Nigeria | More details emerge on Nigeria’s fiscal plans — BoAML

LAGOS, Nigeria, Capital Markets in Africa — Nigeria’s Senators have urged Buhari to sign the budget into law after he requested it be sent to him to check for any unapproved adjustments. The local press has reported that this should happen within weeks but the whole budgeting process has been fraught with delays since it was first started in December 2015. The current delays relate to the allocation of the US$30bn headline expenditure, but the market is more concerned with revenues, specifically how Nigeria’s reform strategy will enable it to increase non-oil government revenues by 87% in a year when GDP growth is slowing significantly. We are Marketweight EXD.

Federal government aims for a 2.2% fiscal deficit 
According to the local press, Kemi Adeosun has outlined plans to increase revenue from non-oil sources by 87% in 2016 to NGN3.4tn (US$17bn), meaning it would fund more than 50% of the planned headline expenditure of US$30bn. This will be driven by improved efficiency of tax collection under the management of the new Federal Inland Revenue Service (FIRS) by Chairman Babatunde Fowler, who managed the Internal Revenue Service of Lagos, one of the few States in Nigeria to have succeeded in generating revenues independently. It is investing in equipment and software upgrades to link government databases and clean up the payroll. Various Ministries Departments and Agencies (MDAs) have also been tasked with independent revenue generation rather than relying on central funding. Recovery of stolen funds is also expected to be a key source of revenue.

On the expenditure side, reducing waste and overheads is a key focus of the new Efficiency Unit, which was established last year. For example, the local press has reported widely on new rules restricting business and first-class travel for senior government employees. The overall fiscal deficit is expected to be NGN2.2tn (US$11bn), or 2.2% of GDP, compared to our forecast of 4.1% of GDP.

Capital spending to drive growth 
The government has already released preliminary expectations of where the US$30bn expansionary budget will be spent (24% on debt service, 43% on non-debt recurrent expenditure, 30% on capital expenditure). Adeosun has provided more detail here, claiming that NGN1.8tn (US$9bn) of capital expenditure will be directed towards roads, housing power, and health to boost GDP growth towards 6% through job creation. PPPs will also be used to attract private capital.

Joint venture cash calls offer a backup plan 
Though the government claims that reduced leakages at the national oil company (the NNPC) have decreased the deficit on a monthly basis. This is due to the “cash calls”, owed by the NNPC to its joint venture partners to fund projects with international and local oil companies.

Adeosun has allegedly claimed that if the ambitious non-oil revenue growth targets are not met, NGN1tn (US$5bn) in the budget for these cash calls can be released back to the government and the cash calls will be funded by other means.

Financing the deficit – Samurai or Panda? 
The government expects to borrow NGN1.8tn (US$9bn), of which US$4-5bn will be raised from external sources. Here, several options have been mentioned. The government is hoping to finalize US$1bn in loans from the World Bank during this week’s IMF spring meetings and has previously mentioned securing US$1bn from the African Development Bank. It also aims to be in the market to raise non-concessional debt in 3Q. Earlier in 2016, Adeosun had mentioned that a US$1bn Eurobond was an option. Now euro, yen (Samurai) or renminbi (Panda) bonds have been added to the list as the government searches for the cheapest available source of funds. Though the spreads on Nigeria’s 2023 Eurobond have fallen by over 100bp since February, current yields of nearly 8% are much higher than when Nigeria last issued in 2013 (with a 6.4% yield).

FX constraint on GDP growth may offset the planned fiscal boost 
Though the Ministry of Finance and the Central Bank of Nigeria (CBN) frequently talk about co-ordination of monetary and fiscal policy, in our view this is where the major flaws in Nigeria’s economic plan lie. The growth and job creation driven by industrialization and improvements in the business environment will likely be more than offset by the difficulties of doing business without access to FX.

This is reflected in the recent CPI statistics. March CPI rose to 12.8% compared to 11.4% in February. Prices rose across all divisions. Higher transport costs due to the fuel shortage as well as FX shortages pushed food inflation to 12.7% and core inflation to 12.2%.

Until FX restrictions are removed, allowing Nigerian companies to import freely, the government’s efforts to boost growth may be in vain. With limited positive catalysts ahead, we stay Marketweight Nigeria EXD.