The implication of the significant revenue shortfall witnessed as a result of the economic lockdown looks dire, with an estimated fiscal deficit of $5.3 trillion, more than twice the initial projection of N2.2 trillion. Worse still, it is beyond the three per cent threshold set by the Fiscal Responsibility Act (2007).
The estimated deficit is already 3.6 per cent of the nation’s Gross Domestic Product (GDP).
According analysts at Afrinvest, the deficit is expected to be financed by local loans of N1.6 trillion and multilateral loans of $6.9 billion, with $3.4 billion already secured from the IMF.
John Obed, an economist based in Lagos, “unknown to some critics, with the pandemic situation all over the world, there is no way many countries will survive with some borrowings.
Given our expectation of lower-than-expected non-oil revenues, analysts say, they expect weak implementation of the proposed capital expenditure.
On debt servicing, the third quarter of 2019 numbers show that debt service to revenue trended lower at 45.2 per cent from 64.9 per cent, compared to the corresponding period of 2018.
As a result, falling oil prices and economic lockdowns mean weaker revenue prospects in 2020. Thus, fiscal policymakers have been compelled to match budget ambitions with current realities. Accordingly, the Federal Executive Council (FEC) last week Wednesday approved the revised Medium Term Expenditure Framework (MTEF) for 2020-2022 and the proposed amendment to the 2020 budget, with both awaiting the approval of the National Assembly. While the revised MTEF is yet to be published, the Minister of Finance highlighted some of the proposed amendments to the 2020 budget. The revised budget assumes a new oil price benchmark of $25.0/bbl., down from $30.0/bbl. in April 2020 and from $57.0/bbl. in December 2019.
Analysts believe, this is realistic given the significant dip in oil prices and the uncertainty around the recovery of prices amid COVID-19. Similarly, crude oil production was revised downward to 1.94mbpd from 2.18mbpd approved in December 2019, partly reflecting Nigeria’s share of the output cuts agreed by the Organisation of Petroleum Exporting Countries (OPEC) and its allies.
Nigeria’s compliance with oil cuts has been weak historically but this could be more pronounced given the prospect for large revenue shortfalls in 2020. The revised budget now assumes the new official exchange rate of N360.00/$1.00 from N305.00/$1.00.
However, with a weaker exchange rate of ₦386.00/$ at the I&E window, the Federal Government (FG) is still leaving money on the table. Overall, the FG’s revenue projection was cut by 38.1 per cent to N5.2 trillion from the N8.4 trillion earlier approved while total spending was slightly lower at N10.5 trillion from N10.6 trillion.
“While oil revenue assumptions are conservative, we believe non-oil revenue estimates are optimistic given the slowdown in economic activities. Meanwhile, the moderate cut in expenditure is an indication of the outsized share of non-discretionary spending”, said analysts at Afrinvest.