The federal government’s optimistic oil production and foreign exchange (FX) rate assumptions, undermine the credibility of the 2017 proposed budget, as presented in the FGN 2017-2019 medium-term expenditure framework, analysts at Renaissance Capital Limite (RenCap) have stated.
“The FGN has maintained what we consider to be its overly optimistic oil production assumption of 2.2mn b/d for 2017 (vs actual production of 1.93mn b/d in 1H16). The FX rate assumption of N290/$1 (vs NGN197/$1 in FY16), also appears to be unrealistic given that the official interbank FX rate is at NGN315/$1 today, the parallel rate at about N450/$1, and there is little prospect of the external position improving in the short term,” RenCap stated in a report yesterday.
It, however, welcomed the federal government’s oil price assumption of $42.5/bl (versus $38/bl in 2016), describing it as the only realistic assumption, given that the year-to-date oil price is $43/bl.
The federal government plans to increase spending by 13 per cent in 2017 budget, to N6.87 trillion, according to the medium-term expenditure framework.
Of that, the government plans to spend N1.77 trillion on capital expenditure.
According to RenCap, that implies an 11 per cent increase in planned capital expenditure in 2017, compared with 2016.
“The budget deficit is projected to widen by 22 per cent to N2.7 trillion which the FGN estimates will come to 2.5 per cent of GDP. Given the dismal real GDP growth outlook for Nigeria in 2017, we think the FGN’s financing gap will be closer to 3.5 per cent of GDP,” it added.
Furthermore, the report showed that of the N2.2 trillion deficit in the 2016 federal government’s budget, only 20 per cent has so far been secured by the government.
The federal government had planned to finance N1 trillion with foreign loans, and the remaining N1.2trn with domestic borrowing. When the 2016 budget was signed, the interbank FX rate was N200/$1, which implied a foreign financing requirement of $5 billion. This financing was expected to come in the form of loans of $1 billion each from the World Bank and African Development Bank (AfDB), respectively, a $1billion eurobond issuance, and the remainder from bilateral loans from lenders such as China.
However, in November, Nigeria secured a $600 million loan from the AfDB for budget support. That was the first inflow of the foreign financing that the government was targeting.
“And at today’s official interbank FX rate, it only accounts for about 20 per cent of the foreign borrowing requirement, by our estimate,” RenCap stated.