Fiscal Reforms to Boost Revenue/GDP to 10% in 2024 –Ratings
President Bola Ahmed Tinubu

A strong focus on non-oil revenue mobilisation has been adjudged positive for the Nigerian government’s fiscal outlook. Nigerian government earnings has improved following the naira devaluation due to a new exchange rate.

This is expected to boost fiscal revenue as a percentage of gross domestic product to 10% in 2024, S&P ratings projected.

Meanwhile, debt service costs on foreign loans is expected to increase sharply after more than 100% devaluation of the local currency since June 2023.

In its latest rating note, S&P Global said over 2024-2027, it projects some fiscal consolidation, which will be supported by savings made via the elimination of the petroleum subsidies.

Though subsidies removal has increased allocations sharable among to Federal Government, States and Local government councils, there is widespread poverty in the country.

The government will benefit from an increase in the collection of non-oil taxes and other revenue owing to ongoing digitization and improved compliance. There are also savings on interest costs due to the securitization of the central bank’s Ways and Means advances.

“Revenues will also be supported by naira depreciation, which improves oil revenues in naira terms. We project the general government deficit–which includes the federal government, states, and local governments combined–will stand at 4.0% of GDP in 2024”.

In 2023, S&P ratings estimated a general government deficit of 4.6%, down from an almost 6% average over 2020-2022. It said the government is currently reforming the Federal Inland Revenue Service, which should engender more transparency and improve fiscal governance.

It recalls President Bola Tinubu’s government approved the establishment of a Presidential Committee on Fiscal Policy and Tax Reform; chaired by a tax specialist and experts from both the private and public sectors.

Tax reforms include attempts to simplify the tax code, reducing total tax categories from over 60 to less than 10, and to digitalize administration and collections to decrease the compliance gap.

“We forecast fiscal revenue to GDP will increase to 10% in 2024 due to the aforementioned efforts and continued strong collection of VAT and corporation income tax.

“Nevertheless, challenges to raising non-oil revenue remain, for instance, the high level of informality in the economy, and the two-tiered federal and state tax system in which the states lack the institutional capacity to garner taxes”.

The 2024 federal government has planned for a fiscal deficit of N9 trillion in its recently passed 2024 budget, down from the 2023 budget of N11.34 trillion, which represents 3.8% of budgeted GDP.

The budget is based on a reasonable oil price estimate of $78 per barrel, but an ambitious oil production volume target of 1.78 mbpd, according to S&P rating, noting that the firm based its oil revenue forecasts on $85 over 2024-2027.

Analysts said high debt-servicing costs and security-related spending will continue to weigh on fiscal dynamics, leaving reduced funds for capital investment, infrastructure development, or social safety nets.

“We forecast Nigeria’s net general government debt stock –consolidating debt at the federal, state, and local government levels, and net of liquid assets – will average 41% of GDP for 2024-2027”.

S&P said, “This level of indebtedness is lower than we typically observe for ‘B’ category rated peers. We include the Asset Management Corporation of Nigeria debt in our calculation of gross and net debt.

“We also include CBN open-market-operation (OMO) bill issuance, as well as central bank lending to the federal government (via the Ways and Means advances), in our debt stock calculations”.

From 2020, the CBN sharply reduced the number of OMO bills that it rolled over, but this was partly counterbalanced by the increase in the Ways and Means advances, and the central bank has begun to revert to OMO issuance in recent months.

The depreciation of the naira has continued to inflate FX debt, which makes up approximately 40% of the total debt stock. We include interest payments on CBN bills and Ways and Means in our calculation of current total interest costs, with the latter having fallen due to the recent securitization of the Ways and Means deal.

Nigeria benefits from its relatively deep domestic financial markets. The government plans to issue domestic naira-denominated Federal Government of Nigeria bonds to finance the majority of the 2024 deficit, with budgeted borrowing reduced compared to 2023, with the rest in foreign financing split between concessional multilateral and bilateral external financing, and commercial borrowing.

The Debt Management Office was able to raise the total planned New Domestic Borrowing of N7 billion in the 2023 Appropriation Act in full during the year, at an average subscription rate of 172% at levels below the monetary policy rate.

On July 12, 2023, the government repaid its $500 million Eurobond in full and on time and the next Eurobond maturity of $1.1 billion is due in late 2025.

After running a very tightly managed exchange-rate regime, the new government cited a long-standing policy of a misaligned exchange rate, and announced the suspension of the governor of the central bank.

In September, the president appointed a new central bank governor, but a lack of quorum on the MPC did not permit the MPC to opine on interest rate adjustment.

The CBN ended trading band limits and permitted a move to a “willing buyer-willing seller” model at the investor and exporter window, which soon led to a significant depreciation of the currency to N780/US$1 from N460/US$1.

Toward the end of January 2024, changes to the NAFEX pricing mechanism led to significant naira depreciation, with the rate falling to almost N1,500/US$1, from N900/US$1 at year-end 2023.

Despite being a sizable hydrocarbon exporter (close to 90% of export receipts are from crude oil and gas exports), the rating firm projects that Nigeria will post only small current account surpluses for 2024-2027 due to uncertainties regarding oil production volumes, alongside high demand for imports.

It added that relatively high oil prices and robust remittances will support current account receipts (CARs), while the country’s increase in refining capacity will help to reduce the import bill from 2024 onward.

The rating noted explained that costlier imports and the clearance of FX arrears will limit the rise in FX reserves.  Analysts noted an oil-backed loan from African Export-Import Bank (Afrexim Bank) of US$3.3 billion, of which US$2.25 was disbursed in January 2024, should benefit the reserve position. #Fiscal Reforms to Boost Revenue/GDP to 10% in 2024 –Ratings#

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