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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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Nigeria’s economy in 2019: Woes or fortune?



As 2019 begins with hopes and aspirations, there are expectations from the federal government to better the economy with a view to making it have more meaningful impact on Nigerians. Here are the looks at the key indicators that will characterize the economy and determine its fortunes this year.

The economy appears to have lost its sparkle; its growth has dwindled. And there are palpable fears that the effect of political activities in the lead-up to the general elections, scheduled to commence on February 16, could overshadow whatever gains the economy may muster during this period, thus, compounding its woes. As it stands, the federal government has abandoned the economy for politics and the economy is already bearing the brunt.

After five quarters of recession, which the economy entered in the second quarter of 2016, having plummeted to a gross domestic product (GDP) growth rate of -2.06 per cent, the economy exited the quagmire in the second quarter of 2017 with a GDP growth rate of 0.55 per cent, which was revised upward to 0.72 per cent, according to data from the National Bureau of Statistics.

Then, the economy turned the corner as it grew at 1.40 per cent in the next quarter- that is, the third quarter of the year, and sustained the improvement recording a GDP growth rate of 2.11 per cent in the fourth quarter of the year 2017. However, in the first quarter and second quarter of 2018, the economy reversed the rising streak as evidenced in the slowed growth rates. NBS data showed that the GDP growth rate fell to 1.95 per cent in the first quarter of 2018 from the 2.11 per cent it achieved at the end of 2017. It dropped further to 1.50 per cent in the second quarter.

The agency noted that the clashes between farmers and herdsmen, which took its heavy toll on agriculture, mainly dragged down the growth rate during the quarter under review. Agriculture, being a major component of the non-oil sector was badly affected. However, with improvement in the non-oil sector, the economy received an impetus for growth, which pushed the GDP growth rate to 1.81 per cent. According to NBS, growth in the third quarter was largely helped by the non-oil sector, which contributed 90.62 per cent to the total GDP, while the oil sector contributed 9.38 per cent to growth in the review period. Oil GDP was reported to have contracted by -2.91 per cent compared to -3.95 per cent in second quarter and 23.93 per cent in third quarter 2017.

Despite the improvement in growth rate in the third quarter of 2018, the economy is still experiencing slowdown and was recently put on red alert of slipping into another recession over weak economic growth.

According to the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, who raised the alarm at a recent Monetary Policy Committee meeting, the economy may be under threat of relapse into a recession, which it recently exited from with fanfare, given the weak economic growth of the second quarter of 2018.

Emefiele also raised concerns about threat to efforts to curb inflation, stabilise exchange rate and build reserves, considering the macroeconomic fundamentals at the period.

The consumer price index, which measures inflation dropped from 11.28 per cent in September 2018 to 11.26 per cent in October 2018 and rose again to 11.28 per cent in November 2018, but when compared with the levels in the corresponding year of 2017, when it dropped from 15.98 per cent in September to 15.91 per cent in October and 15.90 per cent in November, it was not where the monetary authority had envisaged it would be. The apex bank has the onerous task of bringing inflation to its targeted single digit, especially in an election year.

Also, of note as a potential contributor to relapsing the economy into recession, as pointed out by the CBN governor, was the delay in budget implementation. A situation, where three months after presidential assent and about three months to the end of 2018, there was no budget implementation was unhealthy for the economy. According to the apex bank, long years of fiscal policy lag had contributed to the weakness in the economy. Most of the inimical factors identified by Emefiele at that time are still at play.

Given this scenario, as the New Year begins, economic managers have the arduous task of resolving those issues as well as ensuring the economy not only continues to grow, but also record appreciable and inclusive growth. While 2019 is an unusual year, being an election year, more, but critical efforts would be required by handlers to put the economy on a sure footing with a viewing to avoiding a relapse into recession.

The federal government has proposed a budget of N8.83 trillion for the 2019 fiscal year. Nigerians would not accept any excuse for delay in its passage and poor Implementation. The executive and the National Assembly should therefore quickly address the grey areas and harmonize their positions so that the appropriation bill could be passed into law and implemented in earnest.

