The 2024 budget has been presented; in summary, the Federal Government of Nigeria wants N27b in fiscal year 2024, with the bulk of the projected revenues of N7.94b coming from the export sale of crude oil.
These oil revenues are a 247% jump from the fiscal year 2023
The budget does contain certain assumptions that this article would like to examine critically.
The Oil output. This is the most critical assumption in the budget as it drives the foreign currency (forex) revenues that will accrue to the federation.
Forex revenues are a function of international oil prices and the volume of oil exported via official channels.
Nigeria has no control over the global oil prices but controls the volumes pumped. Nigeria’s Foreign currency earning is essential because the nation is exposed to dollar-denominated Eurobond debt at commercial rates. Nigeria is also a massive importer of food and fuel. Thus, the forex revenues guarantee that imports can be paid for.
Nigeria has adopted a 1.78 mbpd figure as an oil production target. According to Rystad, an independent consultant used by OPEC, Nigeria’s production numbers as of November 2023 are put at 1.3m barrels.
This is well below the 2006 figure of 2.5 Mbps. Oil output is low because of oil theft and illegal bunkering in the Niger Delta.
By placing a target of 1.78mbpd in 2024, Nigeria is admitting it can’t even get back to its own numbers in 2006, even as its $ obligations have increased.
A significant risk factor is that OPEC, the oil cartel that Nigeria is a member of, has announced an output cut to Nigeria to 1.5mbpd. OPEC is doing the right thing, as a reduction in oil output will stabilize falling prices.
The inflation rates
The 2004 budget assumed that target inflation would be 21.40%. The latest Nigerian Bureau of Statistics readout of inflation in November shows inflation at 27.44, with food inflation at 30%.
For Nigeria, the Consumer Price Index, which tracks inflation by comparing the price rise in a basket of goods and services, is made up of food items by 51%. The food cost in Nigeria by the NBS is estimated to be about 67% of the household budget.
Thus, food is a crucial cost and expense item in Nigeria to the extent that inflation is driven by hikes in food prices, which is caused by insecurity in the main food baskets and a breakdown in infrastructure to transport food to the cities.
To what degree can monetary policy fix high food prices? If the CBN successfully fights monetary inflation caused by excess liquidity, can raising rates also raise the output of tomatoes in Nigeria?
The Growth Rate
Nigeria estimates the economy will grow by 3.76 in 2024; compared to average growth rates of 6% from 1999 to 2014 (in 2002, Nigeria posted 15.3% GDP Growth), this is very frail.
The population of Nigeria is estimated to grow by 2.38%, according to the World Bank. Thus, a 3.76% estimated growth is almost at par with the population rate with no considerable margin of error.
The benchmark oil price
Nigeria sterilizes her oil receipts by implementing a benchmark price of crude oil. In practice, the budget will adopt a fixed revenue price for crude oil, which is the inflow that flows into the budget.
Any excess above that limit goes to an “Excess Crude Account”, which acts like a memorandum “savings account.”
The benchmarked level is thus fundamental; a high benchmark means potentially more revenues flow to the MDAs, and the ECA will receive less. Still, if the oil prices fall, the budget deficit will rise as the MDA will have to borrow to meet expenditures that have been earmarked based on a high oil benchmark.
The reverse is the same; a lower, more prudent benchmark means fewer revenues flow to the MDAs to spend and more funds flow to the ECA.
The key word here is prudence since spending is based on projected revenues, which will rise as a benchmark is lowered.
2024 has adopted $78 as its benchmark; it looks prudent as average oil prices in 2023 have been at $78.22, according to Statista tracking of WTI, but is now showing weakness, necessitating an OPEC+ cut in output.
Risk, of course, remains that the oil price falls, thus pressuring the benchmarked price set in the budget.
The Exchange Rate
The exchange rate is the report card of the economy. The 2024 budget proposes an exchange rate of $1:750. This is ambitious as the rate in the parcel market is well about $1: N1000.
The calculation is simple: net exports will straighten the naira. The 2024 exchange projection is thus an assumption that Nigeria will post a net export number that will include invisible without restrictions.
This is a tall order, as foreign education and health forex requests significantly drain the reserves.
Plus, we have seen a fall in oil exports. Of course, “exports” include Remittances, FDIs and FPI inflow. If the macroeconomic picture stabilizes, this inflow will increase. Thus, it is ambitious but very possible.
There are a lot of assumptions to track; let us hope they all pan out. Nigeria needs to catch a break.
