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Nigerian Fiscal: Déjà Vu All Over Again?



In first half of 2018 strategy report, ARM Research estimated fiscal deficit over 2018 to print at N2.9 trillion – from the revenue expectation of N4.4 trillion and expenditure of N7.3 trillion – which basically formed the domestic borrowing expectation of N1.7 trillion over 2018.

Precisely, Federal Government’s receipts of N561.7 billion over the first two months stemmed from higher oil prices and crude production while expenditure over the same period printed at N1.1 trillion. In terms of domestic borrowing over the period, Federal Government net issued N122.7 billion and N109.6 billion in January and February respectively which combined sums up to N232 billion – 45.5% of actual fiscal deficit – implying that Federal Government must have sourced funding from alternative sources to meet the balance of N278 billion.

Perusing through the financial statement of the Apex bank revealed an increase in Central Bank of Nigeria claims on the federal government to the tune of N715 billion over the two months period in 2018 wherein the Federal Government must have drawn down on to fund the shortfall between fiscal deficit and domestic borrowing.

Over 2018, ARM Research expects higher crude oil prices and production to bolster oil receipts and, by extension, Federal Government retained revenue. With a budget implementation of 75%, it is expected that fiscal deficit to print at N1.78 billion over the year. In terms of financing, on the sale & privatization of government assets where Federal Government expects N311 billion, ARM Research forecast receipt of 50% of the expected proceeds.

On foreign borrowing, ARM Research expects the FG to issue $2.8 billion (N850 billion) in Eurobonds over the second half of the year. With regard the balance of N775 billion which should ordinarily be financed through domestic borrowing, it is assumed that 50% part funding by the CBN which suggests that the government could possibly net issue ~N388 billion over 2018 under the base scenario.

Budget outlay revised to match higher revenue

After six months of face-off, the legislative arm finally passed the 2018 budget in May with the President assenting the appropriation bill in June 2018. Expectedly, the approved bill came with adjustments. First-off, relative to proposed receipts, aggregate revenue was up N559 billion to N7.17 trillion, following an upward revision to oil revenue estimate (N546 billion to N2.99 trillion) reflecting an upward revision in crude oil price assumption to $51/bbl. (prior: $45/bbl.), while keeping other oil variables unchanged.

The adjustment to crude oil prices was in line with current realities, as crude oil prices averaged $71/bbl. over first half in 2018 (+25%). On non-oil revenue, receipts from Company Income Tax (CIT) was revised lower to N658 billion (- N136 billion) while under ‘other revenue’, a new revenue source – FAAC levies – was introduced with planned receipts of N146 billion over 2018. Overall, approved aggregate non-oil revenue printed at N4.17 trillion, unchanged from what was proposed.

Largely reflecting the increase to Federal Government revenue, aggregate expenditure was revised upward by N508 billion to N9.12 trillion with much of the increase allocated to capital expenditure (+N445 billion to N2.88 trillion), accounting for 31.5% of total Federal Government expenditure (2017: N2.17 trillion). Also, statutory transfers increased N73 billion to N530 billion with the increase most likely allocated to NDDC and UBEC.

Overall, with the foregoing showing higher reviews to revenue than expenditure, fiscal deficit printed at N1.95 trillion, lower than N2.01 trillion earlier proposed. To finance the deficit, the government plans to generate N311 billion – split into N306 billion from privatization of government assets, and N5 billion from sale of other government property. The balance of N1.64 trillion would be financed by borrowings, split into domestic (N793 billion) and foreign (N849 billion) borrowings.

Higher oil prices underpin improved Federal Government receipts  

Over the first two months of 2018, the federal government fiscal deficit printed at N510 billion (split into N288.9 billion in January and N221.7 billion in February) due to higher government outlay which exceeded Federal Government receipts over the same period. Starting off with receipts, Federal Government collected N561.7 billion, representing a decline of 45.2% YoY due to the bloated base of the same period in 2017 from one-off receipts.

Excluding the one-time revenue translates to a 61.8% YoY increase in actual receipts. While the breakdown of two months of 2018 revenue into oil and non-oil receipts wasn’t provided, ARM Research estimated value of oil receipts suggests that the sub-component was the key driver of receipts.

According to our estimate, Federal Government’s share of oil receipts printed at N323.9 billion – 58% of total receipts, supported by higher crude oil price and production. Elsewhere, non-oil receipts of N237.8 billion (+3.4% YoY) was supported by higher tax collection following improved economic activities and widening of the tax base.

