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COVID-19: Oil to fund only 9% of 2020 budget



Nigeria facing existential threat - World Bank

…as debt may hit $30 billion in 2020


Indications have emerged that to the crisis in the external sector where oil plays a major role in revenue contribution to the economy, there is a significant fall in the oil revenues accruing to government which has triggered an increase in total public debt profile as most of the funding from the 2020 budget may come from borrowing.

Consequently, analysts forecast that the nation’s indebtedness will outpace $30 billion in 2020. On a comparative basis, analysts stated that the Nigerian debt stock and external reserves would equate if global prices of oil stay low for long necessitating further.

An explanation of the weak economic situation and assessment of government revenue projections for the 2020 budget show that total revenue from crude oil would only be able to fund 8.78% of Nigeria’s spending plan for the period.

This comes in spite of several adjustments made to the budget, which were supposed to reduce the budget to align with the economic situation, but only lower marginally from the earlier N10.59 trillion to N10.52 trillion in a bid to spend the economy out of recession. But this imposes borrowing obligation on the government.

Meristem Securities Limited in its second half Budget of 2020 economic review tagged, ‘Unmasking value in the scourge’ said spike in budget deficit remains worrisome as it reflects the poor non-oil revenue struggles.

The outbreak of coronavirus has negatively impacted Nigeria’s government revenue, which has embarked on borrowing to finance its budget. To analysts, given the existing debt stock, they believe that more borrowing will increase the nation’s debt burden and worsen economic performance.

 Already, the Debt Management Office statistics revealed that total public debt has lifted to N28.6 trillion in the first quarter of 2020. This amount is yet to include COVID-19 related borrowed funds, and more other multi-lateral as well as a bilateral request by the Nigerian government.

Meristem Securities in its second half report said with the revision of the 2020 budget, 51.05% of the spending plan will be funded by borrowings while revenue from oil will now fund only 8.78%.  The firm stated that the spike in budget deficit remains worrisome as it reflects the government’s poor non-oil revenue struggles.

“Although the 2019 Finance Act represents a definite and comprehensive attempt at improving non-oil (tax) receipts, the recessionary impact of the COVID-19 pandemic on businesses threatens the actualization of the goals of the Act”, Meristem explained.

According to the firm, the Act also suffers from the absence of clear modalities for the implementation of some of its innovative solutions such as the proposed taxation of non-resident digital service providers.

“We, therefore, do not expect a significant improvement in non-oil revenue in the second half of the fiscal year 2020”, Meristem said.

 Spending to remain high

 Planned government expenditure was reviewed downwards marginally to ₦10.52 trillion from ₦10.59 trillion in the 2020 Appropriation Act, following heightened pressure on planned revenues occasioned by the collapse of oil prices.

The cut was minimal as efforts to curtail the spread of the Coronavirus have kept government expenditure elevated. So far, the Federal Government has launched a ₦500 billion COVID-19 Crisis Intervention Fund and an N2.3 trillion economic stimulus package.


Although, there are moves towards reducing waste in government spending with the setting up of a Committee to review the Steve Oronsanye Report with an objective to eliminate duplication of functions across government agencies.

This also includes removal of the problematic petroleum subsidy, and the curtailment of foreign travel by government officials, but it remains to be seen how these will be implemented to free up resources for more important obligations.

 Reliance on borrowing

Analysts explained that there have been growing concerns about the debt profile of the country and the most recent data released by the Debt Management Office (DMO) showed that Nigeria’s total debt stock as at Q1:2020 stood at ₦28.63 trillion from ₦27.40 trillion as at year-end 2019.

The DMO data shows that domestic debt accounted for 65.11% of the total debt while foreign debt made up the remaining 34.89% at ₦9.99 trillion.

“While this is an improvement from 2018 where domestic debt accounted for 68.18% of total debt, it still lagged behind the DMO’s 2016-2019 target of obtaining an optimal mix of 60:40 (domestic to external)”, Meristem explained.

