2018 Budget: PwC Predicts Fiscal Deficit Will Overshoot Projection by 67.7 %

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Says non-oil revenue target could underperform
Vincent Obia

President Muhammadu Buhari presented the 2018 budget to the National Assembly on November 7, in a rare early financial plan meant to consolidate on marginal macroeconomic gains made since the country’s exit from recession in the second quarter of the year, and break the jinx of late budget implementation. But it appears the key goals of Buhari’s “budget of consolidation” may not be achieved, going by a report by leading professional services provider, PricewaterhouseCoopers.

PwC said in the report published on Tuesday that effective implementation of the budget would depend on increase in government revenues, but it doubted the capacity of the government to achieve its revenue projections.

The 2018 budget has a proposed total expenditure of N8.612 trillion, 16 per cent higher than the 2017 budget estimate of N7.441 trillion. An aggregate expenditure of 2.652 trillion or 30.8 per cent of the total budget (inclusive of capital in statutory transfers) is allocated to the capital budget. This is in keeping with the policy of allocating at least 30 per cent of the annual budget to capital expenditure, which the government has implemented since its first full year budget in 2016.

The budget contains a fiscal deficit of N2.005 trillion (or 1.77 per cent of Gross Domestic Product), a reduction from the 2017 figure of N2.356 trillion. The deficit is to be financed with new borrowings estimated at N1.699 trillion, 50 per cent of which will be sourced externally, while the balance will be sourced domestically. N2.014 trillion of the budget is allocated to debt service.
The key parameters and assumptions for the 2018 budget include benchmark oil price of $45 per barrel; oil production estimate of 2.3 million barrels per day, including condensates; exchange rate of N305/$; real GDP growth of 3.5 per cent; and inflation rate of 12.4 per cent.

The budget is looking to generate N11.983 trillion for the economy (N6.387 trillion from oil and gas sources and N5.597 trillion from the non-oil sector), with total federal government revenue of N6.607 trillion, 30 per cent more than the 2017 target. In pursuit of the government’s economic diversification agenda, it projects that oil revenues would account for N2.442 trillion (37%) of the government’s revenue share of N6.607 trillion, while N4.165 trillion (67%) will be from non-oil revenue sources.
But PwC Nigeria said judging from experience, there might be an underperformance in non-oil revenues, which could result in higher fiscal deficit.

It stated, “The 2018 budget proposes an aggressive increase in non-oil revenues to NGN4.2 trillion. Relative to the 2017 budget, the target is 44.6 per cent higher; this variance could be close to 100 per cent when compared to our estimate of the actual non-oil revenue collected in 2017.

“Whilst the reduced reliance on oil revenues is plausible, the trend and reasons for revenue underperformance in prior years suggest that this target might be difficult to achieve.
“Nigeria’s low tax to GDP ratio (around six per cent) is a consequence of a poor and inefficient tax collection system. While the government has implemented specific measures to address this by expanding the tax base and increasing tax compliance using various incentives, the impact is yet to materialise. As a result, we estimate that the fiscal deficit could overshoot projections by as much as 67.7 per cent to NGN3.4 trillion.”

The report foresees debt sustainability problems.
According to the report, “The federal government’s budget estimates the 2018 deficit at NGN 2 trillion. Given our outlook of revenue underperformance, we expect a higher-than-expected deficit, which could bring the federal government’s debt stock to NGN20.9 trillion in 2018 (2017E: NGN17.6 trillion). We believe the Federal Government of Nigeria would rely more on the domestic debt market to finance this deficit, given the availability of a stable domestic investor base, which includes the Pension Funds.

“Moreover, external financing could be tight in 2018 due to the uptrend in interest rates in advanced economies, particularly in the US and UK. Following this, we estimate that debt to GDP could rise marginally to 15.1% (2017E: 14.6%). This is closer to Nigeria’s country-specific threshold of 19.4 per cent, but still far below the IMF’s recommended threshold of 56 per cent.

“Although the low debt-to-GDP ratio is reassuring, the debt service to revenue ratio, which is often cited as a better measure of debt sustainability, is projected at 30.1 per cent in 2018 (threshold: 28 per cent). Based on our estimates, this could rise to 45.9 per cent in the event the budget deficit reaches 2.4 per cent of GDP.”
The Central Bank of Nigeria has of late hinted on monetary easing. But the PwC Nigeria report says inflation may limit the prospects of any relaxation in monetary policy.

The report says, “Given a reduction in core inflation to 12.1 per cent (year on year) in September 2017, and our expectation of a continued moderation in inflation in the near term, we believe there is sufficient head-room for a rate cut in Q1’18.
“However, this reflationary budget, which provides for a 12 per cent increase in personnel costs, raises inflation expectations. Likewise, history suggests that the commencement of the election cycle ahead of the 2019 general elections could portend significant inflationary risks, thus, reducing the scope for monetary easing.”