Few weeks ago, the National Assembly passed the 2019 appropriation bill of the Federal Government into law. This was concluded in record time, considering that May 6 was the earliest time the budget had been passed under the President Buhari administration prior to 2019. Budget deliberations were also less contentious than in the past three years when the executive and legislature had a fractious relationship. While we should be optimistic of better relations going forward, especially given that the ruling party now has a larger majority in the legislature after the 2019 elections, our expectations are measured. In our experience, legislators in Nigeria rarely work in national and party interest. Our greatest disappointment is that while the 2019 budget could have heralded new beginnings, which should be reform driven and growth supportive, nothing seems to have changed. This further supports our expectation of continued economic underperformance over the medium-term.
Revenue Projections Still Too Ambitious
Unsurprisingly, the National Assembly increased the budget by N86.0bn to N8.9tn from the initial N8.8tn the FG proposed to spend in 2019. However, projected revenue at N7.0tn and all budget assumptions were unchanged. Also, the oil price assumption was kept at $60.0/b, which we believe is conservative, as Brent crude oil price has recently increased due to moderating oil supply due to Iran sanctions and OPEC output cuts which have brought the average daily oil price to $63.5/b as at May 2019. The oil production assumption of 2.3mb/d is ambitious as we expect 2.1mb/d in 2019 and the official exchange rate of N305/US$ was kept, consistent with the CBN’s stance. These assumptions translate to a projected oil revenue of N3.7tn (N3.0tn in 2018), which we believe is unrealisable due to the repayment of cash call arrears, petrol subsidies and the prospect of lower than expected oil production. The projected non-oil revenue was unchanged at N1.4tn in 2019, reflecting a more measured expectation. The largest share of non-oil revenue at 57.7% is expected to be generated from Companies Income Tax (CIT) while 21.8% and 16.6% are to be collected through Customs and Excise Duties and VAT respectively. Meanwhile, independent revenue is projected lower at N624.6bn (2018: N848.0bn). While this shows that the FG is finally being realistic, we expect this to be below projections. Overall, considering that the FG collected an estimated N3.7tn in FY:2018, we expect sustained underperformance in revenue by as much as 41.2% in 2019.
Budget Unsupportive of Economic Growth
Beyond unrealistic revenue estimates, our biggest worry is that FG’s spending plans reflect the lack of fiscal discipline and stays unsupportive of growth. This is partly because spending to GDP is weak at 6.4%, but even more so because capital expenditure is still below recommended levels. In 2019, total recurrent expenditure is projected at N6.9tn, crowding out capital spending which is 30.0% of total spending. The recurrent expenditure is split between non-debt and debt at 67.4% and 32.6% respectively. An estimated 63% of non-debt recurrent expenditure is to be spent on FG’s payroll, which is likely to rapidly expand by 2020 when adjustments are made to reflect the recently passed minimum wage of N30,000 per month. The non-debt component of spending, also known as debt servicing, at N2.3tn seems moderate at 32.1% of projected revenues. However, considering our estimated revenue of N4.1tn in 2019, projected debt servicing is elevated at 54.9% of revenue. Finally, the total recurrent expenditure to our 2019 revenue estimate is 168.3%, suggesting that FG’s fiscal position is untenable. While the FG projects fiscal deficit at N1.9tn or 1.4% of GDP, our estimates of N4.8tn and 3.4% respectively shows that this is likely to be worse than expected. The implication of a much wider fiscal deficit would be both higher than expected borrowing and partial implementation of the already poor capital spending.
Petrol Subsidies as a Drain on Limited Resources
According to the NNPC, about US$2.0bn was spent on “cost under-recovery” or petrol subsidies in 2018. Our estimate of US$2.6bn and US$4.4bn at the official and I&E window exchange rates respectively suggest that the spending on subsidy is significantly more than estimated. The implication is that government revenues are weaker with subsidies, thus restricting spending on more productive areas of the economy. The lack of sufficient investment in human capital is one area of concern. The FG continues to underinvest in health and education, further indicated by the allocation to the respective ministries at N50.2bn and N47.3bn in 2019, despite significant underperformance in human capital development indicators. With a removal of petrol subsidies, and taking the 52.7% revenue sharing formula into consideration, we estimate the FG could access from N321.5bn to N707.2bn in more revenues.