Nigeria’s government runs fiscal deficits for 6-Year straight
For six consecutive fiscal years, Federal Government of Nigeria has been running deficit budgets as revenue constraints continue to widening shortfall. From 2013, deficit as percentage of gross domestic product on the increase till date.
However, some experts say this may continue till 2023 on the backdrop of the revenue constraints and historical borrowing tendency, with uptick that started in 2015. In the last four years, Nigeria recorded about 65 percent capital expenditure performance on the average.
In term of revenue sources, receipt from Oil resources still accounts for significant chunk of the nation’s revenue sources, as non-oil component contribution remains low.
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Just a year ago, fiscal deficit as percentage of the gross domestic products settled at 4.4%, from 5.41% previous fiscal calendar in 2017. However, the ratio is projected to close the year at 4.6%.
The widening fiscal deficit will see the government debt burden to swing up in the coming years, thereby raising debt servicing costs, as estimated by Fitch Solutions.
To that end, analysts observed that the decline in government revenues in relations to annual spending remains an issue for the nation to solve. Some experts think that willingness to plug in holes is largely weak on the part of the government.
In 2013, deficit to GDP ratio pitched 2.33% or $11.987 million but increased to $12.059 million in 2014, which then was 2.12% of the GDP. By 2015, budget deficit grew to $17.328 million; the ratio to GDP was 3.51% and $16.029 million deficit in 2016 translated to 3.95% of the GDP, then.
Fitch said it expects Nigeria’s fiscal revenues to be bolstered by gradually increasing oil exports over the coming quarters.
“We believe that the government’s expectations for average crude oil production of 2.3 million barrels per day (b/d) in 2019 and 2.4 million b/d in 2020 will prove overly ambitious”, Fitch stated.
However, Fitch stated that expenditure growth will outpace that of revenues, due to increased spending to tackle security challenges and a higher public sector wage bill raising current expenditure.
Therefore forecast the fiscal deficit to widen from 4.4% of GDP in 2018 to 4.6% in 2019 and 4.5% in 2020.
In coming to this term, Fitch said it expects the public debt burden to remain manageable, but increasing debt servicing costs and revenue constraints will see the government’s capacity to support economic growth via capital spending remain limited.
“While Nigerian state revenues are set to increase over the coming years, we believe that revenues will continue to fall short of the government’s targets.
“Our Oil & Gas team expects oil prices to continue recovering gradually over the coming quarters, while domestic output growth will be underpinned by the ExxonMobil Egina field, set to add 200,000b/d at peak by 2020.
“The oil sector accounted for an annual average of 67.4% of total federal government revenues from 2008 to 2017.
It would be recalled that the government’s revenue targets in its 2019-2021 Medium Term Expenditure Framework (MTEF) are based on a benchmark oil price of $60.0/bbl. in 2019 and $56.46/bbl. in 2020, which Fitch stated that it is below forecasts for Brent crude oil to average $73.0/bbl. and $80.0/bbl. over those years respectively.
However, the government also expects oil output of 2.3 million b/d in 2019 and 2.44 mn b/d in 2020, levels that have not been seen since 2014 and above our 2.1 mn b/d forecasts for both years. Efforts to bolster revenue generation will face continued headwinds over 2019 and 2020.
According to former Budget Minister Udoma Udo Udoma, the government intends to cut its stakes in joint oil ventures to 40% from the current 55-60% by the end of 2019.
“Selling petroleum stakes would provide a marked one-time increase in government revenues. However, the plan would face significant opposition in the Senate, which rejected a similar plan in 2016, due to the state’s reliance on income from the oil sector.
“We expect that rising oil prices will further disincentivise the Senate from approving this in 2019. Widening the tax base will remain challenging”, it added.
According to the Joint Tax Board (JTB), the number of Nigerian taxpayers rose from 10 million in 2015, compared to 68.9 million people in work in fourth quarter of 2015, to 19 million in 2018 (compared to 69.5 million people in work as of third quarter in 2018).
The JTB expects the number of taxpayers to rise to 45 million in 2019 with the implementation of a new taxpayer registration system. While the registration system may provide some support to revenue growth, we do not expect this target to be met”.
Rising current expenditure will drive the fiscal deficit to widen over the coming years.
On April 30 the Senate approved the 2019 budget, with expenditure of N8.91 trillion or USD29.1 billion at the naira’s official interbank exchange rate.
It was observed that planned spending was increased from the initial N 8.83 trillion budget outlined by Buhari in December 2018, largely due to increases in planned defense expenditure to address regional security issues
The increase in the national monthly minimum wage from N18, 000 to N30, 000 – which Buhari signed into law in April – will further add to rising current spending.
Personnel costs, the largest component of current expenditure, will account for 27.7% of planned total spending in 2019 and 27.6% in 2020 according to the MTEF, based on the earlier budget figures.
Fitch Solutions expects the higher minimum wage to see spending exceed these projections, contributing to the deepening fiscal deficit. Limited revenues will see cuts to capital expenditure over coming years.
According to the Budget Office, capital expenditure over the first three quarters of 2018 totalled N930.5 billion.
This was well below the budget target of N2.2 billion for the period. In the MTEF, capital spending is set to be cut over the coming years to N2.6 trillion in 2020 compared to the initially planned N3.2 trillion for 2018.
This will help to contain the extent of the fiscal deficit deepening over the short term, but reflects the government’s limited capacity to bolster still-sluggish growth in areas such as infrastructure and agricultural sector development.
The widening fiscal deficit will see the government debt burden increase over the coming years, raising debt servicing costs.
Fitch said it forecasts that Nigeria’s total government debt to rise from 28.0% of GDP in 2018 to 28.8% in 2019 and 30.1% in 2020.
The rise in public debt amid weak revenue growth over recent years has seen repayment costs relative to government income increase, a trend we expect to continue over the coming years.
Prior to the Senate approving the increased budget in April, the MTEF projected the debt service to revenue ratio rising from a planned 28% in 2018 to 31% in 2019 and 38% in 2020.
The debt burden is still low compared to other major economies in Sub-Saharan Africa – with debt burdens over 50 % of GDP – as well as broader emerging markets, and we expect it to remain manageable over the coming years, Fitch reckoned.
“However, downside risks to potential oil revenues and the country’s security situation could see the government borrow more heavily than anticipated, further constraining its ability to implement spending in support of economic growth over a multi -year time frame”, Fitch stated in a report.
Nigeria’s government runs fiscal deficits for 6-Year straight