28 June 2018 ( Lagos ) :The 2018 Budget was passed on the 20th of June after the National Assembly increased expenditure spending from ?8.6 trillion to ?9.1 trillion, with the Ministries of Power, Works & Housing and Health the primary beneficiaries. 

Analysts reiterate that the budget has the same theoretical fiscal benefits as previous iterations – it can provide a sizable aggregate demand boost and direct investment towards necessary infrastructure. However, late passage and inconsistent execution would continue to constrain fiscal policy. 

Analysts expect imminent elections to spur accelerated budgetary disbursements but are cautious over the long-term economic impact of pre-election fiscal policy. They continue to stress that the efficacy of disbursement would determine the effect of the budget on the economy in 2018, especially as electioneering may lead to fiscal slippage. 

Oil prices to support government revenues 

Analysts expect strong global oil prices to support government oil earnings and even compensate for inevitable shortfall in volumes during the year (compared to budget benchmark). They expect oil prices of $67/bbl and oil production of 2.00 mb/d in 2018, compared to the budget benchmarks of $51/bbl and 2.30 mb/d. 

They note that fiscal position would even be stronger with a more aggressive oil price benchmark, given the strong price outlook for the year, but expect some of the gains from high oil prices to accrue to the Excess Crude Account as a prudent measure to protect against future oil price shocks. 

This expected oil revenue outperformance would be key given the likelihood of a shortfall in non-oil revenues in 2018, but represents the frustrating persistence of the oil dependency of Nigeria’s fiscal position. 

Non-oil reality yet to match rhetoric 

Analysts are less optimistic about non-oil revenues (?4.2 trillion), a view they shared at the start of the year, as they see some of the targets as slightly ambitious. This view has only been strengthened in the first half of the year as the outlook is unpromising for a number of non-oil revenue items. 

Joint Venture oil asset equity divestment is expected to generate 17% of total non-oil revenues but looks unlikely in light of the late passage of the 2018 Budget, pending petroleum sector reform, and the highly sensitive political clime of H2’18. Furthermore, other asset sales (via privatization) are to fund ?400 billion of the budget and recent reports indicate that the government is looking to sell or lease assets ranging from power assets to sports stadiums, as well as sell part of its stake in the Nigerian Reinsurance Company.

Meanwhile, independent revenues are likely to underperform once more due to inconsistent remittances from MDAs. Finally, the Voluntary Assets & Income Declaration Scheme (VAIDS) accrued only $100 million a month before the end-of-June deadline, despite a target of $1 billion and a three-month extension. Amidst all these, and with delayed budget passage likely to compound challenges, analysts harbor reservations about the performance of non-oil revenue this year. 

Nigeria’s poor tax collection (tax-GDP ratio: c.6%) is a serious problem for the economy as it ties the fiscal cycle to global oil price movements and prevents the country from addressing its infrastructure gap or dealing with poverty. The trend is also persistent as non-oil revenues have been relatively sticky in recent years once analysts account for the cyclical effect of recessions.

The International Monetary Fund suggests that Nigeria has a non-oil tax potential of at 16-18% of GDP given prevailing income levels and economic structure – so rising incomes would actually boost this figure – indicating that Nigeria is performing well-below potential. The Economic Recovery & Growth Plan targets a 15% tax-GDP ratio but efforts to reach this level have borne only sporadic fruit. 

Analysts note that the Federal Executive Council approved two Executive Order and Five Bills related to tax policy in June (the Bills must be reviewed by the legislature and Executive before being signed into law). All things considered, they hold the view that whilst tax mobilization efforts are necessary for fiscal sustainability, the fiscal authorities must get their own houses in order. In particular, public spending needs to become more consistently efficient and transparent to entice additional taxes. 

New excise duties set a good precedent 

New excise duties on tobacco and alcohol came into effect on June 4th, 2018 and analysts see this as a positive development. Excise duties are a form of indirect tax (not self-reported unlike income taxes) so opportunities for avoidance are limited. Furthermore, although consumers switch frequently between brands, alcohol and tobacco demand is relatively inelastic. 

All of this points towards a good chance of the Federal government achieving its target of raising ?60 billion through these duties. Nigeria has low excise duties compared to other countries – IMF estimates peg this at 0.1% of GDP vs. 2.9% and 3.5% in Kenya and South Africa, respectively, showing that the country has room to grow revenues in this area. 

In addition, international experience shows that the marginal cost of excise duty collection is significantly lower than other forms of taxes, and excise duties are also good for addressing the external costs of alcohol and tobacco consumption. The main downside of the policy is the effect it may have on still-weak consumer wallets. 

FGN borrowing should moderate, pivot abroad 

Federal Government borrowing should moderate from last year’s levels. The 2017 Budget proposed domestic borrowing of ?1.25 trillion and foreign borrowing of ?1.1 trillion, whilst ?1.52 trillion and ?0.85 trillion ($2.8 billion for 2017 budget) was eventually raised in the domestic and international markets, respectively. 

Meanwhile, the proposed 2018 Budget estimates borrowing of ?1.70 trillion split evenly between domestic and foreign sources. In analyst’s view, this reduction in borrowing is positive in light of the recent pressure on Nigeria’s debt servicing costs – IMF estimates debt-revenue ratio of 70% in 2017. 

In addition, the shift from the domestic bond market would also reduce the crowding out of private sector credit, though it comes with exchange rate risks. Analysts expect pressure to ease on government debt growth and servicing costs, and see the latter as a big positive as the IMF had forecasted debt servicing of 82% of revenues in 2023 at the previous levels of borrowing and borrowing costs. 

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Thursday, 28 June 2018, in Lagos, Nigeria.