January 12, 2023/United Capital Research
As is already widely known, President Buhari has signed Nigeria’s 2023 budget into law, along with the 2022 Supplementary Appropriation Bill. The Federal Government (FG) has a projected revenue of N10.5tn. The FG plans to earn this through Oil Revenue and non-oil revenue sources. However, we are skeptical that the FG will be able to meet its ambitious target.
Across revenue lines, the FG aims to generate N2.3tn revenue via crude oil related sources while the remaining N8.2tn will be generated via non-oil sources (such as Taxes, GOEs revenue, Stamp Duties etc.). First, we focus our attention on the FG’s crude oil revenue budget. The oil revenue budget is built on a production estimate of 1.69mbpd as well as average oil price of $75.0pb. In recent months, attempts have been made to curtail oil theft which has led to improvement in crude oil production (most recent production prints at 1.24mbpd). Estimating a monthly average production growth of 5.0% to peak at 1.80mbpd will see average production print at 1.63mbpd, close to the FG’s benchmark. Another concern is viability of a $75pb price benchmark. Although, OPEC+ has signified intentions to ensure price stability, several headwinds (such as China’s covid-19 struggles and unending signs of recession in economies of major crude importers) remain. Thus, we believe for the FG to achieve its oil revenue target, almost everything has to go right from a production and price perspective, leaving very little wriggle room.
Our major concern is the FG’s ability to achieve its revenue targets from its non-oil sources. Historically, performance in this regard has been underwhelming. For example, between 2015 and 2021, average non-oil revenue performance is 79.4%, while achieving an overperformance in only two of the seven years. Clearly, to mitigate this, the Finance Bill 2022 has been introduced with several new taxes to come onboard. However, we view this as an unsustainable approach to improving government’s revenue. This is besides the negative effect of slowing economic activities and pass-through impact of higher prices. Thus, we believe a long-term strategy aimed at improving tax coverage in Nigeria is a more appropriate strategy to generating sustainable revenue growth. Overall, we consider the FG’s revenue targets fairly ambitious, with the likelihood of the actual deficit exceeding the budgeted N11.3tn.
