March 24, 2022/CSL Research
Based on a new report published by the Economist Intelligence Unit (EIU), Nigeria’s fiscal deficit will widen to a 10-year high this year as high global fuel prices push up petrol subsidy bills while crude oil output remains low despite higher prices. The EIU raised its fiscal deficit forecast for 2022 from 4.5% of GDP to 5% of GDP.
Brent oil price passed US$100/bbl for the first time since 2014 as a worsening of the Russian Ukraine crisis continues to spark fears of a disruption to the region’s energy exports. Theoretically, the rise in crude oil prices, a major source of foreign exchange to the country, should be positive for revenues. However, the perennial issue of terminal shutdowns, vandalism, thefts and low investments in the sector continues to fuel sub-optimal oil output despite the relaxation of OPEC+ production agreements.
The average daily oil production for the fourth quarter of 2021 was 1.50mbpd, lower than the third quarter 2021 production volume of 1.57mbpd and OPEC monthly reports point to still lower production in Q1 2022. These figures compare with 2.5mbpd in 2011. The uninspiring output has been largely due to crude oil terminal maintenance, shutdown, and reduced investments. The real growth of the oil sector was -8.30% y/y in 2021 compared with -8.89%, while the sector contributed 7.24% to real GDP in 2021.
The country’s fiscal deficit has surpassed the target by an average of c.65% over the last 5 years due to ambitious revenue estimates and volatile crude oil prices. The fiscal deficit has more than doubled from 1.0% of GDP in 2014 to about 5.9% in 2021 based on IMF forecast. This is significantly above 3% of GDP as recommended by the Fiscal Responsibility Act (FRA). The low oil revenue mobilization continues to mask the gains from the non-oil segment. The total gross CIT collection in 2021 was N1.69tn, up by 19.6% y/y compared with N1.41tn in 2020 and the highest amount of CIT collected since the official publication began in 2015.
Persistent fiscal spillage has resulted in debt servicing to revenue averaging 70% over the last 5 years. The International Monetary Fund has projected that Nigeria will spend c.92% of its 2022 revenues repaying debts. This trend will likely persist and calls for fiscal consolidation. The fiscal deficit is set to widen considerably in 2022. Government expenditure for 2022 was estimated at an all-time high of N17.12 trillion, while revenue was projected at N10.1 trillion. While expenditure is set to exceed the estimate, revenue will likely underperform the estimate. For one, increasing oil prices implies an increase in the landing cost of petrol and an increase in subsidy payments. The Federal Government had earlier earmarked a sum of N3trn for subsidy payments in 2022. At current oil prices, the figure stands to increase substantially. Again, high fuel costs may likely erode the profits of many companies and lower tax receipts.
