Revisiting the fiscal purse

The success of the FGN’s expansionary fiscal agenda rests on its ability to release funds for capital programmes. Last year the (gross) federally collected revenue stood at N5.7trn, equivalent to 8.3% of total GDP in 2016. This was driven primarily by non-oil revenue collection.

Although the authorities stepped up their efforts, non-oil revenue collection declined from N3.08trn to N2.98trn in 2016 despite several initiatives by the FGN.
Capital releases within the 2016 budget reached a record N1.2trn. A breakdown of the ministry’s total of this sum shows that the power, works and housing ministry was the largest beneficiary, receiving N310bn. A similar picture can be seen in the approved 2017 budget in which the same ministry is set to receive 550bn.

Last month, the National Assembly approved the 2017 budget which sets total FGN revenue at N4.94trn and total spending at N5.7trn, including capital outlays of N2.24trn and debt service of N1.66trn. The assumed average oil price has been lifted from US$42.5/b to US$44.5/b.

The other core assumptions are unchanged from December (average crude output of 2.20 mbpd and exchange rate of N305 per US dollar). The authorities have no choice but to use the current interbank exchange rate as their assumption in the budget. If this rate was adjusted towards or beyond the several other rates currently in operation, there will be gains for oil revenue and customs duty. However, it will also increase the foreign debt burden in naira terms amongst others.

Fiscal stimulus is seen as the principal driver of Nigeria’s expected emergence from recession this year. However, it comes with its limitations. Total FGN spending in 2017 is forecast at just 6.3% of GDP in the Medium-Term Expenditure Framework; this ratio is low for a frontier/emerging market.

Unless the FGN boosts its revenue collection from the oil and non-oil economies, it will struggle to remain fiscally responsible. The total revenue projection for this year is N4.94trn. Oil revenue is projected at N1.99trn while that of non-oil is N1.37trn. Meanwhile, independent and other revenue is estimated to hit N1.6trn.

Perhaps, for a boost in non-oil revenue, the FGN should encourage the culture of paying tax. This is achievable when the taxpayer can identify improvements in infrastructure and public services. Lagos State offers a good case study in this respect.

Only five million of the estimated 37 million micro, small and medium enterprises in Nigeria are registered. The Federal Inland Revenue Service has disclosed that about half a million companies in the corporate sector are not paying tax. There is certainly room for improvement; the focus should be to extend coverage and compliance.

The fiscal deficit this year is projected at about N2.4trn or 2.18% of GDP. The projected debt-to-revenue ratio and debt service are 49% and N1.02trn respectively. The deficit will be financed primarily through borrowing. The optimal blend of domestic/external debt obligations is 60/40 according to the DMO’s medium-term strategy. However, it seems the FGN intends to stick to a 54/46 blend.

The ratio for the FGN at end-2016 was 76/24 and its debt at end-2016, domestic and external combined, represented 14.9% of GDP which compares favourably with its sovereign peers with B+/B credit ratings.

The FGN made a good start to its financing programme for this year with the successful US$1bn, 15-year Eurobond issuance in February. The authorities also aim to collect US$300m from the sale of diaspora bonds this year. When the size of the diaspora is considered, this seems to be a modest beginning.

Additionally, within the N1.25trn projection for domestic financing in the budget proposals, the FGN looks to raise N20bn from the issue of Nigeria’s first green bond. Proceeds from this will be geared towards environmentally friendly projects. Furthermore, the DMO and SEC are working together on a maiden sovereign sukuk (Islamic bond). It is understood that issuance would initially be in local currency.

Returning to the expected expenditure structure for this year, the FGN intends to spend N151bn on electricity supply, N57bn on housing, N348bn on road construction and N191bn on revamping of airports. For the latter, a few specific projects include the completion of airport control towers at Benin, Akure, Kaduna, Ibadan and Ilorin. In addition to this, the FGN intends to expand and upgrade the Lagos international airport which would assist with improving business tourism in Nigeria.
These investments should support other sectors of the economy (agriculture, manufacturing etc.) and by extension create more jobs.

Regarding socio-economic investments from the FGN’s capital expenditure structure, the ministry of health is expected to receive N51bn. This is 79% higher than its allocation last year, but accounts for just 2.3% of total capital expenditure. Meanwhile, education is slated to receive N200bn, 42% higher than the amount recorded last year but also just 2.3% of the total. Additionally, N500bn has been set aside for the expansion of the social investment programmes the FGN introduced last year.

Once the budget implementation begins and with the assumption that capital releases are not slow, the real economy should kick-start. For instance, construction should pick-up. Furthermore, better circulation of money supply should assist with stimulating household pockets thereby affecting demand positively.

Although an expansionary budget is the FGN’s choice to combat the macro challenges, fiscal discipline is still required and as such cautious spending needs to be adopted. The efficiency unit has attained commendable milestones. However, the need to block leakages cannot be overemphasized.
•Chinwe Egwim is a Macro Economist & Fixed Income Analyst at FBN Capital