The federal government has been advised to pursue economic liberalisation policies, including privatisation policies so as to improve efficiency in the public sector.
Analysts at Afrinvest West Africa Limited that gave the advice in a report at the weekend said this was neccessary to generate the much-needed cash flow to invest in capital projects and increase borrowing capacity.
Nigeria’s fiscal deficit had been projected to grow by 22.3 per cent from N2.2 trillion in 2016 to N2.7 trillion 2017 fiscal year, thus deficit/GDP ratio is expected to settle at 2.5 per cent in 2017 from 2.1 per cent in 2016.
Whilst the government’s decision to aggressively borrow from the local debt market to fund the budget deficit in 2016 reduced its susceptibility to exchange rate risk, the Medium-Term Expenditure Framework (MTEF) for 2017 suggests that over the medium term, the federal government will be more skewed towards external financing options, in order to free up local funds for private sector investment.
“However, high debt servicing cost to revenue ratio remains a constraint on ability to continue running below 2.5 per cent fiscal deficit to GDP ratio notwithstanding low debt to GDP ratio (17.0%). Also, given the bearish outlook for the naira, the plan to redirect attention towards external financing options suggests the projected amount for debt servicing will shoot up in 2017 – depending on the performance of the naira.
“The 2016 fiscal year has been largely synonymous with a sharp slowdown in economic activities largely as a result of lower oil earnings which constrained fiscal revenue and foreign exchange supply, as well as underwhelming policy responses and a brooding sub-national fiscal crisis which peaked in the first half of 2016,” the report added.
With a change in monetary policy tact to inflation targeting in first quarter 2016 – demonstrated by two rate hikes – in a bid to bolster FX supply, the federal government has been clear on its intent to counterbalance monetary tightening by utilising available fiscal space to buoy expenditure as a strategy to deepen economic diversification and stimulate economic activities.
Also, it pointed out that despite government’s intent to diversify revenue base and relegate oil earnings to the third most important in 2016, data compiled from first half 2016 budget performance puts oil revenue’s contribution to 42.6 per cent of total, the highest amongst all sources. Indeed, all non-oil revenue sources ran below projected run rates in the first half of 2016. Income from corporate income tax (CIT) was 62.7 per cent less than expected while independent revenue was only 14.2 per cent of projections for half year.
“Thus, the FGN has largely relied on deficit financing to balance its books, with fiscal deficit as at first half of 2016 reported at N1.5trillion (66.6% of total approved for FY:2016), implying a fiscal deficit to GDP ratio of 3.2 per cent compared to 2.1 per cent legislated and three per cent ceiling for a full fiscal year.
Of N1.5 trillion deficit raised, only N159.1bn was released to cash-back capital projects in the period.
“We largely expect revenue to improve in H2:2016 – as observed from FAAC allocations in Q3:2016 – due to translation of oil earnings at lower exchange rate, but still expect fiscal deficit (as percentage of GDP) at year end to exceed 2016 target by a minimum of 0.7 per cent,” the report added.
Nevertheless, last week, the FGN submitted the MTEF and Fiscal Strategy Paper for 2017 – 2019 to the National Assembly with ambitious expenditure targets.
The MTEF provided the framework for the 2017 budget and illuminated the expenditure outlook and revenue expectations for the period.
Aggregate expenditure in the proposed 2017 budget was projected to surpass the N6.1trillion in the 2016 budget by 13.3 per cent (circa N805.9bn) to N6.9 trillion in line with objectives to reflate the economy.