Having said the above, ARM Research highlights that Federal Government’s actual receipts in two months of 2018 was 53% short of budgeted revenue (N1.19 trillion) over the two-month period, largely due to non-oil receipts which had a shortfall of 65.8%.

On expenditure, outflow over the review period printed at N1.1 trillion with recurrent expenditure (N830 billion) accounting for 77% of total spend while the balance was disbursed to meet capital expenditure (N242.2 billion) – which was utilized on 2017 capital projects considering that 2018 capital spend commenced after the assent of the 2018 bill.

Relative to pro-rated two months of 2018 budget, actual recurrent expenditure suggests that Federal Government achieved 90% of its recurrent budget, reflecting its obligation to meet personnel, overhead and debt service spend, as well as the fact that spending on recurrent starts from the beginning of the fiscal year irrespective of when the budget is passed. Accordingly, budget implementation in the two-month period printed at 70.5% (vs. 89.6% in 2-Month in 2017).

History seems to be repeating itself

Despite fiscal deficit of N510 billion, Federal Government net issued N122.7 billion and N109.6 billion in January and February respectively which combined sums up to N232 billion, 45.5% of deficit. This therefore suggests that Federal Government sourced funding from alternative sources to meet the balance of N278 billion (54.6% of fiscal deficit), considering that the proceeds from the $2.5 billion Eurobond in February 2018 were earmarked to meet maturing Treasury Bills and thus, do not think it was used to finance the fiscal deficit.

Perusing through the financial statement of the Apex bank revealed a resumption of funding by the CBN to Federal Government. Interestingly, there was an increase in CBN’s claims on Federal Government from Jan 2018, with month on month increase of N318.8 billion and N396.5 billion in the first two months of 2018, suggesting CBN helped plug the Federal Government deficit.

Momentary respite but headache persists

Over the first four months of 2018, FAAC allocation to state governments expanded 42% YoY to N698.7 billion, reflecting higher oil receipts and increased VAT allocation (+17% YoY). Although, the sturdy growth suggests an improved revenue for states, ARM Research notes that on an annualized basis, actual allocation to states accounted for only 23% of cumulative state government budget for 2018 (vs. 22% in the prior year).

The dismal receipt-budget picture as well as most states inability to generate sufficient internally generated revenue has left the federating units in a dire condition of constantly failing to meet their obligations including the payment of workers’ salaries.

FG finances in better shape on higher oil prices

Over the rest of 2018, ARM Research expects Federal Government’s receipts to remain robust with much of the support coming from the oil segment. On oil, ARM Research expects oil prices to remain stable at an average of $72.5/bbl. over H2 18 – which is significantly higher than the budget oil price benchmark of $51/bbl. The foregoing alongside the expectation of 2.0mbpd oil output (budget: 2.3mbpd) and exchange rate of N305/$, translates to oil receipts of N2.9 trillion, at par with the budget.

On non-oil receipts, ARM Research believes that revenue from this segment will grossly underperform budget due to ambitious targets set by the Federal Government. Specifically, ARM Research are pessimistic on proposed revenue of N710 billion from the restructuring of JV oil assets and N512 billion from recoveries with the former highly unlikely given the absence of moves by the Federal Government with regard commencement of the process towards the reduction of its stake in JV assets.

On other nonoil receipts, ARM Research have varied expectation. They are positive on improved custom receipts due to the recent upsurge in excise duty rates on alcohol & tobacco and Federal Government’s improved ability to collect custom taxes. Overall, we have raised our non-oil estimate by 10% to N2.2 trillion. Combined with oil receipts, ARM Research estimates federally collected revenue to print at N5.08 trillion for 2018 (32% lower than budget projections). Assuming 75% budget implementation (100% recurrent & 40% Capex – Jun to Dec 18), ARM Research expects fiscal deficit to print at N1.78 trillion.

CBN backdoor financing guides to muted local borrowing over 2018

Regarding funding sources, as stated earlier, Federal Government plans to raise N311 billion from the privatization and sale of some non-oil assets. However, considering the bureaucracy and political drags, it is anticipated that 50% of the non-oil asset sale proceeds under the base case scenario in 2018. Federal Government also plans to seek external funding of $2.8 billion via Eurobonds (N850billion) over the second half of 2018 which would be successful considering that Federal Government’s Eurobond sale of $2.5 billion earlier in the year was oversubscribed with a bid-cover size of 1.4x.

