October 27, 2023/Coronation Research
In the recently approved 2024-2026 Medium-Term Expenditure Framework (MTEF) and Fiscal strategy paper, the FGN’s aggregate expenditure for 2024 is estimated at N26.01trn. This is 14.8% higher than the approved 2023 budget.
Unlike previous budget estimates, the proposed capital expenditure estimate is lower by -5.4% at N6.8trn (i.e., 26% of total expenditure) from N7.2trn budgeted for 2023. We expected a slightly higher allocation for capital expenses given the FGN’s emphasis on bridging the infrastructure deficit.
The decline in proposed capex spending coincides with a 23.1% increase in the proposed recurrent (non-debt) expenditure which is estimated at N10.2trn vs N8.3trn in the approved budget for 2023. This increase can be attributed to the recent wage hike announced by the FGN, adjustments in pensions corresponding to the wage increment, and the creation of new ministries. Furthermore, the estimated allocation for debt service increased by 30.7% to N8.2trn from N6.3trn budgeted in 2023.
The MTEF’s underlying assumptions indicate that the FGN expects an oil price benchmark of USD73.9/b, oil production level of 1.78mbpd, an exchange rate of N700/USD, inflation rate at 21.4%. and GDP growth rate of 3.76% y/y in 2024 (with the bulk of the projected growth expected to come from the non-oil sector).
On the other hand, the estimated revenue is N16.9trn, 53.5% higher than the 2023 provision of N9.9trn. This is an ambitious target. The breakdown of this revenue estimate shows that N6.9trn (41%) is projected to come from oil-related sources, while the balance of N10trn (60.5%) is expected from non-oil sources. We note that the projected fiscal outcome in the MTEF point towards expectations of improved revenue inflow, on the back of the removal of PMS subsidy, fx depreciation following the fx liberalization policy, and increased collection of non-oil taxes.
In our view, achieving the proposed revenue target in 2024 would require deliberate efforts towards curtailing oil theft and vandalism in the oil sector. Indeed recent upticks in oil production have been recorded (i.e., 1.5mbpd in September ’23 vs 1.3mbpd in July ’23). However, we expect oil production to range between 1.4 -1.6mbpd in 2024, still below the OPEC target of 1.72mbpd.
As for non-oil, it is worth highlighting that actual non-oil revenue has exceeded FGN’s target by an average of 9.4% since FY2021. We expect the FGN to increase its tax mobilization initiatives and further enhance independent revenue generation and collection efforts, especially from government owned enterprises (GOEs). However, a downside risk to the projection include lower tax receipts due to tight consumer wallets, as households and businesses remain impacted by high inflation.
The 2024 budget deficit is projected at N9.05trn. Although, this is a decline from the N11.6trn budgeted for FY2023, It is 3.83% of the FGN’s estimated GDP output, hence above the 3% threshold stipulated in the 2007 Fiscal Responsibility Act The deficit is expected to be financed by new borrowings totalling N7.8trn (domestic: N6.04trn, external: N1.76trn). We expect continuous reliance on domestic borrowing, as the International Capital Market remains expensive for emerging economies, like Nigeria.
However, the borrowing plan within the budget proposal shows a -23.2% decline in domestic borrowing vs the 2023 domestic borrowing target. This is in line with the FGN’s expectations of increased revenue.
Other proposed sources of deficit finance include privatization proceeds estimated N298.4bn and drawdowns on bilateral/multilateral projects/programs estimated at N941.1bn.
For full economic note, please click here
