October 27, 2022/United Capital Research

The recently released Public Presentation of the 2023 Budget proposal revealed that Nigeria generated a total of N3.7tn revenue between Jan–Aug 2022 compared to the pro-rated sum of N5.5tn expected for the period. This implies that Nigeria was only able to generate 66.7% of the total projected revenue for the first eight months. This dwindling total revenue can be attributed to the significant decline in the oil revenue generated during the period despite the increase in global energy prices exceeding the amended $73.0 benchmark (Brent: $91.7, up 17.9% YTD).

Oil revenue printed at N395.1bn, underperforming by 72.9% against a projected N1.5tn in the period under review. The underperformance is mainly due to weaker than projected oil production, with crude oil production averaging 972,400bpd as of Aug-2022 (compared to the budget benchmark of 1.6mbpd). The declining crude oil production has been down to operational challenges caused by oil theft and pipeline vandalism. In addition, high importation costs of PMS continue to erode FG’s crude oil earnings. Lastly, years of underinvestment in crude oil facilities are beginning to undermine crude oil output. Notably, the contribution of the Oil & Gas sector to the Gross Domestic Product (GDP) remains underwhelming, declining to 6.6% and 6.3% in Q1-2022 and Q2-2022, respectively.

Going forward, the lack of efficient remedial measures to permanently combat the effects of oil theft and pipeline vandalism will continue to weigh on crude oil output. Declining crude oil production will continue to weigh on the FG’s revenue earning capacity due to the significant contribution it holds across the FG’s aggregate revenue stream. Given the proposed aggregate revenue at N9.7tn in 2023, we remain pessimistic about our outlook on the performance of aggregate revenue. In addition, the FGN’s plan to run subsidy programs through H1-2023 will also increase the government’s fiscal obligations. Thus, we project that the country’s budget deficit will widen due to the historical underperformance of revenue by the government and the increase in aggregate expenditure. The increase in the FY-2023 budget deficit will continue to drive the FG’s appetite to seek funding in the debt market to finance its recurrent and capital expenditures and debt servicing obligations.