditure is projected to grow by 3.6% in 2012. Recurrent expenditure, Capital expenditure, debt service and statutory transfers accounts for 52%, 28%, 12% and 8% respectively. Total share of capital expenditure increased from 25% of budget in 2011 to 28%. Budget deficit of N900b is projected for 2012

Projected Impact on Macroeconomic Variables

2012
GDP Growth rate (%) Inflation rate (%) Unemployment rate (%) US$ Exchange Rate (N) Fiscal deficit (% of GDP) Public Debt Stock (Ntr) Debt/GDP ratio (%) 7.2 9.5 23.9 155 2.77 5.962 18.4

2011
7.68 11.80 23.9 150 2.96 5,622 -

Unemployment rate is not expected to

Required Deficit financing 900

Source: National Bureau of Statistics Central Bank of Nigeria International Monetary Fund

improve. The 100,000 jobs to be created by N50b reconstruction fund and YouWin are not expected to change the rate; Inflation rate target may not be achieved as it has already climbed to 12.1% as at 31/03/12; Debt to GDP ratio of 18% is below the IMF recommended ceiling 20% ratio for developing countries; Domestic public debt stock is expected to increase to N5.96 trillion. The main concern is the portion of the budget used to service this rather than absolute volume which is still considered sustainable. The deficit of N900b is expected to be financed by domestic debt. It is expected that Government borrowing will cause crowding out and affect private sector investment.

Pillars of 2012 Federal Government Budget

Macro Economic Stability
-Debt to GDP ratio of not more than 30%; -Reduction of recurrent expenditure ratio; -Single digit inflation rate

Structural Reforms
-Privatization of power sector in line with Power

roadmap unveiled in 2011; -Reform in customs and ports management; -Passage of Petroleum Industry Bill into law.

Strong Governance Institutions

-Strengthen institutions and systems that promote transparency;

Investment in Priority Sectors

-Agriculture; -Housing; -Power; -Education -Transportation Infrastructure
Source: 2012 Budget Speech by HE Goodluck Jonathan

The Fiscal Policy Direction - 2012

2008 2012 excise tariff
- Introduction of custom and excise tariffs to promote industrialization of the country. Major duty waivers on machinery has now been introduced; - Duty concessions and waivers to be granted on sectoral basis only where necessary;

- Concessions will be granted only where this will boost domestic production, export, developing value chains and boosting employment.

Personal Income Tax

- Personal Income Tax Act of 2011 now signed into Law; - Designed to reduce the average tax paid by low income earners and increase disposable incomes available to them; - Tax appeal tribunals has been established to fast track any disputes arising out of Personal Income tax administration

The Fiscal Policy Direction - 2012

Export Expansion Grant
- This scheme is to be reviewed and streamlined to make it more effective in the promotion of non oil export; - The scheme is expected to lead to diversification of the economy; - The ECOWAS trade Liberalization Scheme will be reviewed to promote

regional trade.

Job Creation
- Youth Enterprises with Innovation in Nigeria (YouWin) was launched to create new generation of innovative real sector entrepreneurs who will generate Jobs in the medium term; - Seed funding of N50 billion set aside for emergency construction and rehabilitation of bridges, roads and other infrastructure. This is expected to create additional 100,000 jobs in 2012

Priority Sectors for Investment

Power and Energy
- Ministry of Power puts current power generation at 4,400 Mw of electricity. Out of this about 1,500 megawatts is lost due to gas shortages; - Nigeria needs to generate and transmit at least 10,000 megawatts for it to have

any impact on its industrialization;

- The Power roadmap now being implemented is designed to create a robust power sector through privatization of generation and transmission and attracting new private sector investment to power generation;

- A Bulk trader company has been created to intermediate between power producers and distributors in market making;
- Due to challenges with gas supply, partial risk guarantees has been introduced to give comfort to gas suppliers in respect of Payment.
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Priority Sectors for Investment

Agriculture
- Overall goal of the new agriculture growth initiatives is to ensure food security for

the nation and encourage exports in agriculture value chain where the nation has comparative advantage;
add value to crops such as cassava, rice , oil palm, sorghum etc..;

- Additional focus will be on putting in place incentives to encourage processes that

- To encourage investments and flow of financing to this sector, a risk sharing

-

framework between the governments and the banks is now in place. Highlights include
FG will guarantee 70% of the principal for all loans for supply of seed and fertilizer; Interest rates on agriculture loans will be subsidized by the FG so that borrowers will pay not more than 7%; - Loans will now be available for the medium term rather than short term.

- With effect from January 31, 2012, import duties on machinery and equipment for

the agriculture sector will attract zero duty to enable investment in these by stakeholders.

