October 11, 2022/CSL Research

Sequel to the approval of the 2023 budget at the Federal Executive Council (FEC) meeting last week, President Muhammadu Buhari presented the 2023 budget to a joint session of the National assembly last Friday. In line with the 2023 to 2025 Medium Term Expenditure Framework and Fiscal Strategy Paper, the budget was based on the following assumptions: Benchmark oil price–US$70/bbl.; production estimate–1.69mbpd (inclusive of 300kbpd–400kbpd condensates); exchange rate–N435.57/US$; GDP growth–3.75%; and inflation rateof 17.16%.

Based on the President’s presentation documents, the Federal Government is to spend N20.51tn in 2023, to be financed by an estimated revenue of N9.73tn, leaving a budget deficit of N10.78tn. New borrowings of N8.80tn, privatisation proceeds of N206.18bn and N1.77tn drawdowns on bilateral & multilateral loans secured for specific development projects/programmes would finance the budget deficit. Furthermore, the expenditure estimate is divided into capital expenditure of N5.35tn (including the capital component of statutory transfers), recurrent expenditure of N8.27tn and debt service cost of N6.31tn. On the revenue front, key contributors to revenue will be oil revenue–N1.92tn, non-oil tax revenue–N2.43tn, independent revenue–N2.21tn, retained revenues of GOEs–N2.42tn, and other revenues of N762bn.

We are a little concerned about the Federal Government’s ability to achieve its revenue target of N9.73tn in 2023. This is based on the government’s historical revenue underperformance and the current economic realities. In the President’s budget presentation speech, he noted that only 63% of budgeted revenue had been achieved as of July 2022, largely due to the underperformance of oil and gas revenue. This is despite the high Brent price in the period, above the budgeted oil benchmark price of US$73/bbl. Vandalism, theft, and underinvestment in oil infrastructure continue to limit production. Between January and July 2022, the daily average oil production (including condensates) was 1.45mbpd, lower than the budgeted 1.60mbpd for 2022. Hence, in the absence of any long-term solutions to the low crude oil production, achieving 1.69mbpd (including condensates) for 2023 would likely be impossible. Beyond this, the fiscal strain is further compounded by the drastic increase in petrol subsidy which has gulped N2.04tn between January and July 2022. The subsidy regime extends into 2023, at least until the new administration decides otherwise.

We are also concerned about the government’s rising deficit budget. While we acknowledge the need to pursue an expansionary fiscal policy under current economic conditions, it should not be at the detriment of long-term fiscal sustainability. The budget deficit for 2023 is equivalent to 6.2% of FY 2021 GDP, which exceeds the Fiscal Responsibility Act’s (FRA) limit of 3.0%. We note that the Federal Government typically exceeds its budgeted deficit for a budget year. According to the President, the government already had a budget deficit of N4.63tn at the end of July 2022, which if annualised, may bring the budget deficit to N7.93tn by the end of 2022 compared with a budgeted N7.35tn. Of more concern however is the debt service to revenue ratio, which is becoming unsustainable. As of June 2022, the debt service
to actual revenue ratio stood at 107.7%.