MTEF: Financing the Deficit in the 2016 Budget


Thursday, December 17, 2015 09:45 AM / FBNQuest Research 

In our third commentary on the 2016-18 Medium Term Expenditure Framework, we find that concerns about the projected N2.22trn (US$11.17bn) deficit for 2016 are overstated. The forecast would represent 2.2% of estimated GDP, and so fall within the 3% threshold set in the Fiscal Responsibility Act.

We are confident that the new administration would be prudent in the event of marked underperformance on non-oil revenue collection. It has pledged to make its social investment in stages, as and when resources permit.

New domestic borrowing is projected at N1.2trn next year and N1.0trn in 2017 yet average borrowing costs are assumed to decline. On the basis of DMO data on the FGN domestic debt stock in June and making allowances for debt repayments we see the average financing cost rising from 10.4% this year to 13.2% in 2016 before easing to 10.3% in 2017. This could mean that the CBN’s policy of “easy money” has more legs to run.

In contrast (see chart), external debt service is set to remain negligible. The framework projects concessional external borrowing of N640bn in 2016.

Other than borrowing, there are small contributions to deficit financing from recoveries, privatization and signature bonuses in 2016-18. These are highly conservative projections which leave fiscal space if revenue collection falls short of target. It would be surprising, for example, if the FGN is unable to hold a major bidding round for oil leases in the framework period.

We would also be curious to know which recoveries are shown as financing items, and which above the line.

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