September 22, 2021/Proshare

by FBNQuest Research 

Today’s chart is drawn from the investor presentation for the Eurobond roadshow. Some familiar trends emerge from the outturn for 2020, which we could read across to many other jurisdictions: retained revenue declined, which in Nigeria’s case can be traced to the lower take from the oil industry; debt servicing payments rose due to the higher interest expense on the ways and means advances from the CBN;  recurrent spending also rose so the FGN continued, we assume, to pay its employees; capital spending also increased yet was again inadequate for Nigeria’s infrastructure needs; and the deficit soared from NGN3.76trn to NGN6.22trn. It, therefore, hit 4.03% of GDP and exceeded the ceiling of 3.0% set in the Fiscal Responsibility Act 2007. 

The Budget Office said on the investor call that after seven months of 2021 the inflow from companies’ income tax and VAT was running well ahead of the previous year, but that oil revenue had underperformed. The huge increase projected for total collection this year, therefore, appears elusive. 

The forecast increase in recurrent spending this year (on the 2020 outturn) may look high, but we should remember that headline inflation is still above 17.0% y/y (although slowing) and that the FGN has new interventions planned to tackle the impact of COVID. 

The near trebling of capital spending in the 2021 budget also looks high. However, the Budget Office was adamant on the investor call that, if confronted with the choice, the FGN would accept an above-budget deficit rather than cut back on capital spending. That choice would arise if, as we expect, revenue falls short of target.   

The budget has a deficit this year equivalent to 4.52% of GDP or NGN6.45trn. The DMO has been tasked to raise NGN4.68trn (net), and a good part of the balance is due to be financed by external official creditors. Total spending in the projections and therefore the deficit incorporate the approved supplementary budget of NGN990bn. 

The presentation notes that preparatory work has begun on the 2022 budget. The earliest indications are a total budget size of NGN13.98trn (an increase on 2021 once the supplementary is excluded from this year’s figure), total revenue of NGN8.76trn and an average crude price of USD57/b. They uphold two traditions of the FGN’s budget-making, namely an overly ambitious revenue projection and a conservative oil price (which generally balances out a bold forecast for crude production).

FGN finances (NGN trn)  

Sources: Ministry of Finance, Budget and National Planning; FBNQuest Capital Research