Priority Sectors for Investment

Infrastructure
- To achieve the goals of Vision 20:2020, a total of N32 trillion is expected to be spent on capital projects to provide critical infrastructure in power, transport etc. within the next four years. The private sector is expected to contribute N13 trillion of this amount; - Public Private Partnerships is an important vehicle to unlock funding for these projects with positive multiplier effects across the country.

Education
- Government will continue to invest to improve on the quality of education; - Support Public Private Partnerships for skills acquisition and development

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Priority Sectors for Investment

Oil and Gas production capacity
- Investments will be made to improve the oil and gas production capacity of the country; - Investment by domestic companies are necessary to ensure success of the Local Content act of 2010; - Petroleum Industry bill will promote transparent operations in the sector for the benefit of all;

Housing
- There will be a ramp up of investment in the sector to provide affordable housing for all;

- Public Private Partnerships will play a critical role if this is to be successful due to the shortfall in housing stock;
- An urgent review of the land use act is necessary.

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Value Added by Financial Services Sector

Agriculture
- Banks have played an intermediary role under the Commercial Agriculture Credit

Scheme. From 2009 to March 2012, a total of N175.5 billion has been spent on 222 commercial agricultural projects. Rivers State has accessed N4 billion from this scheme as at March 31, 2012;
- Banks have taken a lead role under the shared risk agriculture scheme to provide

direct loans to enable farmers buy seeds and fertilizers for this planting season. Interest rate will be pegged at 7%. Government will guarantee 70% of principal and subsidize interest rate to ensure it remains at 7%;
- Banks will support agriculture further, by capitalizing on the duty waivers for

import of machinery to make available, asset finance loans to farmers to enable them purchase critical machinery;
- Further up the value chain, there will be finance for the value adding process to

agricultural output. This could include funding of factory constructions and working capital needs.
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Value Added by Financial Services Sector

Housing
- Banks intervention is expected in the area of support for Public Private Partnerships to increase the stock of affordable residential housing supply. - Mortgage Banks abound to act as on-lending institutions of Federal Mortgage Bank in accessing loans to purchase homes; - Illiquid nature of real estate investment can be solved through the securitization of these assets by banks.

Infrastructure and Energy

- Value add by Banks will be in providing project finance funding for long term

projects and arranging syndications where this is necessary;

Oil Production Capacity

- Banks can support domestic companies to seize business opportunities by leveraging on the local content development act; - Funding should also be provided to domestic companies and IOC in their exploration and drilling businesses.

Maritime and Customs

- Developing products and services and an IT system that aids collection of tariffs and duties will go a long way.
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Highlight of 2012 Rivers State Budget

2012 Budget (NB)
Budget Size Capital Expenditure 438 324

Actual 2011 (NB)

415 264

Primary areas of focus for the State

Recurrent Exp.
Difference Revenue Profile Fed. Acc. Receipts IGR

114
261 63

85
66

333 66

Social Levy Receipts

Previous Year Balance Borrowing (Bond)

2
12 100

32 100

Source: Budget briefing by Hon. Gogo Levi Charles, Honourable Commissioner for Budget & Planning

Government are Education, Power generation, Agriculture and expansion/upgrade of road infrastructure; Revenue is conservative as the government has used US$60/barrel of oil to estimate accruable revenue from federation account as against US$72/barrel in Federal Budget; IGR plan declined by 5% from 2011. N63b IGR billion accounted for 19% of total revenue. This ratio lags behind those for Lagos, Delta and Sokoto states; On the average Rivers plans to collect N5.25 billion monthly; The state plans to draw an additional N100 bi from the to N250 b approved by the state house of assembly in 2011. There are many common areas of focus between FGN and RSG.
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League of State GDP To 25%

GDP by Value
State Lagos Rivers Delta Oyo Imo Kano Edo A/Ibom Ogun
GDP 2011 (US$m) 41,464 25,944 20,620 19,848 17,497 15,257 14,636 13,764 12,890

GDP per Capita

Rank 1 2 3 4 5 6 7 8 9 State Delta Rivers Lagos Edo Imo C/River Abia Oyo A/Ibom
GDP/Capita 2011 (US$) 4,188 4,165 3,829 3,786 3,702 3,296 3,142 2,955 2,923

Rank 1 2 3 4 5 6 7 8 9

Source: Projection made from 2008 figures found in Canback Global Income Distribution Database

Rivers state ranks second in both absolute GDP

As it attracts more professionals and companies

and GDP per capital in 2011; These GDP statistics puts the state in pole position to climb the ladder of development

operating in oil and gas sector, its GDP can grow significantly;

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GDP Ranking, Federal & State Budgets Advantages for Rivers State
Rivers State has exhibited high fiscal discipline in the past few years There are convergences in Rivers State and FGN priority areas for investments in 2012 fiscal year. Collaboration and joint venture projects are the keys to optimize spending; Possible areas of joint venturing includes
Energy security for the state and federation Education Agriculture Improvement and expansion of Transportation infrastructure (road, rails etc..)

