· Revenue hits 74% of target but deficit escalates
· Analysts see downside to 2021 targets
By Emeka Anaeto, Business Editor
The state of the finances of the Federal Government of Nigeria, FG, appears to be running on mixed performance following a record rise in actual revenue against target.
But this is coming with a significant increases in deficit level, dampening the speculations that the three-month consistent rise in oil price would have meant that the financial pressures on the government arising from the adverse impact of Coronavirus Pandemic may have started easing off.
Information available to the Vanguard Public Finance Report has indicated that as at December 2020, the budget implementation report of the Ministry of Finance shows that the Federal Government had realised 73.4 percent (or ₦3.9trillion) of its budgeted revenue of ₦5.4trillion for the year.
Although actual revenue shows a significant gap to targeted amount, the percentage performance is hugely impressive compared to average of 55.4 percent in the past three years.
But the FG’s fiscal deficit took almost a 50 percent leap to N620.49billion in November 2020 from N421.35billion at the end of October, according to a report by the Central Bank of Nigeria. The report also indicated that the deficit trend would continue to end of the year.
According to the CBN monthly economic reports, the deficit spending which had maintained a downward trend in the third quarter of 2020 had reversed to uptick in the fourth quarter.
Federal Government recorded N632.83billion, N409.4billion and N246.8billion fiscal deficits in July, August and September, while the figure for October was N451.22billion.
The revenue gap against target was attributed to the huge underperformance recorded in the non-oil revenue which fell below expectations by 21.5 percent to ₦1.3trillion. This drag down, according to sources in the ministry, came from lower performance in the Company Income Tax (CIT) receipt as well as Value Added Tax (VAT) and Customs Revenue.
However, further information shows that oil revenue outperformed by 150.1 percent at ₦1.5trillion as oil traded at a higher average of $43.2 per barrel during the year compared to the revised budget benchmark of $28.
Coming from the cold
In the first quarter 2020, FG effected a revision of the fiscal budget in line with the prevailing realities brought about by the pandemic. The double-whammy of oil price shocks caused by reduced demand for oil and reduced production as agreed by OPEC+ to contain prices dampened prospects for the Nigerian economy which was still struggling with sub-par post-recession growth. The lockdown implemented in the major cities also dampened prospects for non-oil revenue.
The key assumptions in the 2020 budget were subsequently revised; oil price benchmark was lowered to $28 per barrel as against $57, oil production levels was also reduced to 1.8 million barrels per day (mb/d) as against 2.18mb/d.
The domestic currency was also devalued by 15.0% to ₦360.00/$, following the worsening external accounts and declining reserves. This resulted in an upward revision of the benchmark exchange rate in the budget to ₦360.00/$ from ₦306.00/$ and provided some reprieve for government revenue.
Given the revisions, projected revenue for 2020 was estimated at ₦5.4trillion with 20.4 percent of total revenue expected from oil & gas as against 47.6 percent previous year, while revenue from other sources including independent revenue, stamp duty and grant & donor funding was expected to contribute 31.9 percent of total projected revenue.
CBN’s Report on FG’s finances
Part of the CBN’s report on FG’s finances read, “At N706.47billion, provisional gross federally collected revenue in November 2020 contracted by 16.6 per cent and 19.7 per cent, compared with the budget benchmark and the receipt in November 2019.
“It, however, increased by 7.2 per cent, relative to the preceding month. The increase was attributed to upticks in both oil and non-oil revenue components.
“Federal Government retained revenue stood at N284.76billion in November 2020, indicating a significant drop of 36.3 per cent, relative to its level in the corresponding period of 2019.
“Driven by the rise in personnel and overhead costs, provisional aggregate expenditure rose to N905.26billion from N738.71billion in the preceding period.
“Consequently, estimated fiscal deficit in November expanded to N620.49billion, relative to N421.35billion recorded in October 2020.
“Total FGN debt outstanding at end-June 2020 was N31.01trillion; with domestic and external components accounting for 57.6 per cent and 42.4 per cent of the total debt stock respectively.”
At N535.07billion, it stated, the federation account revenue increased, relative to its level in the previous month, but fell below the benchmark of N621.12billion and collections in the corresponding period of 2019 by 13.9 per cent and 21.6 per cent respectively.
‘‘Though gross revenue from both oil and non-oil revenue outperformed the previous month, the increased cash call deductions affected the distributable revenue in November 2020’’, it stated.
According to the report, the increase in oil revenue in November 2020 was driven by the upturn in receipts from domestic crude/gas sales, which was 280.7 per cent and 6.5 per cent above its benchmark and the level in November 2019 respectively due to increased demand, arising from easing of lockdowns in several countries.
It stated that the growth in non-oil revenue in November 2020 increased by 5.9 per cent over the level in October 2020.
This was, however, below the budget target.
The major driver of the increase in non-oil revenue in November 2020 was the receipt of N37.67billion from stamp duty collections.