The balance of N775 billion, using the estimated fiscal deficit, should ordinarily be financed through domestic borrowing. However, it is believed that part of the deficit would be financed by the CBN considering the increase in CBN’s claims on Federal Government over Q1 18 to the tune of N715 billion, after five months of repayment on the part of Federal Government. Also, in recent times, government’s keen drive to reduce its debt burden and debt service cost explains its aversion towards increasing its supply of paper.

Assuming 50% part funding suggests that the government could possibly net issue ~N388 billion over 2018 under the base scenario. Additionally, ARM Research played out different scenarios in the table below to forecast the potential size of domestic paper issue using the estimated fiscal deficit (N1.78 trillion) for 2018.

It is estimated that to finance the budget, the net debt issue could range between N311billion and N737 billion with the range sizably lower than 2017 net issuance of N1.27 trillion. In sum, the scenario analysis guides to muted domestic borrowings in 2018.

– ARM Research


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President Buhari’s Second Term: A chance to provide peace, prosperity, and security?



Nigerians re-elected President Buhari for another four years in what many have termed – a chance to make amends. In what could be called his third stint at the helm of affairs in Africa’s most populous country, questions about a coherent economic strategy are already being asked. In the last dispensation, protectionist posturing was worsened by a management style perceived to be distant while crucial decisions were delayed.

The economy is set to continue its recovery from the worst recession in its history. Nonetheless, the forecast is for economic growth to remain well below historic averages in the next five years. According to economic survey by Economist Intelligent Unit (EIU), Nigeria’s Gross Domestic Product (GDP) is set to reach $473.5bn in 2019 and rise to $680.9bn by 2022. This prediction will hinge, for the most part, on the current intensity of economic reforms and current rate of investment being sustained.


Background of the economy leading to election 2019

The Nigerian economy grew by 1.9% in 2018, an improvement from 0.8% recorded in 2017, with the non-oil sector being the fulcrum for the growth picture. Over the last quarter of 2018, the economy recorded a solid growth of 2.4% – with the expansion in the non-oil space (2.7% YoY) taming the contraction observed in the oil sector (-1.6% YoY). Dissecting the components in the non-oil territory, all subsectors expanded, with the services and Agriculture sector leading the pack. Notably, improvement in the number of active subscribers in ICT subsector coupled with mild support from transport drove the expansion in the services sector (3.8% YoY). Furthermore, while the Agriculture sector improved by 2.5% in Q4 18, it was disappointing compared to its four-year average of 3.8%. On the flipside, the oil sector dived into recessionary waters buoyed by low crude production (-2.6% to 1.91mbpd).


Declining Income per Capita

It is important to note that Nigeria has a huge population of over 180million and a population growth rate of 2.6% – higher than the 2018 GDP growth of 1.9%. GDP growth is projected to reach 2.0% and 2.2% in 2019 and 2020 respectively before rising to 3.2% by 2021. This means Nigeria would have had five consecutive years of declining income per capita – from 2016 to 2020. A burgeoning youth population is also unlikely to be matched by job growth, meaning unemployment – at over 40% – is likely to rise even further.

A breakdown of the GDP components show that Nigeria’s gross fixed investment, at $66.5bn, will account for just 14.0% of GDP in 2019. This pales in comparison to that of other notable emerging economies – Brazil (19%), India (27.12%), China (42.86%), and South Africa (18.7%). Majority of countries in the world have gross fixed investment of 18-22%. The EIU goes further to forecast that gross fixed investment in Nigeria will rise by just one basis points to 14.1% ($86.2bn) by 2022.


Why does this matter?

The importance of this component of GDP is that it is a clear indicator of the future productive capacity of the economy. The aforementioned basically means that the current and projected rate of investment is simply suboptimal and far below the level required to propel Nigeria to an accelerated growth path. It is incapable of providing Nigeria with the investment impetus that will have the desired multiplier effect on output. Nigeria has also grossly underinvested in its infrastructure. The existing infrastructure gap is estimated at over $300bn and requires 10% of GDP ($37.6bn)/annum over the next 10 years to bridge – an unlikely feat given that  current infrastructure needs are far in excess of current cash flows. Nigeria’s capital budget in 2018 was $7.98bn – 26.6% of total budget and 2.2% of GDP. This compares to 6% of combined GDP of emerging market economies. Nigeria’s share of emerging markets total spend on infrastructure is currently less than 1%.


