Thursday, December 10, 2015 9:10 AM / FBNQuest Research
On Monday, the minister of budget and national planning, Udo Udoma, disclosed that the Federal Executive Council has decided on a N6trn (US$30bn at current interbank rates) budget for 2016.
The headline figure for total spending is significantly higher than N4.6trn approved for 2015. The benchmark oil price was set at US$38/b, 28% lower than the benchmark in 2015 of US$53/b, and the fx rate at the CBN’s official rate of N198/US$.
The full details have not been released into the public domain so we are dependent upon accounts in the newswires. This is a very expansionary budget. We suspect it signals the government’s belief that the economy requires a jumpstart given the sobering GDP growth figures of late: 2.8% y/y in Q3 2015.
The assumption of average crude oil production of 2.2mbpd compares with 2.28mbpd in 2015 approved budget. This is an achievable target considering the recent strides the FGN has made in suppressing pipeline vandalism to ease production.
We welcome the proposed allocation of N1.18trn (US$9.1bn) for capital items which represents 30% of total spending, more than double the N700bn (15% of the total spending) released for capital projects for 2015. It should help towards bridging the country’s huge infrastructure gap.
The government plans to spend N500bn (US$2.5bn) on social welfare programmes to assist with poverty alleviation. While this is likely to prove controversial in some quarters, we recall it was a pledge the President made while campaigning during the elections.
The FGN’s projected revenue is estimated at N3.82trn (US$19bn), implying a projected deficit of N2.22trn (US$11bn). Funding this deficit will be done via bolstering non-oil revenue collection as well as borrowing. Companies’ income tax (CIT) is a significant contributor to non-oil revenue. The rates may not be raised but we expect increased efforts, as with all taxes, to strengthen compliance.
The new administration is said to favour borrowing from external partners on soft loan terms. That said, we see the risk that (domestic) rates will rise. The projected level of borrowing is not likely to exceed 3% of GDP. For this year, FGN deficit was projected at N755bn or 0.79% of estimated GDP.
At this point, it is still unclear if the fuel subsidy would be retained in 2016, but given where oil prices are currently it is becoming easier to make a case to remove it. The IMF echoed similar sentiments very recently.
7. Oil Prices and 2015 Budget - Mar 20, 2015