As a result of decline in retained revenue by 10.3 per cent and an increase in aggregate expenditure by 22.6 per cent (relative to the level in the preceding month), estimated fiscal deficit rose by 49.7 per cent and 47.3 per cent above the 2020 budget benchmark and the level in October 2020 respectively.
The rise in fiscal deficit was attributed to the 51.9 per cent increase in recurrent expenditure owing to the government’s quest to stimulate aggregate demand to mitigate the impact of the COVID-19 pandemic.
2021 fiscal outlook
Though the 2021 budget appears to have taken lessons from the adversities of 2020 analysts at Afrinvest West Africa, a Lagos based investment house seem to give notes of cautions pointing at several downsides.
They stated: ‘‘We applaud the conservative revenue assumptions with oil price benchmark at $40/bbl, oil production (including condensates) at 1.86mb/d in line with OPEC supply cuts and a more reflective exchange rate of ₦379/$. Economic growth assumption of 3.0% also appears achievable especially given the low base from 2020.
‘‘We believe the devaluation of the naira and improving global demand for oil would support oil revenues going forward.
‘‘For non-oil revenue, FG expects to collect ₦1.5trillion in 2021 which, although seems conservative, may be a tall order given the weakness in the non-oil economy and the likelihood of continued disruptions to some sectors of the economy that are unable to resume activity due to the new strain of the virus and surging numbers of infected people. ‘‘It is pertinent to note that revenues from oil and non-oil sources are estimated to account for 43.8% of total revenues in 2021 as the government included revenues of 60 Government-owned Enterprises (GOEs).
‘‘We note the inclusion of other unsustainable revenue sources such as Grants & Aids, signature bonus & renewals and stamp duty may fuel a disappointing outcome in 2021.
‘‘FG’s planned expenditure remains on the rise, surging to ₦13.6trillion (inclusive of expenditure for the included GOEs) in 2021. Capital expenditure budget ticked higher by 62.9% Year-on-Year (YoY) to ₦4.4trillion, representing a higher proportion of the expenditure budget at 32.2% compared with 24.8% in 2020’’.
Other matters in 2021
Another huge pressure on FG’s finances comes from debt servicing obligations. For debt service, FG budgeted ₦3.1trillion to service obligations in 2021 which is lower compared to the ₦3.3trillion expended (budgeted: ₦2.4tn) for the same purpose in 2020.
Reflecting on this in relation to FG’s fiscal deficit, Afrinvest analysts had these to say: ‘‘The weakness in the currency largely contributed to the increase in debt service costs and with the FG’s foreign borrowing plans in 2021, actual costs should be higher.
‘‘Elsewhere, we expect domestic yields to tick upwards in 2021, further imposing upward pressure on debt service costs. ‘‘Budgeted deficit for 2021 stands at ₦5.6trillion, although history suggests a higher actual deficit.
‘‘Our model reveals actual revenues would come in at ₦4.9trillion or 61.6% of budget in line with historical performance and uncertainties associated with the year. Lower revenues and expanding expenditure would continue to widen the fiscal deficit.
‘‘Already, the proposed deficit represents 3.9% of GDP and exceeds the allowable limit of 3.0% by the Fiscal Responsibility Act, the revenue-expenditure disparity would further worsen the situation.
‘‘Finally, we expect debt service-to-revenue for 2021 to remain elevated as we expect FG to return to the Eurobonds.
2020 Finance Act may depress revenue
In addition to the above challenges the 2020 Finance Act has also been fingered by the analysts at Afrinvest as a major pressure point for deficit in the 2021 fiscal year contrary to what the government had envisaged.
The Finance Act amends some of the key provisions of Capital Gains Tax Act, Personal Income Tax Act, and Fiscal Responsibility Act among others. Some of the key provisions of the Act includes exemption of small companies with less than ₦25million turnover from payment of tertiary education tax, granting of tax relief to companies that donated to the COVID-19 relief fund under the Private Sector Coalition against COVID, reduction in the rate of import duties payable on tractors and motor vehicles to 10 percent and 5 percent, respectively and 50 percent reduction in minimum tax rate from 0.5 percent to 0.25 percent of gross turnover for financial years ending between 1st January 2020 and 31st December 2021.
The analysts at Afrinvest made the following observersions on these provisions: ‘‘While we applaud the thoughtfulness of some of these provisions, we believe those provisions relating to reduction in taxes and levies would lower government revenue in 2021 especially income from CIT, VAT and custom levies.
‘‘Already, the 2021 Appropriation Bill already reveals expected respective declines in income from CIT and VAT by 17.0% and 16.1% in 2021 from the revised 2020 budget numbers while custom levy is projected to grow by 12.8% in 2021.
‘‘We expect actual revenue from these sources to underperform budgeted numbers due to structural weakness in the non-oil economy which is being magnified by the pandemic.
‘‘Hence, fiscal deficit would further widen’’.