September 23, 2021/CSL Research
Based on media reports, yesterday, the Senate approved the 2022 – 2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF – FSP). The decision followed the adoption of the recommendations of a joint committee of the National Assembly led by Senator Olamilekan Salami. The committees, which consist of sub-committees on finance, foreign and local Debts, banking, Insurance, and other financial institutions, were saddled with observing the document’s necessary provisions and making recommendations where necessary.
The disruption in the global economy creates a need to have a framework upon which the Federal Government (FG) fiscal activities would be anchored. Below are a few excerpts from the new framework:
- Daily crude oil production was estimated at 1.88mbpsd, 2.23mbpsd, 2.22mbpsd for 2022, 2023, and 2024 respectively
- Exchange rate, GDP growth rate, and inflation were pegged at N410.15/US$, 4.20 percent, and 13 %, respectively
- By 2022, the FG is expected to have a fiscal deficit of N5.62tn, expected to be financed by N4.89trn (Domestic and Foreign loans), and a US$3.5bn international monetary fund loan.
In our view, the revenue estimates appear unrealistic. Nigeria’s fiscal deficit has surpassed the target by an average of c.65% over the last five years due to ambitious revenue estimates and volatile crude oil prices. The fiscal deficit doubled from 1.0% of GDP in 2014 to about 5.6% in 2020. This is significantly above 3% of GDP as recommended by the Fiscal ResponsibilityAct (FRA). We forecast fiscal deficit to print at 5.0% of GDP in 2021. While this is slightly lower than the 2020 deficit, it is significantly higher than the 5-year average of 3.4%. Moreover, debt servicing to revenue averaging 62% over the last five years remains a significant concern. Recent reports show that debt servicing charges gulped 98.0% of revenue between January and May.
The MTEF joint committee recommended reviewing the salary structure of all Ministries, Departments, and Agencies (MDAs). The new salary structure is expected to reflect the financial positions of the MDAs. In essence, the salaries of staff at the relevant agencies will be based on the productivity of such agencies. Given the dwindling government revenue, the continued rise in recurrent expenditure gradually heightens the risk of sustained infrastructure deficit. Also, while the Debt to GDP ratio (c. 32.0%) remains relatively low, the country’s debt stock is fast rising, steering debt service to revenue ratio to unsustainable levels. In our view, a critical look at the expenditure side of the budget is a welcome idea.
