Tuesday, May 30, 2017 10:30 AM /BMI Research
BMI View: Delayed implementation of an expansionary fiscal budget will once again weigh on Nigeria's economic growth trajectory in 2017, following a similar debacle in 2016. On the positive side, rising oil revenues will enable greater spending without giving rise to a dangerous fiscal deficit but expenditure will still fall short of target.
We forecast that Nigeria's budget deficit will remain stable in 2017, at 2.8% of GDP, compared to 2.6% in 2016. The authorities managed to keep the deficit in check last year, despite a dramatic decline in oil revenues.
However, this came at the cost of realising a much-vaunted expansionary budget, which was barely implemented. This year, we project that there will be some sizeable growth in spending, enabled in part by greater oil revenues and in part by borrowing, but that it will once again fall short of what was planned in the 2017 budget.
Oil Recovery Will Boost Revenues
An improving outlook for the crude oil sector, which provides the bulk of government revenues, will drive increasing expenditures over our short-term outlook. We forecast that oil revenues will expand by 40.0%, driven by both higher crude prices and increasing production, compared to a decline of 44.3% in 2015 and 28.2% in 2016.
Our Oil & Gas team forecasts that Brent crude will average USD57.0 per barrel (/bbl) this year, compared to USD45.1/bbl in 2016, and that production will recover as a general amnesty with militant saboteurs remains in play. Oil production was crippled in 2016 as militant group the Niger Delta Avengers attacked essential infrastructure and this devastated government income.
Although the renewed amnesty payments agreed with the militias, including backdated payments, will raise unproductive recurrent spending, this is far outweighed by the greater revenues from uninterrupted oil exports. We also expect an improvement in non-oil revenues, forecasting a 20.0% expansion driven by a general macroeconomic recovery following the 2016 recession.
Some Progress on Budget Implementation
Significantly for budget implementation, we also expect far more stability in the oil price on the back of the OPEC deal announced on November 30 2016 which will see members cut production by a cumulative 1.2mn barrels – although Nigeria was exempt from this agreement, given the troubles it has had with production (see 'OPEC: Initial Views On The Production Deal', December 1 2016).
Less volatility in the wake of the deal will better enable the Nigerian government to implement its planned expansionary budget. This is one of the factors that have led us to forecast that capital expenditure will increase by 20.0%, compared to the 12.3% increase in 2016.
However, we caution that Nigeria's budget realisation will once again fall short of budgeted expenditure in 2017. The 2016 budget was much delayed, with 'padding' and a general lackadaisical approach by President Buhari meaning that it was not passed until May 2016 (see 'China Deal Not A Silver Bullet For Macro Woes', April 15 2016).
The delayed implementation of the budget was one of the main factors behind disappointing growth in 2016 and this year looks set to be a repetition as at the time of writing, on April 10, the budget has once again not yet been passed. As a result, we forecast total government expenditure of NGN5.7trn, far short of the budgeted NGN7.3trn. In 2016, total spending came to NGN5.3trn, 87.0% of the targeted NGN6.1trn.