 The firm stated that the downgrade in sovereign rating and the implied higher costs of borrowing from the international capital market has led to a review of the debt mix to 70:30 (domestic to external) as set out in the Debt Management Strategy for 2020- 2023.

Hence, given the need for cheaper debt, the planned ₦850 billion external borrowings in the 2020 Appropriation Act will now be raised locally.

Meristem said while the current macroeconomic condition presents a case for a tilt towards domestic borrowing, the crowding-out effect as a result of this policy remains a key risk to economic growth.

 Meristem stated that debt servicing may spiral out of control, especially in the face of dwindling revenue accruable to the government. In the first quarter of 2020, Nigeria’s debt to GDP ratio stood at 19.85% compared to 19% in 2019 and 19.09% in 2018.

 This was within the 25% upper limit provision of the Fiscal Responsibility Act, and below the World Bank – IMF recommended a threshold of 56% for her peer countries. However, analysts stated that debt service to revenue ratio however tells a much starker story, hovering above 50% since 2016, much higher than the 22.5% prescribed by the World Bank.

In the recently released Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) Paper, the rising costs of the country’s debt hit a new milestone in the first quarter of 2020.

 During the period, the debt service to revenue ratio rose to 99.20% as the country spent ₦943.12bn of total revenue (₦950.56bn) on debt servicing. Both oil and non-oil revenues under-performed budget expectations – with a joint shortfall of 52% as the impact of the Covid-19 pandemic hit hard.

In line with current realities, the FG has reviewed its spending plan for the year. Total expenditure was cut from ₦10.59 trillion to ₦10.51 trillion, while debt servicing costs and non-debt recurrent expenditure rose to ₦2.68 trillion and ₦4.93 trillion respectively from ₦2.45 trillion and ₦4.84 trillion.

Eventually, the budget deficit widened to ₦5.19 trillion and it is expected to be funded largely by borrowing. True to the FG’s reliance on borrowing, the IMF in April extended a USD3.4 billion loan to Nigeria to help tackle the twin impact of the Covid-19 shock and the sharp drop in oil prices on its economy.

It has also received USD288.8 million from the AfDB while there is a pending application to raise USD1.5 billion from the World Bank, which could rise to USD3 billion.


 “These loans appear necessary to fund the fiscal responses in the wake of the pandemic”, experts at Meristem stated.

Meristem said although the rates on these loans are low, they will add to the debt burden of the country given the implied exchange rate risk. “We have always maintained that Nigeria has a revenue problem, part of which the Finance Act seeks to address.

“The removal of inefficient subsidies on petroleum products should also help to ease the nation’s fiscal struggles”, analysts stated.

Meristem explained that in the long run, structural issues impeding the development of other key sectors with the potential to grow export earnings remain top challenges that must be tackled to escape the quagmire.

 Cloudy outlook

 With the economy likely headed for a recession, and the depressed outlook oil and non-oil revenues, analysts said they expect the FG to rely heavily on borrowing to plug the gap in the revised budget. They believed that the recent recovery in crude oil prices provides some form of succour, but compliance with OPEC+ production cuts are expected to moderate oil revenues going forward.

 On the other hand, analysts said while it is still too early to assess the effect of the newly implemented Finance Act on non-oil revenue, expectations are that key changes such as the VAT increase and the FG’s plan to tax foreign digital service providers would cushion the fall in oil revenue.

“Thus, we expect Nigeria’s reliance on borrowing to keep its debt stock and servicing costs elevated in 2020”, the firm stated.

Analysts at Meristem said without a significant improvement in its revenues, the government’s capacity to stimulate economic growth through capital expenditure would be constrained, thus slowing the pace of growth.

 “Therefore, we reiterate the need to significantly cut down the cost of governance and eliminate inefficient subsidies on fuel and electricity. The Government should also embrace public-private partnership as a means of financing long-term capital-intensive”, they said.

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