The budget has been predicated on an oil-price benchmark of $60 per barrel. In recent times, oil prices have been sliding at the international market and currently stood around $54 per barrel. The falling oil prices have been identified as threat to implementation of the budget and as such, the relevant authorities would do well to peg the budget at the most appropriate benchmark.

As part of its strategy to mobilize revenue, the federal government through the ministry of finance, in July 2017, created Voluntary Assets and Income Declaration Scheme (VAIDS), a tax amnesty, which was expected to rein in $1 billion from tax evaders and avoiders. By the end of the scheme, one year later, with only about N30 billion, the proceeds fell short of the government target, but the scheme was able to swell the tax database by five million to 19 million from 14 million. The government is expected to follow up on this initiative as well as intensify the revenue mobilization from more alternative sources than oil and borrowing to fund the budget. As at the end of 2018, the total collection by the Federal Inland Revenue Service was about N7 trillion.

Besides, the federal government is expected to review the power sector transition market policy performance this year after its first five years of implementation.

It is obvious that this present administration led by President Muhammadu Buhari, which is already pre-occupied with politicking ahead of the general elections, would not be able to solve the burgeoning unemployment problem. With unemployed Nigerians now at 20.9 million, having risen by 17.6 million in nine months, one of the major tasks before the incoming administration is to tackle the factors causing unemployment or to put it more aptly, provide employment opportunities in the economy and tame the rising scourge of unemployment.

Besides, Nigerians are anxiously waiting for positive outcomes from the talks, between the Nigeria Labor Congress and federal government over the N30, 000 minimum wage, that have resumed and are expected to be brought to a logical conclusion before the general elections.


Experts’ Views on the Economy

But in the view of the Chief Executive Officer of Financial Derivatives Company Ltd, Mr. Bismarck Rewane, political jostling and the elections would becloud the talks on the minimum wage. He also expressed the opinion that political activities and elections would becloud 2019 budget talks by the legislature and the first monetary policy committee (MPC) meeting in the month of January.

Also, in his projections, Director, Union Capita Market Ltd, Mr. Egie Akpata, posited that 2019 would likely be more challenging for the Nigerian economy than 2018.

According to him, most variables which were in the country’s favor last year, but not capitalized on, have reversed. “Oil prices, local interest rates, inflation, stock market indices, political environment and other variables that were positive for most of 2018 are now negative and will remain so for most of 2019.”

On the key areas that are likely to impact the entire economy, Akpata noted that in the aspect of government finances, it was unfortunate that for the federal government, tax revenues could be generated by threat or decree.

“The VAIDS programme fell far short of expectation and so did many other initiatives to diversify government revenues away from oil. These failures are not surprising. Individuals and companies have to be financially buoyant to pay a lot of tax. The reality is that most sectors of the economy are in a recession and profitability has been badly eroded.

“Self-inflicted damage from Apapa ports congestion, inability to solve the power crises, government crowding out the private sector in the debt markets, insecurity in large sections of the country amongst others mean that corporate profitability is unlikely to improve and hence better non-oil revenue for the government will take a while to materialize.”

Akpata added that, the federal and state governments had shown that they were unable to reduce their costs and instead had resorted to massive borrowing, particularly at the federal level.

This borrowing, he pointed out, was almost entirely to fund overheads. “Unfortunately, this produces very high market borrowing rates which very few private companies can afford. As long as the economy continues to have a risk free rate close to 20 per cent, it is unlikely that there will be massive credit to the private sector to drive the investment needed to grow the economy at the required levels.”

“Until there is a political force to stop government simply borrowing to fund overheads, FGN debt will continue to grow at an alarming rate. Since a default is very unlikely, the market will happily give the FGN all the debt it wants to pay its bills today. Repayment is largely a problem for future governments to worry about,” he also submitted.

He argued that the presented 2019 budget showed that “it is business as usual – unrealistic revenue targets, huge borrowing and waste on fuel subsidy. None of these are a positive for government finances,” stating that, the ongoing minimum wage battle with the NLC would likely result in some kind of wage increase, which will put more pressure on government finances.

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