October 11, 2021/CSL Research
Following the approval of the 2022 budget at the Federal Executive Meeting (FEC), President Buhari presented the 2022 budget to a joint session of the National Assembly last week.
Commendably, the current administration remains keen on achieving the January to December budget cycle. The highly ambitious 2022 budget is to promote economic diversification, intensify infrastructure investments, alleviate poverty, and achieve social inclusion.
The budget was based on the following assumptions: Benchmark oil price of US$57/bbl., Production estimate of 1.88mbpd (inclusive of 300kpd – 400kbpd condensates), Exchange rate of N410.15/US$, GDP growth of 4.20% and an Inflation rate of 13.00%.
Based on the President’s presentation documents, the Federal Government plans to spend N16.4tn, to be financed through an anticipated revenue of N10.1tn, thus creating a budget deficit of N6.3tn in 2022. The budget deficit is expected to be financed majorly by borrowings of N5.0tn (local; N2.5tn and foreign; N2.5tn), multi-lateral/bi-lateral loans of N1.2tn and privatisation proceeds of N0.9tn. Furthermore, the expenditure estimate includes capital expenditure of N5.4tn, Recurrent expenditure of N6.8tn, Sinking fund of N0.3tn, the recurrent component of statutory transfer of N0.3tn, and debt service cost of N3.6tn. On the revenue front, projected revenue sources include oil revenue(N3.5tn), taxes (N2.1tn), independent revenue (N1.8tn), retained GOE (N1.7tn), and others (N0.9tn).
The revenue target of N10.1tn in 2022 appears too ambitious to us based on current realities. Nigeria has, in recent years, adopted an expansionary fiscal stance without specific non-debt revenue-generating goals. In many cases, projected fiscal deficits exceed projected shortfalls. Despite the conservative oil benchmark price of US$40/bbl. and the actual crude oil price rising even beyond the pre-pandemic levels, the government only achieved 66% of the target revenue as of July 2021, as highlighted in the budget presentation speech. Although this was attributed to the OPEC+ production cuts agreement, which should reduce as demand recovers, but this places a cap on price increment. Again, a successful resolution of the VAT collection dispute between the federal government and states, in favour of the states, will likely affect the tax revenue target of N2.1tn.
Another concerning aspect is the budget deficit. Though the government claims that total borrowings as a percentage of GDP are still within acceptable limits as the total money borrowed as of 22 July was 23% of the Gross Domestic Product (GDP), debt service revenue ratio (including GOEs) of 73% as of August 2021 remains a concern. The government plans to achieve a debt service to revenue ratio (including GOEs) of 36% in 2022, but again, this appears unrealistic. While we expect the proposed Finance Bill to accompany the 2022 appropriation act, we do not rule out the possibility of a change in the budget projections.
