July 20, 2023/CSL Research
Based on media reports, the three tiers of government will be sharing a total of N1.959trn in July 2023. This is c.149% higher than the N786.161 billion shared in June and c.199% higher han N655.93 billion in May. Allocations are usually shared from the preceding month’s revenue implying June revenue is what will be shared in July.
Many States rely solely on FAAC allocations to run their states with very minimal Internally Generated Revenue (IGR). FAAC allocation on the other hand is dependent on highly volatile oil receipts. We expect a considerable improvement in the country’s fiscal position this year due to the devaluation of the Naira and the elimination of subsidies.
Given the expectations of continued inflationary pressures, we expect VAT revenue to maintain the growth momentum since VAT is deducted by applying VAT rate on the value of transactions. An increase in prices of goods and services will necessarily imply growth in VAT collections. However, we expect Company Income Tax (CIT) to decline as the profitability of businesses is strained amidst increasing cost pressures.
That said, taxes from new sources introduced in the new finance act such as the N10 per litre tax placed on carbonated drinks, tax on phone calls etc. should support accretion to non-oil revenue if they kick-start before year end. The President through several executive orders has postponed the commencement date of many of these taxes.
For oil revenue, while we believe the oil prices may come in slightly higher than the government’s expectation of US$75/bbl considering H1 average price target of US$81.93/bbl, we do not think that the target oil production of 1.69mbpd is achievable. Going by the latest data released by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), average daily oil production (including condensates) for the first half of the year was .1.45mpd. The perennial issues of pipeline vandalism, theft, and terminal shutdowns have continued to constitute clogs.
Though the government has been making efforts to clamp down on theft, production numbers in the first half of the year have not been too impressive.
That said, the devaluation of the currency at the I&E window and the FX unification bodes well for oil receipts and as such oil revenue will likely exceed budgeted numbers this year. Again, expensive subsidy payments also engulfed over 75% of gross oil revenue in 2022, limiting the amount paid to the federation account. With the subsidy eliminated, the country’s revenue position should improve considerably.
