Galloping Spending, Weakening Revenues
The 2021 budget was presented in the context of a global pandemic that has not only claimed over 1.2m lives globally but has als s such as MSME Survival Fund, Nigeria Youth Investment Fund, CBN support programme for specific sectors that were created to provide help to Nigerians.
Nigeria's GDP declined by 6.10% in Q2 2020 which means that the country might be flirting with a recession if it encounters another quarter of negative growth. Nigeria has a high unemployment rate, at 27.1% as at Q2 2020, and also a high incidence of poverty. Nigeria also faces constraint of weak revenue growth with its revenue per capita less than 8%. The country has not been able to mobilise private capital as its budget cannot plug an infrastructure deficit that requires $100bn annually for the next decade.
With its severe dependence on oil over the decades, Nigeria has finally accepted the reality that it cannot depend on oil as prices have significantly tumbled while the cost of governance has shot up. The government of President Muhammadu Buhari has intentionally increased Nigeria's budget size despite its weak ability to gather revenues. Nigeria's budget in nominal terms has grown from N4.5tn in 2015 to N10.8tn in 2020. With the inclusion of 60 Government-Owned Enterprises (GOEs) whose total expenditure stands at N1.35tn, the Nigerian budget in 2021 is projected at N13.08tn. While the expenditure component of the budget might have expanded, the federal government's actual revenue has only increased from N3.24tn in 2015 to N3.86tn as of 2019, a 19.3% increase. The only way that the FG has continually met its expenditure has been through the escalation of debts and unfunded deficits provided by the Central Bank of Nigeria.
According to the Budget Office, the federal government's actual deficits in the last five years have stood at N1.52tn for 2015, N2.19tn (2016), N3.80tn (2017), N3.64tn (2018) and N4.17tn (2019). The consequence of this has been the rising cost of debt servicing which has grown from N624bn in 2014 to N2.45tn as of 2019. Nigeria continues to trample on fiscal sustainability as debt service to revenue ratio has grown to 94%.
This is a gross anomaly in the public finance analysis of a sustainable entity. Some experts might say that the country might not be borrowing too fast as debt-to-GDP is still approximately 29% at the end of 2019, but the complete story is that Nigeria has failed to gather revenues and its leaders do not want to take drastic measures required to significantly rationalise expenditure.
2020 Budget Performance: The Story Unchanged
As at June 2020, the federal government projected a revenue of N2.92tn but only raised a sum of N1.65tn, being 56% budget performance. The surprise element is that oil revenue outperformed projections as FG share of oil revenue was N820bn, compared to a target of N506bn. Nigeria has poorly complied with OPEC cuts, a measure meant to boost oil price that significantly tanked in half-year 2020. While FG budgeted $28 per barrel, average oil prices for the half of the year stood at $37 per barrel. A huge 28% drop in expectations was seen in the non-oil sector component with non-oil revenues clocking N581bn, compared to a target of N812bn. A significant drop was in the Value Added Tax which only happened to reach N85bn as at June 2020, compared to a target of N142bn. The "Other Revenues" element of the budget continues to be a filler for Nigeria's budget planners to keep a healthy deficit for approved projects. As usual, there were no significant gains in Special Accounts, special levies account, domestic fines and recoveries, stamp duty, and others. It is exciting to see the federal government earn N70bn from the signature bonus, a receipt from the auction of oil licenses.
While revenues might remain grossly poor, Nigeria has not failed to keep up expenditure, rightly needed during the current fiscal atmosphere. With a revenue of N1.65tn as of June 2020, FG still went ahead to spend N4.46tn as against a pro-rated budget of N5.41tn. This means that Nigeria spends 2.7 times what it earns. About 67% of the total expenditure remained allocated to personnel costs (N1.42tn) and debt service costs (N1.56tn). The change in Nigeria's minimum wage structure and expanding debt portfolio has contributed to the increase in FG's recurrent expenditure; as of June 2020, it stood at N3.94tn. As such, FG spent 88% of its total expenditure on recurrent items, with its capital expenditure significantly underperforming despite the restructuring of the budget calendar. Items such as debt service costs continue to overperform with half-year debt servicing costs rising to N1.57tn, despite a projection of N1.47tn.
