By Audrey Lotechukwu
MON 03 MAY, 2021-theGBJournal- The FGN plans to borrow nearly N4.69 trillion-excluding multilateral/bilateral project-tied loans- to finance the over N5.6 trillion 2021 budget deficit. PwC, the multinational assurance, advisory and tax services firm in their Assessment of the 2021 FGN Budget contained in latest Nigeria Economic Alert, reckons that if this plan is executed, it will potentially expand the FGN’s total debt outstanding to more than N32 trillion by the end of 2021.
PwC’s alert shares insights on the 2021 budget, assessing its components and examining the trends exhibited overtime. The conclusion drawn is that ‘’continuous implementation of the 2021 budget will avert an impending recession due to the pandemic.’’
Among its observations; ‘’ Though positive market sentiments have helped to sustain the recent rise in crude oil prices, the likelihood that the FGN will achieve its revenue projections for the 2021 budget remains uncertain.’’
The Appropriation Act of 2021 earmarks an estimated N13 trillion in 2021 for the Federal Government budget. The total projected revenue (inclusive of revenues from GOEs) estimated to finance the 2021 budget is about N7.99 trillion, with the budget deficit at about N5 trillion. The estimated budget deficit accounts for about 3.9% of the GDP, above the 3% stipulated in the Fiscal Responsibility Act (FRA).
The 2021 budget deficit is estimated at N5.6 trillion (revised 2020 figure was N4.98 trillion), roughly 70% of FGN revenues and about 3.93% of nominal GDP.
The growing fiscal deficit has necessitated the need to borrow to plug the shortfall, significantly increased the debt stock, and expanded the cost of servicing outstanding debts.
The deficit is to be financed through borrowings of N4.9 trillion from the domestic and foreign debt markets.
Another way the FG has sought to finance the deficit is through ways and means advances from the CBN. In 2020, total ways and means advances to the FG stood at N2.86 trillion, representing roughly a quarter of the 2020 revised budget. The total cost of servicing ways and means advances stood at about N912.6 billion in 2020.
About N2.2 trillion is estimated to come from oil receipts. This figure is more than double the N1.09 trillion receipt projected in the revised 2020 budget. Similarly, the non-oil revenue projection is pegged at N1.49 trillion, lower than the N1.62 trillion budgeted in 2020.
The actual debt servicing cost in 2020 stood at N3.27 trillion and represented about 10% over the budgeted amount of N2.95 trillion. This puts the debt-to-revenue ratio at approximately 83%, nearly double the 46% that was budgeted.
‘’This implies that about N83 out of every N100 the FG earned was used to settle interest payments for outstanding domestic and foreign debts within the reference period. In 2021, the FG plans to spend N3.32 trillion to service its outstanding debt. This is slightly higher than the N2.95 trillion budgeted in 2020.’’
PwC suggests that this reduction is because of the economic impact of the pandemic on revenues anticipated from company income taxes.
‘’Many businesses are still grappling with the economic challenges from the COVID-19 pandemic,’’ it adds.
Other revenue sources include independent revenues (N1.06 trillion), revenues from GoEs (N2.17 trillion), signature bonuses (N0.68 trillion), among others.
According to PwC, the actual revenue achieved relative to the budgeted figure performed relatively well, with 73% or N3.94 trillion realised. About 79% of the non-oil revenue budget was achieved in 2020. The proportion of actual non-oil revenue has been increasing since 2016, from a nine-year low of 52% to 88% in 2019.
In comparing the proposed expenditure for 2021 and analysing the expenditure in 2020, PwC noted that, recurrent expenses historically, have always recorded nearly 100% implementation. I said ‘’in some cases, actual recurrent expenses tend to exceed the budgeted amount by a significant amount. The same trend happened in 2020 as the FG spent about N11.4 billion above the budgeted non-debt recurrent expenditure.
Meanwhile, only 48% of the capital budget has been implemented, on average since 2016. Except for 2020, which was one of the best years for capital expenditure implementation, as nearly 90% of the amount budgeted was deployed.’’
Nigeria has operated on a budget deficit since 1981, except for 1995 and 1996, when the federal budget recorded a surplus.
How realistic is the new crude oil price benchmark in the face of changing global energy market?
The 2021 budget is based on an oil price benchmark of US$40 per barrel and oil production output of 1.86 million barrels per day. The current global situation may support the realisation of this target, in the short to medium term. For instance, increased rate of vaccinations against COVID-19, the OPEC+ oil production cut, a new United States President, declining U.S. crude inventories, China’s strong economic growth as well as geopolitical tensions in major oil producing countries such as Russia/Ukraine and Israel/Iran are factors driving the recent rally in oil price.
Market analysts and global energy organisations are projecting relatively strong crude oil demand, as economic activities commence in many countries. In a recently released report, OPEC increased its global oil demand projection by about 190,000 bpd while the International Energy Agency (IEA) ramped up projections by 230,000 bpd.
As of April 16, 2021, the Bonny Light price traded slightly above US$65 per barrel, higher than the US$40 per barrel benchmarked in the 2021 budget.
‘’Beyond crude oil, receipt from gas sales could well provide relative stability to FG’s revenue,’’ PwC said.
It noted that in 2020, actual gas receipts exceeded its projection by 79%. The fundamentals for gas remain strong especially in the light of the ongoing call for a reduction in global carbon emissions. Nigeria needs to ramp up investment in domestic gas production and expand its capacity for gas exports.
For PwC, COVID-19 has led to a fragile economic growth globally and exposed the domestic economy’s vulnerabilities to external shocks arising from fluctuations in oil prices. While the pandemic presents risks, it nevertheless offers the country another opportunity to diversify its economic base while aggressively pursuing institutional reforms that would drastically reduce the cost of governance and ensure productivity in the public sector.
‘’More importantly, relentlessly implementing the 2021 budget will go a long way in averting an impending recession as a result of the pandemic outbreak,’’ it said.