Revenue from Oil Could Only Finance 8.78% of Nigeria’s Budget 2020
Total revenue from crude oil would only be able to fund 8.78% of Nigeria’s spending plan for 2020 after several adjustment made to the budget to align with economic situation.
Meristem Securities Limited in its second half of 2020 economic review tagged unmasking value in scourge said spike in budget deficit remains worrisome as it reflects the poor non-oil revenue struggles.
The outbreak of coronavirus has negatively impacted Nigeria’s government revenue, government has embarked on borrowing to finance its 2020 budget.
To analysts, given the existing debt stock, they believe that more borrowing will increase the nation’s debt burden.
Already, the Debt Management Office statistics revealed that total public debt has lifted to N28.6 trillion in the first quarter of 2020.
This amount is yet to include COVID-19 related borrowed funds, and more other multi-lateral as well as bilateral request by the Nigerian government.
Meristem Securities in its second half report said with the revision of the 2020 budget, 51.05% of the spending plan will be funded by borrowings while revenue from oil will now fund only 8.78%.
The firm stated that the spike in budget deficit remains worrisome as it reflects the government’s poor non-oil revenue struggles.
“Although the 2019 Finance Act represents a definite and comprehensive attempt at improving non-oil (tax) receipts, the recessionary impact of the COVID-19 pandemic on businesses threatens the actualization of the goals of the Act”, analysts at Meristem explained.
According to the firm, the Act also suffers from the absence of clear modalities for the implementation of some of its innovative solutions such as the proposed taxation of non-resident digital service providers.
“We therefore do not expect a significant improvement in non-oil revenue in the second half of fiscal year 2020”, Meristem said.
Government Spending to Remain Elevated
Planned government expenditure was reviewed downwards marginally to NGN10.52trn from NGN10.59 trillion in the 2020 Appropriation Act, following heightened pressure on planned revenues occasioned by the collapse of oil prices.
The cut was minimal as efforts to curtail the spread of the Coronavirus have kept government expenditure elevated.
So far, the Federal Government has launched a NGN500 billion COVID-19 Crisis Intervention Fund.
Although, there are moves towards reducing waste in government spending with the setting up of a Committee to review the Steve Orosanye Report with an onjective to eliminate duplicity of functions across government agencies, removal of the problematic petroleum subsidy, and the curtailment of foreign travel by Government officials, it remains to be seen how these will be implemented to free up resources for more important obligations.
Revenue Shortfalls Highlight FG’s Growing Reliance on Borrowing
Analysts explained that there have been growing concerns about the debt profile of the country and the most recent data released by the Debt Management office (DMO) showed that Nigeria’s total debt stock as at Q1:2020 stood at NGN28.63trn from NGN27.40 trillion as at year end 2019.
The DMO data shows that domestic debt accounted for 65.11% of the total debt while foreign debt made up the remaining 34.89% at NGN9.99 trillion.
“While this is an improvement from 2018 where domestic debt accounted for 68.18% of total debt, it still lagged behind the DMO’s 2016-2019 target of obtaining an optimal mix of 60:40 (domestic to external)”, Meristem explained.
The firm stated that the downgrade in sovereign rating and the implied higher costs of borrowing from the international capital market has led to a review of the debt mix to 70:30 (domestic to external) as set out in the Debt Management Strategy for 2020- 2023.
Hence, given the need for cheaper debt, the planned NGN850 billion external borrowing in the 2020 Appropriation Act will now be raised locally.
Meristem said while the current macroeconomic condition presents a case for a tilt towards domestic borrowing, the crowding out effect as a result of this policy remains a key risk to economic growth.
…But Debt Servicing Costs May Spiral out of Control
Meristem stated that debt servicing may spiral out of control, especially in the face of dwindling revenue accruable to the government.
In the first quarter of 2020, Nigeria’s Debt to GDP ratio stood at 19.85% compare to 19% in 2019 and 19.09% in 2018.
This was comfortably within the 25% upper limit provision of the Fiscal Responsibility Act, and below the World Bank – IMF recommended threshold of 56% for her peer countries.
However, analysts stated that debt service to revenue ratio however tells a much starker story, hovering above 50% since 2016, much higher than the 22.5% prescribed by the World Bank.
In the recently released Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) Paper, the rising costs of the country’s debt hit a new milestone in the first quarter of 2020.
During the period, the debt service to revenue ratio rose to 99.20% as the country spent
NGN943.12bn of total revenue (NGN950.56bn) on debt servicing.
Both oil and non-oil revenues underperformed budget expectations – with a joint shortfall of 52% as the impact of the Covid-19 pandemic hit hard.
In line with current realities, the FG has reviewed its spending plan for the year.
Total expenditure was cut from NGN10.59 trillion to NGN10.51 trillion, while debt servicing costs and non-debt recurrent expenditure rose to NGN2.68 trillion and NGN4.93 trillion respectively from NGN2.45 trillion and NGN4.84 trillion.
Eventually, the budget’s deficit widened to NGN5.19 trillion and it is expected to be funded largely by borrowing.
However, the budget version approved by the legislature increased total expenditure by NGN300 billion to NGN10.80 trillion.
True to the FG’s reliance on borrowing, the IMF in April extended a USD3.4 billion loan to Nigeria to help tackle the twin impact of the Covid-19 shock and the sharp drop in oil prices on its economy.
It has also received USD288.8 million from the AfDB while there is a pending application to raise USD1.5 billion from the World Bank, which could rise to USD3 billion.
“These loans appear necessary to fund the fiscal responses in the wake of the pandemic”, experts at Meristem stated.
Meristem said although, the rates on these loans are low, they will add to the debt burden of the country given the implied exchange rate risk.
“We have always maintained that Nigeria has a revenue problem, part of which the Finance Act seeks to address.
“The removal of inefficient subsidies on petroleum products should also help to ease the nation’s fiscal struggles”, analysts stated.
Meristem explained that in the long run, structural issues impeding development of other key sectors with the potential to grow export earnings remain top challenges which must be tackled to escape the quagmire.
Amplified Reliance on Borrowing Clouds Outlook
With the economy likely headed for a recession, and the depressed outlook for both oil and non-oil revenues, analysts said they expect the FG to rely heavily on borrowing to plug the gap in the revised budget.
Analysts believed that the recent recovery in crude oil prices provide some form of succour, compliance with OPEC+ production cuts are expected to moderate oil revenues going forward.
On the other hand, while it is still too early to assess the effect of the newly implemented Finance Act on non-oil revenue, expectations are that key changes such as the VAT increase and the FG’s plan to tax foreign digital service providers would cushion the fall in oil revenue.
“Thus, we expect Nigeria’s reliance on borrowing to keep its debt stock and servicing costs elevated in 2020”, the firm stated.
Meristem said without a significant improvement in its revenues, government’s capacity to stimulate economic growth through capital expenditure would be constrained, thus slowing the pace of growth.
“Therefore, we reiterate the need to significantly cut down the cost of governance and eliminate inefficient subsidies on fuel and electricity.
“The Government should also embrace public-private partnership as a means of financing long-term capital-intensive
Revenue from Oil Could Only Finance 8.78% of Nigeria’s Budget 2020