Afrinvest, an investment banking firm, has described the recently passed 2019 appropriation bills of the Federal Government into law as a wishful spending. Afrinvest expressed disappointment, said that it expects economy to under perform over the medium term. 

The firm said; “Our greatest disappointment is that while the 2019 budget could have heralded new beginnings, which should be reform driven and growth supportive, nothing seems to have changed. This further supports our expectation of continued economic underperformance over the medium-term”.

The National Assembly increased the budget by N86 billion to N8.9 trillion from the initial N8.8 trillion the FG proposed to spend in 2019. However, projected revenue was stated at N7 trillion and all budget assumptions were unchanged. 

On the revenue side, the oil price assumption was kept at $60.0 per barrel, of which analysts believe is conservative, as Brent crude oil price has recently increased due to moderating oil supply on the back of Iran sanctions and OPEC output cuts which have brought the average daily oil price to $63.5 per barrel as at May 2019.

“In terms of oil production, the assumption of 2.3 million per barrel a day (mb/d) is ambitious as we expect 2.1mb/d in 2019 and the official exchange rate of N305/US$ was kept, consistent with the Central Bank of Nigeria’s (CBN) stance. These assumptions translate to a projected oil revenue of N3.7 trillion (N3 trillion in 2018), which we believe is unrealisable due to the repayment of cash call arrears, petrol subsidies and the prospect of lower than expected oil production”.

The budget detail shows that the projected non-oil revenue was unchanged at N1.4 trillion in 2019, reflecting a more measured expectation. The largest share of non-oil revenue at 57.7 per cent is expected to be generated from Companies Income Tax (CIT) while 21.8 per cent and 16.6 per cent are to be collected through Customs and Excise Duties and VAT respectively. Meanwhile, independent revenue is projected lower at N624.6 billion as against N848 billion in 2018.

“While this shows that the FG is finally being realistic, we expect this to be below projections. Overall, considering that the FG collected an estimated N3.7 trillion in fiscal year 2018, we expect sustained underperformance in revenue by as much as 41.2 per cent in 2019”, Analysts at Afrinvest noted.

The investment banking experts agreed that beyond unrealistic revenue estimates, our biggest worry is that FG’s spending plans reflect the lack of fiscal discipline and stays unsupportive of growth. This is partly because spending to GDP is weak at 6.4 per cent, but even more so because capital expenditure is still below recommended levels.

In 2019, total recurrent expenditure is projected at N6.9 trillion, crowding out capital spending which is 30.0 per cent of total spending. The recurrent expenditure is split between non-debt and debt at 67.4 per cent and 32.6 per cent respectively. An estimated 63 per cent of non-debt recurrent expenditure is to be spent on FG’s payroll, which is likely to rapidly expand by 2020 when adjustments are made to reflect the recently passed minimum wage of N30, 000 per month.

The non-debt component of spending, also known as debt servicing, at N2.3 trillion seems moderate at 32.1 per cent of projected revenues.

Afrinvest said; “However, considering our estimated revenue of N4.1 trillion in 2019, projected debt servicing is elevated at 54.9 per cent of revenue. Finally, the total recurrent expenditure to our 2019 revenue estimate is 168.3 per cent, suggesting that FG’s fiscal position is untenable.

While the FG projects fiscal deficit at N1.9 trillion or 1.4 per cent of gross domestic products (GDP), our estimates of N4.8tn and 3.4 per cent respectively shows that this is likely to be worse than expected. The implication of a much wider fiscal deficit would be both higher than expected borrowing and partial implementation of the already poor capital spending”.

According to the NNPC, about US$2 billion was spent on “cost under-recovery” or petrol subsidies in 2018. Our estimate of US$2.6 billion and US$4.4 billion at the official and investors and Exporters (I&E) window exchange rates respectively suggest that the spending on subsidy is significantly more than estimated.

Analysts said that the implication is that government revenues are weaker with subsidies, thus restricting spending on more productive areas of the economy. The lack of sufficient investment in human capital is one area of concern.

The FG continues to underinvest in health and education, further indicated by the allocation to the respective ministries at N50.2 billion and N47.3 billion in 2019, despite significant underperformance in human capital development indicators.

“With a removal of petrol subsidies, and taking the 52.7 per cent revenue sharing formula into consideration, we estimate the FG could access from N321.5 billion to N707.2 billion in more revenues, Afrinvest said.

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