Nigeria on fiscal cliffhanger over revenue gap, expenditure shortfalls

There are ominous uncertainties ahead for Nigeria and its proposed 2022 fiscal spending plan of N16.39 trillion, a figure that is 12.5 percent higher than its current 2021 budget, with revenue sources remaining short as a result of the federal government’s historical underperformance across different segments of its revenue chain.

Analysts who have been poring over the 2022 fiscal document since it was made public speak of a country tottering on a fiscal cliff hanger needing to quickly reverse its course and be realistic for the sake of future generations, they warned.

The country’s historical revenue underperformance, which has taken legendary status in the last six years, has been well exhibited in various budget life cycles, and has sometimes led to a crowding-out effect with consequences for private sector actors, and also, built in deficits that stem from the government’s diminishing revenue accretion powers.

Many analysts base their fiscal cliff hanger verdict of Nigeria on this widening gap in government revenue, which continues to fall short of total expenditure and debt service, and they say this will spike when an artificially low interest rate policy environment is thrown away.

Bismarck Rewane, chief executive officer, Financial Derivatives Company Limited, and one of many analysts who have looked at the numbers said: “Nigeria’s debt service is increasing and total productivity flat; the gap is widening as government revenue continues to fall short of total expenditure. The growing concerns over our debt sustainability indicate Nigeria is quickly falling into a debt trap. But, debt service will spike when artificially low interest rate policy is rejected, and an increased domestic debt issuance to mop up liquidity becomes imminent.”

In a related development, the Debt Management Office’s latest data release on the federal government’s debt services, brings further evidence that Nigeria’s federal government domestic debt has become stable with a 3.2 percent year on year increase to N323 billion in the second quarter of 2021. Thus, Nigeria’s domestic debt stock rose 14 percent over the same period of 2021, but the weak point in the narrative of government’s debt service and revenue generation hangs on the poor revenue collection of the federal government from which it is to service its debts.

A cursory look at the data from the federal finance minister’s presentation of the 2022 budget, show that total debt service (domestic and external), between January and August this year represented 93.7 percent of federally retained revenue or 72.9 percent if government-owned enterprises are included in the analysis; but the domestic and external mix of total debt service is currently 77 percent and 23 percent, respectively.

For economic analysts at FBNQuest Capital Research, “The outturns published by the federal finance ministry and the Budget Office of the Federation give the fullest picture of domestic debt service to reflect the interest payments on the Ways and Means advances. These are the drawings from the CBN to cover what may be termed the unfunded deficit of the CBN (i.e. borrowings that are not provided for in the budget).

“The burden is growing strongly, from N339 billion in 2019 to N913 billion in 2020 and N808 billion in the eight months of 2021. In line with established practice, CBN financing is not included in FGN debt stocks. If proposals to securitize the advances come to fruition, then it will be added to the stocks and push the ratio for total FGN debt stocks/GDP up by approaching ten percentage points.  These ratios are far worse than in the budget because, as we have often noted, the FGN has a track record of overly ambitious revenue projections. Retained revenue between January and August of 2021 amounted to 67.8 percent of the pro rata budget. The collection of companies’ income tax and VAT was comfortably ahead of budget although oil revenue disappointed,” they noted.

Nigeria’s fiscal deficit or total public debt has risen by 0.98 percent to N33.12 trillion, approximately $87.24 billion in the first quarter of 2021 and it is approximately 35 percent of the GDP, while the deficit-to-GDP ratio surged 3.7 percent in 2020 from 2.1 percent reported in 2016; while on an annual basis, Nigeria’s external debt gulps 70 percent of the government’s revenue.

President Buhari submitted the N16.39 trillion sized 2022 budget to the National Assembly seeking a 17.24 percent increase in its total expenditure, from N13.98 trillion this current year. The proposed budget projects a growth forecast of 4.2 percent, with a crude oil benchmark price of $57 per barrel, a daily oil production estimate of 1.88 million barrels, which is inclusive of condensates of 300,000 to 400,000 barrels per day and an exchange rate of N410.15 per dollar.

Breaking down the proposed expenditure, 41.7 percent of the budget was set out for recurrent expenditure (recurrent + statutory transfers), 22 percent was allocated for debt servicing, whilst just 32.7 percent of the total budget was set for capital expenditure spending. On the revenue side, the federal government estimates total projected revenue of N10.1 trillion, including revenues from government owned enterprises, which is 24.8 percent higher than the 2021 projection of N8.1 trillion, with oil income projected to be higher by 34.9 percent and non-oil revenue, higher by 6 5.1 percent.

As most concerned individuals would have thought by now, due to the sheer size of the proposed 2022 budget, the budget deficit remains robust at N6.22 trillion, plugged by domestic borrowing of N1.3 trillion and CBN Ways & Means of N2.4 trillion; although less than the eventual 2021 budget  plus the NASS supplementary budget.

Meanwhile, the president, at the presentation to the joint houses of the assembly, said further borrowings to finance the deficits will help achieve the proposed plans in the 2022 fiscal year.

“We plan to finance the deficit mainly by new borrowings totalling N5.01 trillion, N90.73 billion from privatization proceeds and N1.16 trillion drawdowns on loans secured for specific development projects. Some have expressed concern over our resort to borrowing to finance our fiscal gaps. They are right to be concerned. However, we believe that the debt level of the Federal Government is still within sustainable limits. Borrowings are to specific strategic projects and can be verified publicly,” President Buhari said.

However, economic analysts at United Capital Research, have stated that their earlier projections for the 2022 budget implementation points to the debt financing shortfall required for the federal government, which would be even steeper in actual terms.

Our position is predicated on continued historical budget underperformance of the revenue segments of previous budgets. 2020 aside (2015-2019), the average five-year revenue performance sits at 77 percent. In the same period, the actual deficit to budgeted deficit, reports at 1.3X which essentially highlights the FGN disposition to exceed and over-borrow from its budgeted deficit positions. For 2022, we expect this trend to continue leading to a potential crowding-out effect, potentially hurting private issuances,” they noted.

Meanwhile, Bismarck Rewane noted, however, that the average budget benchmark price sits 25.78 percent below the actual, excess crude account benefits from the headroom revenue, according to the theoretical rule of deficit and actual surplus, while Nigeria has been running a nominal deficit with real surplus rounding the existence of four possibilities that the surplus could be in excess crude account; extra budgetary spending (subsidies), government leakages or in all aforementioned. However, the jury is out as to what is happening.