High GDP indicates active productive activities in the state. The state is positioned to attract more people into the productive activities through
Business partnering with citizens and residents to leverage on the local content

development act; Providing state guarantees for business men to access financial products and services for business.
The state can improve its IGR to total revenue ratio that is currently at 19%. The

ration for Lagos State is 61%. This will need material improvements to its revenue collection and tax administration systems.
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Recommendations for the State

Consolidate on Oil and Gas related economy base/cluster. Encourage

industry inclusion by leveraging on Local content development act 2010;

Continue to focus resources and systems towards the growth of GDP.

This GDP growth should be managed in way that it also impacts on the metrics measured in the well being index: Health. Education, environment, inequality in income, living standards, leisure and culture. road, housing etc.;

Continue to focus on provision of physical infrastructure such as power,

Align interests of state and federal governments. Develop effective

economic strategies to promote growth;

Provide social and political infrastructures such as education,

healthcare and security, strong governance framework etc.;

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Recommendations for the State

Doing Business in Nigeria Rankings
Topic Ranking Starting a Business Dealing with building permits Getting Electricity Registering a property Getting a Bank loan Protecting Investors Paying Taxes Trading Across Boarders 2012 Rank 116 84 176 180 78 65 138 149 2011 Rank 108 83 176 180 75 60 109 149 Change -8 -1 -3 -5 -29 -

Develop doing business in Rivers State index to help attract additional industry clusters. Nigeria composite ranking in current global index is 133 out of 183. 8 out of 10 variables in the table are within the control of the state government. It can work to improve these and score higher than National averages; Its main competitors for investment in the medium term remain Lagos, Ogun, Delta, Akwa Ibom, Imo, and FCT Abuja. Competitive response should be conscious and deliberate;

Enforcing contracts
Resolving Insolvency

97
99

98
105

+1
+6

Source: World Bank, Measuring Business Climate 2012

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Recommendations for the State

Clusters and Economic Development
Rivers state has consolidated its status as the Oil and Gas hub of West Africa. This cluster should be deepened to include all the sub industries in the Oil and Gas value chain; To optimize its potentials as a prime investment destination, it has to move to develop additional business clusters that plays up its areas of comparative advantage such as Agriculture; It can leverage on presence of Multinationals in other sectors to build additional clusters.

Develop Related Clusters

Deepen existing clusters

Turn Niche Products into clusters

Build Clusters around strong MNCs

Source: Michael Porter, Creating a Competitive Nigeria 2009

Potential Clusters include but are not limited to Agro Allied industries Medium scale steel mills Information Technology Aquatic tourism Food processing

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Diamond Banks Support for 2012 Budget

Diamond Bank is a key partner to the people and Government of

Rivers state since 1991 when our first branch opened in Trans Amadi Industrial Layout; Today, we have 11 branches in different parts of the state and operate from over 220 locations nationwide; We have effective presence on the West African Coast and operate from 4 countries; Our first branch in a major European capital will soon open for business; Our Public Sector Banking, Retail Banking, Business banking, Corporate Banking and Structured Finance Businesses have over the years offered services that are value adding.
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Diamond Banks Support for 2012 Budget

We possess expertise that have been and are relevant to the State:
Our mortgage finance business is supporting the housing program

by developing a 106 units housing estate in Eliaparanwo. This has reached an advanced stage of completion; Our Corporate Banking business has deep expertise in financing energy projects and is currently the lead funder for a power plant in Abia State Structured finance business has been recently reorganized to provide advisory services to clients and play a leading role in arranging long term capital for project finance. This will be useful PPP alliances of the state; Transaction banking and collections business is able to restructure the collection process for levies, taxes etc. and ensure improved collection. We have a suit of products across retail and business banking that will suit individuals and businesses. I recommend you visit our nearest branch or go to www.diamondbank.com
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Conclusion
Both the Federal and Rivers State Governments budget are

capable of promoting growth if fiscal discipline is maintained and the budget fully implemented; The participation of the private sector through Public Private Partnerships is a key driver for the success of both budgets. The intervention of banks is necessary to bridge financing gaps for the different projects as well as offer advisory services to the Government; Banks will need to seek out specific areas of intervention that creates the biggest impact in view of finite financing sources.

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Thank you

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