16 October 2012, Sweetcrude, Lagos – Given downside risks to global growth, and its ongoing single commodity dependence, Nigeria has opted for further fiscal consolidation. Despite expectations that Nigerian GDP will decelerate to 6.5% in 2013, the weakest outcome since 2009, a modest 5% nominal increase in spending was proposed in the 2013 budget.
Under the proposals announced on 10 October, spending will increase to NGN 4.92trn (USD 31.74bn if an FX assumption of USD-NGN at 155 is used, although the budgeted FX rate was not made clear), from c.NGN 4.7trn in 2012. Not only does this represent a likely decline in spending in real terms, but the share of recurrent expenditure declines once again to 68.7% of the budget, from 71.47% previously, making more room for growth-enhancing capital expenditure, fulfilling one of the authorities‟ key medium-term aims.
Encouragingly, a USD 75/bbl benchmark price of oil has been proposed, up from USD 72/bbl last year. However, two caveats are likely to concern investors. First, Nigerian lawmakers have pledged to increase the benchmark price of oil to USD 80/bbl, lessening the „windfall‟ savings that would normally be diverted to Nigeria‟s Excess Crude Account. The likely standoff between the National Assembly and the Executive could test the willingness to enact fiscal reforms. It may also signal wider political risk, if it leads to an environment that is less conducive to other reforms.
Second, Nigeria‟s 2012 output assumption, which rises further to 2.53 million barrels per day (mmbd) from a revised 2.48mmbd, remains problematic for many. Despite some „official‟ estimates suggesting that Nigeria‟s oil production, at c. 2.7mmbd, is near all-times highs, there are wide variations in measures of it. Loading schedules over the last year have often suggested a range of between 2-2.3mmbd, raising the risk that revenue may need “augmentation” from excess crude proceeds, if output assumptions disappoint.
The lack of transparency on oil output provides a further complication. Illegal oil bunkering – or oil theft – is sometimes thought to account for as much as one-fifth of Nigeria‟s oil output, but its pervasive nature (it is thought to involve several different levels of the oil supply chain) means that obtaining accurate data on the amount of oil actually produced is near impossible. Even given anticipated regulatory change under the proposed Petroleum Industry Bill, this will do little to enhance transparency in the sector; the Finance Ministry and Federal Inland Revenue Service are likely to remain reliant on Oil Ministry estimates of production and revenue.
While efforts to boost non-oil revenue continue – we are told merely that it will “grow‟ in 2013 with ongoing reform in revenue-collecting agencies – for now Nigeria remains dependent on oil. (In all, 2013 federal government revenue is expected to rise 9% to NGN 3.89trn. The benchmark price of crude is up a modest 4% – if current plans hold, and oil output assumptions rise another 2%, hinting at the small increase in nominal non-oil revenue that is expected.)
This places in context the risks to budget deficit projections which are otherwise promising. In 2013, Nigeria should see a further narrowing in the Federal Government deficit to 2.17% of GDP from an estimated 2.85% in 2012, still in line with the Fiscal Responsibility Act, which aims to cap the deficit at 3% of GDP. Also encouraging are plans to establish a NGN 100bn sinking fund to be used to repay maturing debt obligations and curb Nigeria‟s rising domestic debt. Reduced borrowing (this falls 2.3% to NGN 727bn in 2013), complemented by the recent move to a Treasury Single Account, should favour a continued, positive outlook for the domestic debt market, which has benefited from Nigeria‟s recent GBI-EM index inclusion. Nigeria will also see more rebalancing of its debt with the planned issuance of a second eurobond, of USD 1bn, to build gas infrastructure.
Despite the good news, spending risks need to be watched. Spending on defence and the police alone (NGN 669bn) accounts for 28% of total recurrent expenditure, and almost matches the NGN 706bn set aside for health and education. The 2013 budget takes a step in the direction of fiscal consolidation, but important risks remain, and there is still room for further reform.
*Rezia Khan did this analysis for the Standard Chartered Bank.