Few options, Tough Choices

Nigeria’s high population growth rate means it must be much more efficient with economic policy. Putting Nigeria on an accelerated path to a free and market driven economy requires making tough game-changing decisions now. It will begin with figuring out how to raise the level of gross fixed investment to levels above and beyond the global average of 18-22%. Investment in the next 3-5 years will depend on policies and incentives.

Galvanizing domestic and international investment will be crucial. This will require a structure that incentivizes private investment considerably more than what is currently obtainable. Achieving this will require significant increases in public investment in infrastructure, in addition to more comprehensive and deep-seated market oriented structural reforms.


The Game changing Formula

Raising the level of investment in infrastructure given the government’s current revenue and borrowing constraints requires rethinking ways to attract private sector funding in the form of Public Private Partnerships (PPP). Outright sale and concessions of government assets– airports, seaports, inner city highways and trunk roads– should be a key consideration for policymakers.

Airports concession has the potential to lower the average cost for aviation operators by 50%. The government’s stake in the power distribution companies should be sold to the private sector while the power sector forbearance needs to be dealt with. The rail investment program needs to be accelerated while the road networks to major seaports need to improve.  Another item that is top on the list of reforms is the foreign exchange policy where a movement to currency convertibility with minimal intervention is paramount. Fears of a wild depreciation if the Central Bank of Nigeria lets go of its current policy of a managed float, are greatly exaggerated. The almost insignificant deviation between the parallel and the Investor Exporter Foreign Exchange (IEFX) window – which is closer to market equilibrium than the official rate – supports this fact. There is also the issue of fuel subsidy which has now taken the form of under recovery as the Nigerian National Petroleum Company (NNPC) now fully bears the brunt of the subsidy as the sole importer of Premium Motor Spirit (PMS). Deregulating the downstream sector of the petroleum industry requires the removal of subsidies, which will spur competition, bring about efficiency and increased investment in domestic refining – the lack of which has been a huge drain on Nigeria’s foreign exchange earnings over the years.  Not only is a game changing formula now imperative, it has become inevitable. Nigeria can continue at its current pace of reforms and investment – a recipe for chaos, social and political disintegration; or take drastic measures to raise public and private sector investment to levels that will accelerate productivity and economic growth.


Ending extreme poverty must be a top policy priority for Nigerians and the new government. The country has the capacity to deal effectively with poverty: large endowments of natural resources, especially oil; a young and highly educated population; and many people adept at entrepreneurship and the creation of wealth.

Nevertheless, there are many threats to the creation of wealth. Two of them stand out: widespread corruption and the absence of peace and security in many regions. Corruption, like embezzlement of public funds, has plagued Nigeria since independence. Buhari came to power in 2015 promising to clean up corruption and restore professionalism in the public services. Although he appears to have made significant progress in that fight, his critics say that he only targeted his political opponents and ignored his allies and supporters. Still, many Nigerians give him credit for his efforts and for not illegally amassing wealth for himself. To deal more effectively with corruption, Buhari must now significantly improve openness and transparency in government communication, especially with respect to government procurement programs.

The Buhari government also needs to deal with extremism and other threats to peace and security like Boko Haram and the lawless armed gangs who roam parts of the country kidnapping people and holding them for ransom. This must be done not just through military action but also by providing opportunities for young people, especially in the rural areas, for self-actualization.

Finally, the government must address the issue of lack of basic infrastructure for development: passable roads, adequate and reliable power, water treatment plants (access to clean drinking water is a major problem for most communities), basic health care, affordable housing (especially in urban areas), police protection, and other services that can enhance the ability of citizens to live in peace.

Posterity will judge Buhari and his government by how well they use the opportunity granted to them by Nigerian voters to make peace, security, and prosperity possible for their fellow citizens.

On the economic front, we expect resilience in agriculture sector and a recovery in the oil sector to be the key drivers for growth in non-oil and oil sector accordingly. In the non-oil sector, muted growth in ICT and in turn services as well as weak growth in Manufacturing due to depressed consumer wallet and delay with minimum wage bill, guides to slower growth in the non-oil sector of 1.3% YoY (2018: 2.0% YoY). In the oil space, the additional 200kbpd from the Egina oil field guides the expectation of an expansion in crude production over 2019 (2.06mbpd), albeit capped by OPEC cut. That said, it is expected growth in the oil sector to print at 7.1% (2018: 1.1%). Overall, 2019 growth estimate is forecast to 1.98%, a notch away from 1.93% recorded in 2018. For Q1 19, a slowdown in growth is expected to 1.3% YoY driven by a contraction in the oil sector (-1.1% YoY) and moderation in non-oil sector growth.

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