Report: Retention of N3trn Fuel Subsidy to Raise Nigeria’s Budget Deficit from 3.4% to 4.7% in 2022

Emmanuel Addeh

A new report by Renaissance Capital, a frontiers market investment bank, has projected an increase in Nigeria’s budget deficit in relation to Gross Domestic Product (GDP) from 3.4 per cent to 4.7 per cent on the back of the recent announcement of the retention of a N3 trillion fuel subsidy this year.

Nigeria’s President, Muhammadu Buhari while presenting the 2022 Budget on October 7, 2021, to the Joint Session of the National Assembly, had announced that the budget will have a deficit of about N6.25 trillion, approximately 3.39 per cent of GDP.

“On the fiscal front, the delay in removing the subsidy implies a budget deficit of 4.7 per cent of GDP in FY22, on our estimate vs the government’s 3.4 per cent target, ”the report said.

Although, typically, an improvement in FX liquidity hinged on higher oil price, lubricates Nigeria’s economic engines and spurs an increase in economic activity, but in 2022, it stated that this will be undermined by an uncertain outlook for oil production.

“This explains our small upward revision of our 2022 growth forecast for Nigeria to 2.9 per cent, at an oil price of $80 per barrel vs 2.8 per cent previously at $60 per barrel.

“We forecast flat growth of 2.8 per cent in 2023, as we see no significant upside catalysts, and expect a lengthy settling in of the new administration, which will place a dampener on growth, ”it added.

The outlook for oil production, the report stated, remains uncertain, because it will depend on new investment in the sector and oil producers’ effectiveness in fighting decline rates, which are a function of the underinvestment over the past couple of years.

Nigeria’s total liquids production (crude and condensates) has been falling by 650kb/d since the onset of the pandemic in March 2020, to 1.47million b/d in December 2021.

However, it said that total liquids production increased by 210kb/d in January to 1.68mnb/d, for the first time since July 2021.

It also projected a total liquids production at 1.71.8 million b/d, on average, in 2022, moderately up from 1.6 million b/d in 2021.

In January, Nigeria’s finance minister announced that the federal government was suspending its plan to remove the petrol subsidy in July. This was seen as a response to the labour unions that threatened to strike in January in protest against plans to remove the subsidy.

The petrol subsidy is estimated to have amounted to NGN1.4 trillion in 2021 (over $3 billion), which is equivalent to 10 per cent of the 2021 budget.

The suspension of the plan to remove the subsidy implies that the federal government now has to make an allowance of N3 trillion, as proposed by the national oil company, in the 2022 budget for it.

“This implies a wider deficit than the government was projecting of 3.4 per cent of GDP. Higher security spending is another downside risk to the budget deficit. We think a deficit of 4-5 per cent of GDP in FY22 is more likely,” the report added.

With the presidential election around the corner, Renaissance Capital stated that there will be a higher degree of uncertainty, particularly around policy, ahead of the polls, compared to that of 2019 when the incumbent sought a second term.

“We expect activity to remain muted in the two quarters following the election due to the transition from one administration to the next.

“In Nigeria’s case, it takes several months to appoint a cabinet, as it must be representative of all 36 states. When Buhari won the presidential election in March 2015, it took him six months to put together a full cabinet,” it said.

The report listed three strong themes namely: a strong oil price; elections; and high inflation that will dominate the economic space in Nigeria in 2022.

In addition, the firm said it expects Nigeria’s current account (CA) surplus to increase to 1.2 per cent in 2022 as against 0.8 per cent in 2021, a firmer FX rate of NGN465/$1 at year end 2022, but flat growth of 2.9 per cent and a budget deficit of roughly 5 per cent due to the fuel subsidy.

While the pick-up in the oil price has been stronger and more persistent than expected, RenCap explained that it still expects the “overvalued” naira to depreciate, but by a smaller rate to NGN465/$1 in contrast to its previous forecast of NGN482/$1.

It stated that the Dangote refinery is set to start producing in 2H22, which should help boost manufacturing activity, saying however that uncertainty in the oil sector implies a limited contribution from this sector to growth.

“We expect inflation to slow to 12.4 per cent at YE22, from 15.6 per cent a year earlier, but the risks, including insecurity, are to the upside, ”RenCap analysts noted.

According to the firm, the start of operations at the Dangote oil refinery in 3Q22, implies an increase in activity in the oil refining sector which has been on the decline for 11 consecutive quarters and by implication the manufacturing sector, which is positive for growth.

Stressing that the naira is now 14 per cent overvalued as against 9 per cent a year earlier, on its Real Effective Exchange Rate (REER), the organisation maintained that the naira has a fair value of NGN482/$1 currently.

“We believe that the strong oil price, which is positive for exports; and the prospect of the Dangote refinery commencing operations in 2H22, which implies FX demand for Nigeria’s biggest import, fuel, will fall, increases the likelihood of the central bank under a Buhari administration maintaining an overvalued currency, ”it added.

In December, Nigeria’s lawmakers approved total spending of NGN17.1 trillion in FY22, a 4 per cent increase from the N16.4 trillion that Buhari proposed when he presented the 2022 budget proposal to the National Assembly in October.

This implies a 17 per cent increase in spending, two-thirds of which will be financed with revenue and the remaining one-third with new borrowing and other proceeds.