Nigeria’s 2017 fiscal underperformance, unrealistic assumptions may bog down 2018 budget targets

Nigeria’s 2018 ‘budget of consolidation’ though intended to build on the gains of the 2017 ‘recovery and growth’ budget, its bold targets may not be met due to fiscal underperformance in 2017 and some unrealistic assumptions, say analysts at Renaissance Capital.

In a research note entitled “Nigeria: FY18 budget reach for the moon…” published Monday and seen by Businessamlive.com, the researchers say the Federal Government 2018 budget targets are unattainable.

“We think the Federal Government of Nigeria’s (FGN) FY18 budget targets are unattainable. This is in part due to unrealistic assumptions, notably 3.5% growth (vs our 2% forecast) and oil production of 2.3mn b/d (vs1.84mn b/d in 7M17).

“We also believe its FX rate assumption – NGN305/$1, vs our YE18 forecast of NGN373/$1 – further undermines the revenue target,” they pointed out.

Specifically they noted that 30 percent revenue increase as planned for FY18 to N6.6 trillion is over ambitious in comparison to a 14 percent shortfall at 9M17.

“We think the FGN’s plan for a 30 percent increase in revenue to N6.6 trillion ($18.4bn), is a stretch, given that we only expect nominal GDP growth of 17 percent in 2018. Half of this is expected to come from non-oil revenue, 37 percent from oil revenue and the remainder from independently generated revenue (IGR).

“At 9M17, total revenue was 14 percent below target, mainly because of non-oil revenue shortfalls; IGR was 75 percent below target,” they noted.

This is just as they said the proposed 16 percent increase in spending to N8.6 trillion may be more modest when one considers that spending was 30 percent below target at 7M17.

“We think the FGN’s plan to increase FY18 spending by 16 percent to NGN8.6 trillion ($24bn), would be attainable, if calculated off actual vs targeted FY17 spending,” they opined.

While noting that recurrent expenses were assigned 40 percent of the budget, capex 30 percent and debt servicing 23 percent, they opined that recent history shows that the later the budget is passed, the smaller actual capex (0% at 7M17), and the bigger the debt servicing share of the budget (38% at 7M17).

“Although we expect the FY18 budget to be passed sooner than May (as was the case in FY17), we still expect capex to fall short of the target, in part due to perennial capacity constraints.”

They said they expect revenue shortfalls to undermine plans to reduce the FY18 deficit to N2.0 trillion (1.4% of GDP, by our estimate) vs the FY17 target of N2.4 trillion.

“We think likely revenue shortfalls imply upside risk to the deficit. This may be offset by the FGN missing its spending targets. Nigeria’s high debt service costs/revenue – of 62% at June – partly explains the FGN’s desire to reduce its borrowing,” they noted.

They however noted that progress is being made on the infrastructure front, adding that one of the positives in the FY18 budget speech was the granularity provided on infrastructure developments, which has been light in previous budgets and this helped shine a light on how the capex budget is being spent.

“The Abuja Metro-Rail project – which began in 2007 – is now at 98 percent completion vs 50 percent in 2015, when this administration came into office. Over 766 km of roads were constructed or rehabilitated year to date,” they said.