Zainab Ahmed, Nigeria's Finance Minister

Debt-GDP ratio to hit 30% in 2020 – Fitch

By JULIUS ALAGBE

There is fresh anxiety over the fiscal performance of the economy in 2019 as projected revenue continues to decline with just four months to the end of the year. This situation has spiked the already worrisome deficit level of the budget which experts said is becoming unsustainable.

Oil price which is the main source of revenue has remained sluggish most of the year, with the price trading most of the period below the benchmark of $60 per barrel for the budget. Recently government issued a query to the Executive Chairman of Federal Inland Revenue Service, FIRS, Mr. Babatunde Fowler, over alleged discrepancies in revenue projections and collections.

For six consecutive fiscal years, government has been running deficit budgets. In 2018, fiscal deficit as percentage of the gross domestic products, GDP, settled stood at 4.4%, from 5.41% in 2017. However, the deficit ratio has been projected to 4.6% in 2019.

The widening fiscal deficit will see the government debt burden increase over the coming years, raising debt servicing costs, Fitch Solutions estimated in a recent Africa Monitor release.

Analysts observed that the decline in government revenues in relations to annual spending remains an issue for the nation to solve. Then, some experts’ view is that the willingness to plug in holes is largely weak on the part of the government.

In 2013, deficit to GDP ratio was 2.33% or $11.987 million but increased to $12.059 million in 2014, which then was 2.12% of the GDP. By 2015, budget deficit grew to $17.328 million; the ratio to GDP was 3.51% and $16.029 million deficit in 2016 translated to 3.95% of the GDP, then.

Fitch said it expects Nigeria’s fiscal revenues to be bolstered by gradually increasing oil exports over the coming quarters.

“We believe that the government’s expectations for average crude oil production of 2.3million barrels per day (b/d) in 2019 and 2.4million b/d in 2020 will prove overly ambitious”, Fitch stated.

However, Fitch stated that expenditure growth will outpace that of revenues, due to increased spending to tackle security challenges and a higher public sector wage bill raising current expenditure. Therefore forecast is that the fiscal deficit will continue to widen from 4.4% of GDP in 2018 to 4.6% in 2019 and 4.5% in 2020.

Fitch said it expects the public debt burden to remain manageable, but increasing debt servicing costs and revenue constraints will see the government’s capacity to support economic growth via capital spending remain limited.

“While Nigerian state revenues are set to increase over the coming years, we believe that revenues will continue to fall short of the government’s targets.

“Our Oil & Gas team expects oil prices to continue recovering gradually over the coming quarters, while domestic output growth will be underpinned by the ExxonMobil Egina field, set to add 200,000b/d at peak by 2020.

“The oil sector accounted for an annual average of 67.4% of total federal government revenues from 2017 to2008.

It would be recalled that the government’s revenue targets in its 2019-2021 Medium Term Expenditure Framework (MTEF) were based on a benchmark oil price of $60.0/bbl. in 2019 and $56.46/bbl. in 2020, which Fitch stated is below forecasts for Brent crude oil to average $73.0/bbl. and $80.0/bbl. over those years respectively.

However, the government also expects oil output of 2.3million b/d in 2019 and 2.44mn b/d in 2020, levels that have not been seen since 2014 and above our 2.1mn b/d forecasts for both years. Efforts to bolster revenue generation will face continued headwinds over 2019 and 2020.

According to former Budget Minister Udoma Udo Udoma, the government intends to cut its stakes in joint oil ventures to 40% from the current 55-60% by the end of 2019.

“Selling petroleum stakes would provide a marked one-time increase in government revenues. However, the plan would face significant opposition in the Senate, which rejected a similar plan in 2016, due to the state’s reliance on income from the oil sector.

“We expect that rising oil prices will further disincentivise the Senate from approving this in 2019. Widening the tax base will remain challenging”, it added.

According to the Joint Tax Board (JTB), the number of Nigerian taxpayers rose from 10 million in 2015, compared to 68.9million people in work in the fourth quarter of 2015, to 19million in 2018 (compared to 69.5 million people in work as of third quarter in 2018).

The JTB expects the number of taxpayers to rise to 45 million in 2019 with the implementation of a new taxpayer registration system. “While the registration system may provide some support to revenue growth, we do not expect this target to be met”. Rising current expenditure will drive the fiscal deficit to widen over the coming years.

On April 30 the Senate approved the 2019 budget, with expenditure of N8.91 trillion or USD29.1 billion at the naira’s official interbank exchange rate.

It was observed that planned spending was increased from the initial N8.83trillion budget outlined by Buhari in December 2018, largely due to increases in planned defense expenditure to address regional security issues

The increase in the national monthly minimum wage from N18, 000 to N30, 000 – which Buhari signed into law in April – will further add to rising current spending. Personnel costs, the largest component of current expenditure, will account for 27.7% of planned total spending in 2019 and 27.6% in 2020 according to the MTEF, based on the earlier budget figures.

Fitch Solutions expects the higher minimum wage to see spending exceed these projections, contributing to the deepening fiscal deficit. Limited revenues will see cuts to capital expenditure over coming years. According to the Budget Office, capital expenditure over the first three quarters of 2018 totalled N930.5 billion.

This was well below the budget target of N2.2 billion for the period. In the MTEF, capital spending is set to be cut over the coming years to N2.6trillion in 2020 compared to the initially planned N3.2trillion for 2018.

This will help to contain the extent of the fiscal deficit deepening over the short term, but reflects the government’s limited capacity to bolster still-sluggish growth in areas such as infrastructure and agricultural sector development. The widening fiscal deficit will see the government debt burden increase over the coming years, raising debt servicing costs.

Fitch said it forecasts that Nigeria’s total debt to rise from 28.0% of GDP in 2018 to 28.8% in 2019 and 30.1% in 2020. The rise in public debt amid weak revenue growth over recent years has seen repayment costs relative to government income increase, a trend we expect to continue over the coming years, the agency said.

Prior to the Senate approving the increased budget in April, the MTEF projected the debt service to revenue ratio to GDP rising from a planned 28% in 2018 to 31% in 2019 and 38% in 2020.

The debt burden is still low compared to other major economies in Sub-Saharan Africa – with debt burdens over 50.0% of GDP – as well as broader emerging markets, and we expect it to remain manageable over the coming years, Fitch reckoned.

“However, downside risks to potential oil revenues and the country’s security situation could see the government borrow more heavily than anticipated, further constraining its ability to implement spending in support of economic growth over a multi -year timeframe”, Fitch stated in a report.