Nigeria’s constrained fiscal space

The Minister of Finance, Zainab Ahmed, on Thursday, released the four-month fiscal report of the economy during a public consultation on the 2023-2025 Medium Term Expenditure Framework/FSP. According to her, the aggregate expenditure for 2022 was estimated at N17.32trn, with a prorated spending target of N5.77trn at the end of April.

The actual spending as of the end of April, however, was N4.72 trillion. Of this amount, N1.94trn was
for debt service, and N1.26trn was for personnel costs, including pensions. On the other hand, FGN’s retained revenue was only N1.63trn, 49% of the prorated target of N3.32trn.

The Minister noted that huge subsidies had overburdened government finances and pushed fiscal deficit to as much as N3.09trn between January and April this year. Nigeria’s fiscal deficit has surpassed the target by an average of c.65% over the last 5 years due to ambitious revenue estimates and volatile crude oil prices.

The revised government expenditure for 2022 was estimated at an all-time high of N17.31 trillion. Revenue projection of N9.96trn will likely underperform estimate as already being seen in Q1. We forecast that the budget deficit will come in at N9.7tn, above the government’s deficit target of N7.35tn.

Recurrent spending will likely overshoot targets while capital spending will be lower than planned, in our view, oil revenue will significantly fall short of target, but non-oil revenue will outperform budget estimates. We expect Increased borrowings on the domestic market either through additional bonds or Ways and Means to finance the larger shortfall. The Debt Management Office (DMO) in its last report, said that Nigeria’s total public debt stock increased to N41.60tn in the first quarter of 2022 from N39.56tn as of December 2021.

We believe recurrent spending will come in at N7.5trn above the N7.0trn targeted in the budget. With election activities lined up, spending will likely intensify over the course of the year. Capital spending historically has come in below target and we believe that it will do so once again in 2022 – we are forecasting a total capital expenditure of NGN3.6trn, below the authorities’ target of NGN5.4trn. Also, the government plans to spend N4tn on subsidies in the year. As of May 2022, the government had already expended N1.27tn on petrol subsidy.

Going by the monthly progressive increase in subsidy so far in the past 5 months, we expect the government to spend not less than N3.5tn on petrol subsidy in 2022. According to the Minister, subsidy on premium motor spirit (PMS) is estimated at N6.72trn for the full year 2023.

While we think the oil prices will end up being higher than the government’s revised expectation of US$73/bbl from the initial US$62/bbl, we do not think that the revised target oil production of 1.6mbpd from 1.88mbpd is achievable. Going by the latest data released by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the average daily oil production (including condensates) for the first half of the year was 1.48mpd, also lower than the OPEC benchmark of 1.68mbpd in the review period.

The perennial issues of pipeline vandalism, theft, and terminal shutdowns have continued to constitute clogs. With no lasting solution in sight to curb this menace in the year, oil production will most likely remain at sub-optimal levels for the rest of the year.

CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.