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FG Adds to Armory for COVID-19 Showdown

Fiscal Policy	1231 VIEWS
Fiscal Policy
1231 VIEWS

Tuesday, April 07, 2020 / 08:35 AM / CardinalStone Research / Header Image Credit: @FinMinNigeria

COVID 19 - Fiscal authorities unleash another round of stimulus

Earlier today, the Federal Government (FG), through the Minister of Finance, Budget, & National Planning, formally announced a set of fiscal stimuli aimed at easing the medical-cum-economic burden of COVID-19 and the impact of oil price decline. The new measures are expected to complement previous stimulus packages announced by the Central Bank of Nigeria (CBN) and the country's import substitution policies, which, interestingly, now appear to be somewhat "inspired" in the face of current realities. Notably, the ongoing crisis has coincided with two credit ratings downgrades, with the latest being Fitch's long-term credit downgrade to 'B' (from 'B+' previously) which came just before the minister's broadcast. The downgrades have largely been linked with suggestions that prior measures were inadequate to correct Nigeria's weakening external balance position as the crisis threatens to plunge the country into a second recession in four years. The FG, in line with global trend, has opted to increase the scope and depth of its response to cushion the impact of the shocks and better position the nation for a swift rebound. The new stimulus measures include:

Establishment of a N500 billion COVID-19 crisis intervention fund

This fund is expected to draw from existing special funds and accounts, with the backing of a proposed bill in the legislature. The fund will be directed at improving healthcare infrastructure, supporting FG's state healthcare interventions, and expanding the ongoing special public works programme to the 36 states. Importantly, the pilot phase of the public works programme already commenced in 8 states early in the year. The programme is expected to create 1,000 jobs in each of the 774 local government areas of the country.

NCDC to drawdown outstanding $82 million REDISSE facility as FG sources more external funding

The Nigeria Centre for Disease Control (NCDC) has access to a $90 million Regional Disease Surveillance Systems (REDISSE) credit facility from the World Bank but has drawn only $8 million so far. The FG is aiming to fully drawdown on the balance of the facility and request a fresh $100 million from REDISSE to meet COVID-19 emergencies in Nigeria. The government revealed it has also applied for the International Monetary Fund's COVID-19 Rapid Credit Facility, to drawdown the totality of Nigeria's contributions ($3.4 billion as par government estimates) with the World Bank Group and the IMF. FG also made it clear that this drawdown will be free from all conditionalities and that the country is unwilling to negotiate a formal programme with the IMF now or in the future. A further $1.0 billion will also be sourced from the AFDB for same purposes.

Augmentation of FAAC allocations & moratorium on states' debt

Although previous fiscal assumptions were premised on expected Federal Account Allocation Committee (FAAC) disbursements of N888.5 billion monthly, actual FAAC allocations have underperformed projections so far this year (Marchdisbursement: c.N580 billion) and are expected to decline further to c.N400 billion (vs. N600 billion required to meet key obligations) in coming months. In view of this, FG has approved the drawdown of $150 million from the Nigeria Sovereign Investment Authority (NSIA) stabilization fund to augment FAAC shortfalls. The government also directed NLNG to fast track dividends due to the federal government to further supplement the disbursement gap. Elsewhere, FG also revealed plans to work with the CBN to implement a debt and interest moratorium for states on FG and CBN-funded loans if FAAC receipts falls below a soon-to-be communicated threshold. States are also advised to seek similar restructuring for bank loans.

Appropriate stewardship of donated funds and adequate supply of essentials

The TSA will be temporarily restructured for better capturing of COVID-19 contributions. COVID-19 accounts will be opened with select banks (Zenith, Access, GTB, UBA, and First Banks) and linked directly to the TSA for ease of monitoring and reporting. Notably, charitable donations by benevolent companies will be tax deductible. Supply of essentials to affected Nigerians would also be ramped up.

Fiscal budget updates

The minister reiterated that the budget benchmark oil price has been revised lower to $30/bbl (vs. $57/bbl previously). In line with our surmise relating to the potential for a decline in crude oil output, FG also reduced its 2020 oil production target to 1.7mbpd (vs. c.2.2mbpd earlier) to account for ongoing market share tussle. Non-oil revenue projections across tax, customs receipts, and proceeds from privatization were also revised lower. Details of the non-oil adjustments will be provided in the revised 2020-2022 Medium Term Expenditure Framework/Fiscal Strategy paper.

Conclusion

Nigeria's drawdown request from the IMF is in line with a COVID19 related provision that allows nations to draw down between 50.0%-100.0% of their contributions without facing the usual loan conditionalities of the IMF. The minister hinted at a 6 week timeline (best case) for a complete processing of the proposed loans, with the IMF facility likely to expedited faster due to its largely predetermined nature. All in, these aids are likely to complement efforts by African countries to obtain c.$100 billion in debt relief from foreign institutions. If approved, the benefit of this move could come in form of a 2 to 3 years forbearance on interest payments on external loans across the continent. As at December 2019, Nigeria had external debt of $27.7 billion and expended $1.3 billion in debt service. 24.7% of the debt service went to multilaterals like the World Bank and the AFDB. We believe interest forbearance is more likely to come from these multilateral fund providers.