Rencap: Federation Account Revenue Fell 33% Below Target in 7 Months

• Debt/service ratio rose to 62% in June
• Shift to external debts meant to lower borrowing cost
• Presidential amnesty expenses caused other service-wide votes to shoot up by 400 % 

Kunle Aderinokun

The federation account revenue, which the federal government had estimated in its budget to hit N7.8 trillion, dropped 33 per cent below its target in seven months, analysis by Renaissance Capital has revealed.

In a research note by Sub-Saharan Africa Economist, Yvonne Mhango, titled, ‘Nigeria: Fiscal Operations in 7 M17 – Capex-light and Debt Service-heavy’, Renaissance Capital, a leading emerging and frontier markets investment bank and research company, explained that the revenue fell short of the target because oil revenue came in 37 per cent below its (pro-rata) target, at N1.2trillion, and non-oil revenue 30 per cent below target, at N1trillion.
According to Mhango, this largely explained why the FGN revenue allocation from the federation account was 55 per cent below target, at N855billion, in seven months. “This sizeable shortfall in FGN revenue was mitigated by the Paris Club’s N467billion refund.”

“Three-quarters of the FGN’s planned revenue for FY17 is expected to come from the federation account, of which two-thirds will stem from oil revenue. At 7M17, the federation account’s revenue was one-third below its NGN7.8trillion target,” she stated.

Similarly, Mhango estimated that, Nigeria’s debt service/revenue had risen sharply in recent years, moving up significantly to 62 per cent as at June 2017 from 29 per cent in 2014. This, it explained, “largely reflects the FGN’s low revenue/GDP (the FY17 target is 4 per cent, by our estimate).”

The economist acknowledged that the federal government planned a $5.5billion Eurobond issuance before the end of this year, as part of its efforts to lower lofty local interest rates, by reducing domestic debt/total public debt to 60 per cent from the current level of over 70 per cent today.

According to her, “This shift towards a larger share of external debt is also intended to help lower the government’s borrowing costs. There is almost a 10-percentage point spread between domestic and foreign borrowing costs, according to a comment the head of the Debt Management Office made to the media. The $5.5billion debt issuance implies external debt will increase to 5.3 per cent of GDP at YE17, vs. 3.9 per cent in June, by our estimates. That implies a 10 per cent increase in total public debt, to 18 per cent of GDP at YE17, by our estimate, assuming no domestic borrowing in 2H17. This would bring debt service/revenue to c. 70 per cent at YE17 vs. 62 per cent in June, by our estimates.”

This report coincided with the appearance of the Minister of Finance, Mrs. Kemi Adeosun, before the Senate Committee on Local and Foreign Debts, where she confirmed that, 77 per cent of Nigeria’s total debt stock of N19 trillion was secured from the domestic market, which could create crowding out and reduce the availability of funds to the private sector.

Adeosun, who was represented by the Director-General, Debt Management Office (DMO), Ms. Patience Oniha, was at the legislature to defend the $5.5 billion foreign loan request of the executive.

President Muhammadu Buhari in a letter dated October 4, 2017 had sought the approval of the National Assembly for the issuance of $3 billion Eurobond/Diaspora Bond in the international capital market to refinance maturing domestic debts, and $2.5 billion external borrowing to finance the capital component of the 2017 budget.

Nevertheless, Mhango noted that, strong increase in domestic debt explained lofty yields. “Nigeria’s public debt/GDP is low vs. the Sub-Saharan African average of 45per cent, but it has seen a strong increase in recent years. Since 2014 it has risen by 7 percentage points of GDP to 16.4per cent of GDP in June 2017, by our estimate; 70 per cent of this increase was due to domestic debt. The FGN’s domestic debt has increased by 4 percentage points of GDP since 2013, to 10per cent of GDP in June. The states’ domestic debt saw its biggest annual increase this decade in 2015, when it jumped to 2.1per cent of GDP, vs. 1.4per cent in 2013. It edged up further to 2.5per cent in 2016 and has since plateaued. External debt saw a significant 1 percentage point of GDP increase in 1H17, in part due to a $1.5bn Eurobond issuance. External debt now accounts for 25per cent of public debt, vs. 19per cent at YE16,” it explained.

On capital expenditure, Mhango noted that, “In June, the federal government of Nigeria’s (FGN) FY17 NGN7.4trillion budget (6.2per cent of GDP, by our estimate) was signed by the executive, after being passed by the Senate in May. Of this, NGN3.1trillion (2.5per cent of GDP) was spent in 7M17.”

In her analysis, she stated that, “Expenditure in 7M17 was 30per cent below the (pro-rata) target and was entirely made up of recurrent spending. There were no capital releases from the FY17 budget because of its late approval. “
“However, capital releases did take place in 7M17, as the FY16 budget continued to be implemented into 1Q17.

Revenue came in on target, at NGN2.6trn (2.1per cent of GDP) because of a one-off refund from the Paris Club. When this is stripped out, there was a 20per cent shortfall in revenue. Below-target spending – due to delayed capital releases – explains the small budget deficit for 7M17 of 0.8per cent of GDP, by our estimate, vs. the 1.5per cent (pro-rata) target,” she added.

Mhango pointed out that, for the recurrent non-debt expenditure, shortfall in personnel costs was offset by presidential amnesty expenses. According to the firm, “Total FGN expenditure in 7M17 may have been 30per cent below target, but recurrent expenditure was in line with the target. Of the NGN5.3trillion total recurrent spending budget planned for FY17, 50per cent was allocated to non-debt expenses, 42per cent to debt expenses and the remainder to transfers. Of the recurrent non-debt expenses, 70per cent was assigned to personnel costs. At 7M17, personnel costs were 30per cent below target.”

Nevertheless, the economist added, “Total recurrent non-debt expenditure was on target because expenditure on Other service wide votes (which is like a contingency account for unforeseen events) was 400per cent higher than projected, because of the inclusion of expenses related to the Presidential Amnesty (which we assume is related to the Niger Delta amnesty deal that was brokered in 2Q17).”

“The difference between expenditure planned for other service wide votes (NGN126billion, pro-rata) and actual spending in 7M17 (NGN541billion) was NGN415billion, which we assume went towards the Niger Delta Presidential Amnesty,” she explained.