Culled—Proshare
October 2, 2020
by CSL Research
The Federal Executive Council (FEC) at its recent meeting presided over by President Muhammadu Buhari approved the budget estimate of N13.08tn for the 2021 fiscal year. According to information disclosed by the Minister of Finance, Budget and National Planning, Zainab Ahmed and the President’s Special assistant on Digital and New Media, the budget was built on the following assumptions; Oil Benchmark Price – US$40/bbl, Oil Production – 1.86mbpd (incl. 400kbpd condensates), Exchange Rate – N379/US$, GDP Growth – 3% and Inflation target – 11.95%. In addition, 29% of the budget would be spent on Capital expenditure while a deficit of N4.48tn would require financing. The Federal Government estimates it would generate Revenue of N8.6tn in 2020. The approved budget is expected to be sent to the National assembly in the coming weeks in time for the budget to receive the President’s assent before the end of the year.
Budget 2021 Assumptions
- Oil Benchmark Price – US$40/bbl,
- Oil Production – 1.86mbpd (incl. 400kbpd condensates),
- Exchange Rate – N379/US$,
- GDP Growth – 3% and
- Inflation target – 11.95%.
The first positive for us is that this administration continues to sustain efforts to maintain the January to December budget cycle by ensuring the budget is prepared and assented to before the commencement of the new fiscal year. In addition, we note the actual oil production for Nigeria is estimated at 1.46mbpd in 2021 which is well in line with OPEC cuts to be implemented by Nigeria.
However, we note that there are several unrealistic assumptions of the budget. First is the inflation forecast of 11.95%. We note that the country is currently facing significant inflationary pressures which is not expected to abate in the medium term. Inflation rate in August 2020 was 13.22% and is expected to reach c.14.0% by the end of the year. Imported inflation (due to FX devaluation & illiquidity), sustained rise in food prices, increase in energy costs etc. are factors that continue to drive inflation. In addition, the CBN’s easing of monetary policy as well as the sustained expansionary fiscal policy (reflected in the N4.48tn budget deficit) employed by the government are factors that could exacerbate inflationary pressures in 2021.
Furthermore, we are concerned about the growth assumption of 3% for 2021. The Nigerian economy is expected to plunge into a recession by Q3 2021 with no major catalyst for growth expected in 2021. While the low base of Q2 and Q3 2020 may provide support for a moderate y/y growth in 2021, we think the economic growth will remain tepid as critical bottlenecks mitigating against business growth and pressures on consumer spending (which contribute c.60% of GDP) remain drags to economic prosperity.
Lastly, we think the Federal government’s expectation to generate Revenue of N8.6tn as well as spend N13.08tn in 2021 is quite too optimistic. Based on comments made by the minister, FG only generated 68% of its prorated budgeted revenue of N4.75tn as at July 2020 despite adjusting the official exchange rate for revenue conversion to N360/US$1 from N306/US$1 previously. On the otherhand, the Federal government had a 92% performance on the expenditure side which implies the budget is being financed by a wider deficit than budgeted.
