Friday, November 21, 2014 8:32 AM / FBN Capital Research
The FGN has made its fiscal response to plummeting oil revenues with a revision and updating of the medium term expenditure framework (MTEF). Our initial take is that the response is on the timid side, although not surprisingly in view of the electoral calendar.
We stress that our comments are based on media accounts of the framework, which was submitted by the presidency to the National Assembly on Wednesday.
The headline figure for FGN spending in 2015 has been trimmed to N4.66trn from an earlier version of N4.82trn. Within the new total, recurrent items are unchanged at N2.62trn while the capital outlay has been reduced to N1.21trn from N1.44trn. (The balance consists of statutory allocations and debt service.)
Our starting point is the oil price threshold of US$73/b for 2015, compared with US$78/b in the earlier version and US$77.5/b in the 2014 budget. The fiscal strategy paper explains that it is based upon a 15-year moving average. Even if we take a benign view of the direction of oil prices, which we do, this leaves little for the rebuilding of the fiscal buffers. The mountain of recurrent spending has grown so much in the past five years that a lower threshold is not feasible.
The assumption for average oil production is set at 2.27 mbpd. CBN data show an average of 2.22 mbpd for January-July 2014. To repeat ourselves, as we cannot explain the pick-up in oil production losses/leakages, so we cannot forecast their recovery.
The trimming of capital expenditure reflects the difficulty in pruning recurrent items, particularly in the run-up to elections. Actual capital items totalled N1.08bn in 2013.
The media accounts of the revised MTEF note that the subsidy bill is projected to fall from N971bn to N459bn for petrol, and from N250bn to N156bn for kerosene. They also show a decline in the allocation to the Subsidy Reinvestment and Empowerment Programme among capital items from N259bn to N185bn. This does not necessarily indicate another attempt at subsidy cuts.
Most analysts would have been looking for a more robust fiscal response than the revised framework and proposed hikes in taxes on luxury items. They should, however, be encouraged by the implied FGN deficit in 2015 of N835bn, equivalent to 0.9% of our forecast GDP for the year.