Analysts See Much Higher Fiscal Deficit for Nigeria
Presidebt Muhammadu Buhari

Analysts See Much Higher Fiscal Deficit for Nigeria

Due to Nigeria’s weak revenue performance despite higher global oil prices, analysts have projected a much higher fiscal deficit for 2022. In its macroeconomic note, Cordros Capital said Nigeria’s fiscal deficit will hit N9.74 trillion, from actual record of N7.71 trillion reported last year.

Nigeria’s revenue expectation is anchored on higher foreign receipts from oil but crude oil production volume has been unimpressive. The organisation of Petroleum Exporting Countries (OPEC) said in a report that Nigeria’s daily production printed at 1.23 million barrels per day, as against 1.8 million barrels per day for the 2022 budget.

In its monthly report, the Central Bank of Nigeria (CBN) revealed that the Federal Government’s retain revenue underperformed by 8.4% in February 2022. While Cordros Capital sees a much higher budget deficit in 2022 as the firm noted FG’s fiscal slippage record, Fitch Solutions differ in the same.

The firm said Federal budget deficit would narrow, though analysts hint that revenue performance remains a concern. Fitch analysts believe that higher income from oil and gas companies will help Nigeria’s fiscal position in the year.

“We believe that higher energy prices will boost the government’s tax take from the crucial oil and gas sector. While our Oil & Gas team predicts that the volume of Nigeria’s oil production will decline by 9.0% in 2022, this will be more than outweighed by the rise in global energy prices.

“We expect that Brent crude will average USD100 per barrel in 2022, up from just USD74.00 per barrel in 2021. We estimate that the value of Nigeria’s oil exports will jump by 23.7% in naira terms, rising to an all-time high of N21.8 trillion”, it said.

The gap between expected government revenues in the fiscal year against projected expenditure has been underperforming for years due to untamed fiscal slippage. READ: Rising Fiscal Deficit, Weak Naira Fuel Nigeria’s Debt Burden –Analysts

The pressure has been worsened by rising inflation while Nigeria continues to use N411 per dollar to convert its foreign debt exposures. Nigeria’s debt profile has crossed N40 trillion and Nigeria’s debt agency has indicated a plan to access the local debt capital market to raise N720 billion in the third quarter.

At the investors’ window, the naira rate worsened to N430 while parallel market offerings near N620 per the United States dollar. According to the recently released data by the National Bureau of Statistics (NBS), headline inflation rose by 89bps to 18.60% year on year in June – the highest reading since January 2017 when the price level was 18.72%.

The outturn is in line with Cordros’ estimate of 18.61% year on year and 10 basis points higher than Bloomberg’s median consensus estimate of 18.50%. In a market report, Cordros Capital analysts said the increased consumer prices synchronised neatly with the impact of the high food demand-supply gap as planting season was underway, PMS shortages, elevated diesel and gas prices, and lingering currency pressures.

The FGN’s fiscal deficit ran ahead of the pro-rate budgeted in February amid a persistent shortfall in the FGN’s retained revenue. According to the CBN’s monthly economic report, the FGN’s retained revenue declined by 8.4% month on month to N371.67 billion in February from N405.51 billion in January.

The decline was primarily driven by lower inflow from the Federation account, down 54.7% in February given the lower net oil and gas revenue. Simultaneously, aggregate expenditure increased slightly by 0.2% to N952.61 billion versus N951.14 billion in January on account of higher recurrent spending.

The federal government’s recurrent spending inched upward by +22.7% month on month but capital expenditure was 50.0% below expectation. Nigeria overspent its pro-rated monthly budget in February by 6.5% to N580.93 billion as against total spending of N545 billion in January, the pro-rated budget provision was N466.80, according to fiscal provision.

“We maintain our expectation of underwhelming FGN’s retained revenue in 2022E, given the expected significant shortfall in oil revenue.

At the same time, we expect the government to meet its expenditure targets in line with historical precedence amid increased spending on vulnerable groups”, Cordros Capital said in a note. The firm said its baseline expectation is that the fiscal deficit will print N9.74 trillion including government-owned enterprises in 2022, a higher print compared with N7.71 trillion level seen in 2021. 

However, higher oil prices will also affect the expenditure side of the budget by forcing the government to increase its spending on domestic fuel subsidies. “We still think that the higher price of oil will have a positive effect on the federal government’s overall budget position”, Fitch solutions said. #Analysts See Much Higher Fiscal Deficit for Nigeria