The 2020 revenue performance at N1.65tn ($4.34bn) continues to underwhelm and there is no way that meaningful growth or quality public spending can subsist on these numbers. Nigeria needs to hack its revenue challenges and there is evidence in the Strategic Revenue Growth Initiative (SRGI) of the federal government that it might raise its Value Added Tax to 10%, which would only be a boon for state governments. The inability of the federal government to dedicate new debt for capital projects is also alarming. While FG borrowed N1.42tn as domestic debt as of June 2020, it only spent N446bn for capital items, which means it continues to borrow to maintain recurrent positions.
Half-year unfunded deficit, typically support from the CBN, has risen to N1.38tn, and in a mark of honesty, FG spends N461bn as interest on "Ways and Means", a testament that the money-printing support from the CBN will continue to provide disincentive revenue growth and also lead to inflation. Nigeria's fiscal position is on the brink and it requires an immense response from its political leadership. The courage to rationalise costs, ensure brutal efficiency in management of capital expenditure and expand revenues by intentionally investing in economic growth, needed especially in periods of boom and mild recovery has been grossly lacking.
Proposed 2021 Budget: A Quick Review
The 2021 Budget, aptly tagged "The Budget of Recovery and Resilience", is rightly premised on the ravaging effects of COVID-19. Assumptions for 2021 budget include a realistic $40 per barrel, oil production at 1.86m barrels per day, the exchange rate of N379 to US$ and a flattering growth rate of 3%.
Revenues: Cautious Optimism
The 2021 budget projects a total expenditure of N13.08tn, a revenue target of N7.87tn which leads to a deficit of N5.21tn. It is important to note that Nigeria's proposed deficit was higher than its nominal budget, six years ago. Oil-related sources of the FG's 2021 total revenue target is fast shrinking at 25.5%. This amount includes receipts from the signature bonus and early renewal of licences. Since June 2020, Brent Crude futures have hovered around the $40- 45 per barrel window and oil production level of 1.86m bpd (which includes condensate) remains possible. With the gains of exchange rate devaluation, a N2tn revenue target from oil is feasible. However, Nigeria needs to ensure that earnings from the signature bonus actually bear fruit. While the federal government has budgeted for this in previous years, it was comforting to finally see post revenue numbers regarding this as of June 2020.
On the non-oil revenue component, FG continues to set huge expectations that are not in tandem with the overall health of the economy. However, there was a significant adjustment of the Company Income Tax (CIT) with the projections of the FG's share falling from N822bn in 2020 to N681bn in 2021. Despite the slowdown of global trade, it is shocking to see customs' revenue targets rise from N450bn as projected in 2020 to N508bn in 2021. Non-oil revenue has consistently failed to meet the mark in recent years and the current 2021 projection of N1.49tn is not outrageous but could have been a little lower. The rise in inflation rate and weakness of the Nigerian economy is expected to weigh heavily on the non-oil economy in 2021 as the world seeks a permanent solution to the current COVID-19 pandemic.
It is instructive to note that FG's total revenue target from oil and non-oil sources remain 55% of the entire budget projections. The 2021 proposed budget remains unique as it adds budgets of 60 Government-Owned Enterprises (GOEs) to the whole FG budget. The net revenue from the GOEs is N1.35tn and there's a nearly impossible target of N500bn expected from stamp duty, N300bn from special levies account and N354bn from grants and aid. It remains a fact that "other revenues" of the budget seems only used to pad the revenue targets of the budget as recent numbers have shown that these projections have not been met.
In the end, the federal government had used budget deficits (borrowing and support from CBN) to fund the looming budget deficit gap; this is an unsustainable approach. It might be trite to state it but Nigeria's revenues remain grossly low for its population size and very inadequate to fix its social and infrastructure deficit.