Budget 2018 faces execution risk over bullish revenue forecast
Nigerian authorities may have been overly optimistic in preparing budget estimates with ambitious revenue projections that largely failed to materialise in the previous two budget budgets cycles of 2016 and 2017.
For the 2018 budget however by inexplicably further raising the bar some 30 percent in terms of expected government revenues, it is stoking fresh concerns over the feasibility of execution.
“Mostly, I think that they are setting themselves yet more unattainable goals,” said John Ashbourne, Africa economist at Capital Economics, which expects a budget deficit of 2.5 percent of GDP in 2018.
“The federal government falls short on its revenue and expenditure targets every year, and Buhari always responds by writing an even more ambitious target into the budget for the following year,” Ashbourne said.
The Federal government plans to earn N6.6 trillion, as stipulated in the N8.6 trillion 2018 budget presented by President Muhammadu Buhari on Tuesday.
This implies a 30 percent increase from the N5.08 trillion budgeted in 2017.
Non-oil revenue is projected to triple to N4.2 trillion and will include funds raised from restructuring of government’s equity in joint ventures, according to Buhari, while oil revenue was raised 15 percent to N2.4 trillion from N2.12 trillion in 2017.
“The assumptions made, particularly on projected revenues, remain a tad ambitious and as such we see expenditure execution risks in 2018,” Standard Bank said in a November 8 note to clients.
“While the authorities have outlined some planned revenue boosting reforms, including implementing the Voluntary Assets and Income Declaration reform as well as increasing VAT on ‘luxury’ goods, it is still hard to believe that these would suffice to produce the 40 percent year/year jump between what we anticipate will be the actual non-oil revenue collected in 2017 and the target for 2018,” the South-Africa based lender said.
If revenues underperform in 2018, it could widen the fiscal deficit beyond the planned N2 trillion, which comes to about 1.7 percent of GDP, and force the federal government to scale back on expenditure, particularly capital spending.
The Federal government’s retained revenue totalled N1.004 trillion in the first six months of 2017, according to data compiled by BusinessDay and sourced from the Ministry of Budget and National Planning.
That is equivalent to a N1.53 trillion shortfall (60.5 percent off mark) as against the planned N2.5 trillion prorated estimate for the period.
The biggest slippages came from Independent Revenue, down 70 percent (N119 billion earned versus N403 billion projected), Company Income Tax, down 61 percent (N157 billion vs. N403 billion) and FGN’s share of oil revenue, down 60.97 percent (N414 billion versus N1.06 trillion).
Non-oil revenue also fell below the budget target by 49.96 percent (N352 billion vs. N705 billion).
The expenditure target in the half year period was N3.72 trillion, but the federal government managed an actual spend of N1.27 trillion, according to data provided by the budget office.
“The government has failed to take cognisance of the economic recession on company profits and the impact of slowing imports on customs duties, in arriving at revenue projections and was over ambitious with its oil production benchmark, which is currently at a negative variance of 400,000 barrels daily,” said Johnson Chukwu, chief executive officer of Lagos-based advisory firm, Cowry Assets Ltd in a comment to BusinessDay.
According to OPEC data, Nigeria pumped 1.8 million barrels of crude oil daily in August 2017, 18 percent off the budget benchmark of 2.2 million barrels daily in 2017. In 2018, production is pegged at 2.3 million barrels per day while a $45 per barrel oil price was adopted.
“Capital expenditure would bear the brunt of another revenue shortfall, so the government may be forced to review its funding model for capital projects to feature more private capital if it must get the economy going,” said Chukwu.
The proposed capital expenditure in the 2018 budget makes up around 28 percent of the total expenditure envelope, while debt servicing takes up another 23 percent.
The budget has a N2 trillion ($5.6 billion) deficit.
The deficit will be funded by N1.7 trillion of borrowing, half of which will be external, and the privatization of non-oil assets to the value of N306 billion, Buhari said.
Moody’s Investors Service, fresh off handing Nigeria a credit downgrade, projects a bigger deficit which it says could come to 2 percent of GDP deficit.
The oil shock severely weakened Nigeria’s public finances, with general government revenues suffering a 50 percent decline between 2014 and 2016 from 10.5 percent of GDP to 5.3 percent respectively, according to Moody’s.
“The damage wrought by the oil price shock has not yet been undone, and the downgrade reflects our view that this weakness in Nigeria’s public finances will remain for some years to come,” the New-York based ratings agency said Wednesday.
Moody’s forecasts general government revenue to average only 6.4 percent of GDP over 2017-2019, the lowest level of any sovereign rated by Moody’s.
Nigeria’s fragile economic recovery and improving corporate profit is likely to lift tax revenue this year, according to Ayodele Akinwunmi, head of research at FSDH Merchant bank, who adds that any increase in tax revenue will struggle to make up for the overambitious revenue projection for 2018.
“The Federal government’s revenue has been challenged in the last two years on account of the drop in oil revenue. Furthermore, the fact that a significant part of government revenue goes towards interest payments means that little revenue is left for the government to undertake capital projects,” Akinwunmi told BusinessDay.
President Buhari has asked the National Assembly to approve the 2018 budget to speed up economic recovery.
Lawmakers are required to approve the budget before spending can start. In the last two years delays of as much as six months in signing the budget into law held back spending on projects and weighed on economic growth. Africa’s biggest oil producer is rebounding after the economy contracted by 1.6 percent in 2016, the first such performance since 1991.
LOLADE AKINMURELE, DIPO OLADEHINDE & BUNMI BAILEY
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