Macro Analysis /

Nigeria's budget is not the farewell Buhari intends

  • Nigeria's President Buhari recently presented a record spending budget of NGN20tn to parliament

  • The budget includes weak revenue, high debt service and other recurrent spending, and minimal attention to capex

  • Financing is more likely local than foreign, but maintaining ways and means caps domestic yields

Nigeria's budget is not the farewell Buhari intends
Janet Ogabi
Janet Ogabi

Senior Research Analyst

Tellimer Research
13 October 2022
Published byTellimer Research

Ahead of the February election, Nigeria’s President Muhammadu Buhari recently presented the eighth and final budget of his administration, for the 2023 fiscal year. Clearly, Buhari plans to end his tenure with a bang, but we don’t think it will be of the good kind.

The proposed budget makes provision for NGN20tn in total expenditure and NGN9.7tn in total revenue. These print 20% higher and 9% lower than the 2022 budget, respectively, and leave a staggering NGN10.8tn as the projected deficit for the coming year. The latter will be 69% higher yoy and is estimated at 4.8% of the GDP. Moreover, based on history, it is almost certain that the actual deficit will be higher.

Nigeria's fiscal deficits have historically printed higher than budget

The budget estimates are based on the following assumptions:

  • Oil price benchmark of US$70/barrel;

  • Oil production estimate of 1.69mbpd (including condensates of 300-400kbpd);

  • Exchange rate of 435.57 naira per US dollar; and

  • Projected GDP growth rate of 3.75%; and

  • Inflation rate of 17.16%.

We take a closer look at four critical areas.

1. Low oil production means revenue projections are a long shot

The government estimates Nigeria will generate NGN1.9tn of oil revenue in 2023. But, given the country's oil production challenges, meeting this target will be tricky. As at end-June, only 11% of the pro-rated net oil revenue target for 2022 had been met, owing to increased subsidy costs and low oil production.

The 2023 projection is based on lower oil production of 1.69mbpd (including condensates) and 1.29-1.39mbpd (excluding condensates). Meanwhile, official data from the Nigerian Upstream Petroleum Regulatory Commission showed total oil production printed at 1.1mbpd in September (including condensates) and at 937kbpd (excluding condensates).

The government's target, despite being lower than last year’s estimate and even lower than the current OPEC quota of 1.8mbpd (excluding condensates), may still be unattainable if oil production recovery efforts do not come to fruition. However, the conservative oil price benchmark of US$70/barrel in the budget will be favourable, if oil prices remain high.

Nigerian oil production (kbpd)

2. Petroleum subsidy discontinued in 2023?

The huge fiscal cost of the petroleum subsidy remains the elephant in the room. Buhari, who in January extended the subsidy by 18 months to June 2023, stated during his recent budget address that it is unsustainable, and that it would be discontinued next year – of course, under the new administration.

With a brand-new government in place, there will presumably be less desperation to please Nigerians with election-friendly giveaways; however, we have heard this before. There was no subsidy provision in the July 2021 Petroleum Act, but the Presidency revised the 2022 budget to make room for additional subsidy financing. As at end-July this year, NGN2tn had been spent on the petroleum subsidy, 50% of the full year’s budget provision of NGN4tn.

In the 2023-25 medium-term expenditure framework (MTEF) document, the government painted two scenarios as to how the subsidy could play out in 2023:

  • Scenario 1: A business-as-usual approach in 2023 could mean the subsidy remains in place for the full year, with NGN6.7tn spent in total;

  • Scenario 2: Reform in 2023 would mean the subsidy only stays in place until the end of June, with expenditure of NGN3.4tn.

In the 2023 budget, the government estimates NGN2.4tn for oil and gas deductions, but it does not clearly state how much will be set aside as provisions for the petroleum subsidy. But it is clear the subsidy is unsustainable and will eventually have to be removed, despite the short-term cost to citizens.

Since the start of the year 2022, the state oil firm has not remitted any oil export proceeds to the government, due to the netting off costs of the subsidy. Earlier in September, the regulators estimated the ex-depot cost of petrol prints at NGN462/litre – almost 3x more than the approved fuel pump price. The government is financing 64% of the country's petrol consumption and is spending all of its oil export proceeds in doing so.

3. Expenditure is not only spiralling, but is also unprogressive

The proposed budget shows an increase in total expenditure by 20% yoy in 2023 and a weak composition. Of the total NGN20tn in total expenditure, NGN6.3tn is to be spent servicing debt (+75% yoy) and NGN8.3tn is to be spent on non-debt recurrent expenditure (salaries, etc; +20% yoy). Only NGN5.4tn (-2% yoy) is to be spent on capital expenditure.

The country’s mounting debt has recently hit the press, with the IMF projecting that 100% of Nigeria’s revenue could be spent servicing debt by 2026. Total debt/GDP (including "ways and means" and AMCON debts) prints at 36%, which is close to breaching the government's new threshold of 40% (increased from 25% in February 2021), but below the IMF and World Bank's recommended threshhold of 55%. That said, projected debt service/aggregate federal revenue is uncomfortable, at 65% 2023. As at end-June, rising debt service costs had pushed interest payments to 79% of aggregate federal revenue and 107% of federally retained revenue.

Meanwhile, the budget reduced the provision for capital expenditure over the coming year by 2%, to NGN5.4tn. Capex/total expenditure is 26%, which is 6ppts lower than the figure in last year's budget. The deluge of spending on debt financing and recurrent expenditure, and the weaker focus on capex, represents an unprogressive and weak final budget for the outgoing administration.

4. Financing the record deficit

Plugging the NGN10.8tn budget deficit gap is to be done via debt financing (NGN8.8tn), multilateral and bilateral loans (NGN1.8tn), and asset sales and privatisations (NGN206bn).

Details on the borrowing split between local and foreign sources are not yet known. But there is limited scope for foreign borrowings (via eurobonds, etc.), amid rising yields globally. Thus, we think the government is likely to lean more on local borrowing.

Nigeria’s debt has increased 243% to NGN41tn since Buhari resumed office in 2015

On local funding sources, a traditional approach would be to fund via bonds and treasury bills. But the central bank has also been a major source of borrowing for the current administration (via "ways and means" financing).

As we have noted previously, the continuation of "ways and means" financing complicates the central bank's efforts to tame inflation (although this is largely driven by cost-push factors) and to stablilise the naira. It also caps how high domestic yields can rise, as it curbs government note issuance and the increased system liquidity strengthens market demand.

That said, it is worth stating that we have seen a gradual pick-up in primary and secondary market yields, especially after the 150bps rate hike last month.

Nigeria's yield curve (%)