Budget deficit swells more than twice to ₦5.3trn on sharp fiscal adjustment
The Federal Government will finance the budget 2020 spending plan with total borrowing of ₦5.3 trillion, which analysts said is more than twice the initial plan. The nation’s budget deficit widens from ₦2.2 trillion in the initial plan due to the sharp fiscal adjustment made to the spending plan.
The twist and turns in the global prices of oil and coronavirus pandemic have invalidated initial revenue estimates for the year. Falling oil prices and economic lockdown mean weaker revenue prospects in 2020, thus compelled fiscal policymakers to match budget ambitions with current realities.
Accordingly, the Federal Executive Council (FEC) on Wednesday approved the revised Medium Term Expenditure Framework (MTEF) for 2020-2022. Also, FEC proposed an amendment to the 2020 budget, with both awaiting the approval of the National Assembly.
While the revised MTEF is yet to be published, the Minister of Finance highlighted some of the proposed amendments to the 2020 budget. The revised budget assumes a new oil price benchmark of $25 per barrel of oil (bbl), down from $30.0/bbl. in April 2020 and from $57.0/bbl. in December 2019.
In a review, Afrinvest stated this is realistic given the significant dip in oil prices and the uncertainty around the recovery of prices amid COVID-19. Similarly, crude oil production was revised downward to 1.94 million barrels per day (mbpd) from 2.18 mbpd approved in December 2019.
This partly reflects Nigeria’s share of the output cuts agreed by the Organisation of Petroleum Exporting Countries (OPEC) and its allies.
“Nigeria’s compliance with oil cuts has been weak historically but this could be more pronounced given the prospect for large revenue shortfalls in 2020”, Afrinvest stated. For conversion purposes, the revised budget now assumes the new official exchange rate of ₦360.00/$1.00 from ₦305.00/$1.00.
However, Afrinvest stated that with a weaker exchange rate of ₦386.00/$ at the I&E window, the FG is still leaving money on the table. Overall, the FG’s revenue projection was cut by 38.1% to ₦5.2 trillion from the ₦8.4 trillion earlier approved while total spending was slightly lower at ₦10.5 trillion from ₦10.6 trillion.
“While oil revenue assumptions are conservative, we believe non-oil revenue estimates are optimistic given the slowdown in economic activities”, Afrinvest positioned.
Meanwhile, Afrinvest said the moderate cut in expenditure is an indication of the outsized share of non-discretionary spending. Afrinvest explained that the implication of the significant revenue shortfall is a larger fiscal deficit estimated at ₦5.3 trillion or 3.6% of GDP. This is more than twice the initial projection of ₦2.2 trillion and beyond the 3.0% threshold set by the Fiscal Responsibility Act (2007).
The deficit is expected to be financed with local loans of ₦1.6 trillion, multilateral loans of $6.9 billion, with $3.4 billion already secured from the International Monetary Fund.
“Given our expectation of lower-than-expected non-oil revenues, we expect weak implementation of the proposed capital expenditure”, Afrinvest stated.
On debt servicing, 9-month 2019 numbers show that debt service to revenue trended lower at 45.2% from 64.9% in the comparable period. “We anticipate a significant deterioration in the near-term given the large borrowing planned this year”, analysts at Afrinvest stated.
Read Also: Rising Fiscal Deficit, Weak Naira Fuel Nigeria’s Debt Burden
Budget deficit swells more than twice to ₦5.3trn on sharp fiscal adjustment
