Wednesday, December 16, 2015 09:25 AM / FBNQuest Research
Neither the new administration nor its early policy pronouncements have impressed the markets. The 2016-18 Medium Term Expenditure Framework (MTEF) offers the potential to make amends, and we draw on South Africa to make our point.
In our view the largest contribution to the transformation of the sovereign credit under majority rule and the attainment of investment-grade ratings has been the fiscal discipline under three finance ministers (Trevor Manuel, Pravin Gordan and Nhlanhla Nene). The latter’s replacement last week by an untested party loyalist (since replaced himself by Gordhan) led to an aggressive sell-off.
The framework projects federally collectible non-oil revenue of N5.72trn (US$29.0bn) for 2016, an increase of 40% on the 2015 budget and, more significantly, 133% on the outturn for January-September. Forecast increases slow dramatically thereafter to 9.4% in 2017 and 4.3% in 2018, which is broadly in line with projected growth (of 5.1%).
The framework assumes therefore substantial and rapid gains from one-offs in the form of recoveries and strengthened revenue collection. The forecast of N1.48trn from VAT in 2016 (gross, before distribution) is 15% higher than the current year’s budget but 153% above the outturn for nine months. The projections through to 2108 do not suggest much change to the standard 5% rate for VAT.
Among other components of non-oil revenue, the framework projects a very strong rise in FGN independent revenue in 2016, and healthy growth in corporate tax receipts. In contrast, there is no growth projected in customs receipts. The new administration is pushing import substitution hard, and imports generate close to 90% of all customs revenue.
Turning to FGN retained revenue, these projections more than compensate for its plummeting share of oil receipts. The total rises to N3.86trn in 2016 from N3.45trn in this year’s budget.
For FGN expenditure we note a token N5bn reduction in the statutory transfer to the National Assembly, to N115bn in 2016 and thereafter.
The headline in the spending projections is the increase to N1.60trn for capital items excluding transfers from N720bn in the 2015 budget and a nine-month outturn of just N140bn. The principal beneficiary is the Capital Development Fund (N1.23trn), which appears not to be the same body as the Infrastructure Development Fund mentioned in the official commentary.
The capital spending hike and the new allocation for special interventions largely explain the 35% rise in total FGN spending to N6.08trn.
9. Oil Prices and 2015 Budget - Mar 20, 2015