March 20, 2020 / 09:55 AM / By FDC Ltd / Header Image Credit: Channels TV
On December 17, 2019, the president assented to the appropriation bill of N10.59 trillion for the 2020 fiscal year. The benchmark price on which the oil revenues was based was $57pb. However, the unexpected Covid-19 pandemic has precipated a global economic crisis of output, markets and liquidity.
Oil prices have plunged owing partly to a cartel war of price leadership between Saudi Arabia and Russia. The oil price has plunged over 50% in 2 months with catastrophic consequences.
The 2020 budget is made up of recurrent expenditure of N4.84trillion, capital expenditure of N2.46trillion and a debt servicing of about N2.7trillion.
The plunge in oil prices has forced a downward revision to its 2020 budget by N1.5trn to N9.09trn, a 14.16% cut. The benchmark oil price assumption has also been cut by 47.37% to $30pb from $57pb. The finance minister stated that recurrent spending would be slashed by 25% while the capital component of the budget would drop by 20%.
The FGN response to the oil price slump is a step in the right direction. However, lower oil price means that Nigeria's risk premium will rise, and so will the cost of issuing new debt instruments - domestic and foreign. This will alter Nigeria's debt profile negatively as the debt to revenue ratio will spike.
However, the new ratio will still be within acceptable standards. The downward revision of the economic outlook from stable to negative will make the cost of additional borrowing steep and expensive.