2019 Budget Implementation: Beyond the Miracle of FG’s Special Accounts

In the light of recently released data by the CBN (Q4:2019 quarterly report), we turn our attention to the fiscal performance of Nigeria in 2019. While we note that the data provided by CBN are provisional, history shows that actual numbers do not significantly deviate from the Bank’s estimates. The CBN’s report shows that federally collected revenues, which is shared among the FG, States and Local governments, rose 7.3% y/y to ₦10.2tn in 2019.  While this represents only a marginal boost on the surface, there is noticeable progress when revenue is deconstructed.

Oil revenue continues to struggle, contracting 0.2% to ₦5.5tn with a reduced share of total revenue at 54.2% from 58.2% in 2018. We suspect that the 10.0% contraction in oil prices to US$64.0/bbl. in 2019 more than offset the 5.1% expansion in oil production to 2.0mb/d as well as the performance from other sources. Meanwhile, non-oil revenue expanded 17.7% to ₦4.7tn, with a higher share of revenue at 45.8%. Although this suggests that the government’s revenue drive is on track, we believe this may be attributed to continuous economic recovery. The strong performance was broad-based across core revenue lines, as Corporate Income Tax (CIT) rose 14.5% to ₦1.6tn, Value-added Tax (VAT) expanded slightly by 7.2% to ₦1.2tn while customs and excise duties grew fastest at 18.7% to ₦837.4bn.

Seeing Behind the Mask
Moving on to the performance of FG’s 2019 budget, we notice that implementation was stronger than expected despite a huge revenue shortfall. The CBN reported total expenditure of ₦9.4tn, the highest on record, although total revenue of ₦4.8tn underperformed budget by 31.4%. The implication was a record-high deficit of ₦4.6tn, against the budget of ₦1.9tn. We have reasons to doubt the expenditure estimate given that the Budget Office put spending at ₦5.8tn as at Q3:2019.

However, we note that CBN’s revenue estimates have always tracked actual numbers. As at Q3:2019, the Budget Ministry reported that the retained revenue of the FG was ₦3.0tn while revenue from special accounts contributed an additional ₦1.3tn for a total revenue of ₦4.3tn, indicating that CBN’s projected deficit may be far off the mark. What makes up special accounts is unclear but we are certain that this does not include primary revenue sources as the CBN estimated revenue at ₦3.2tn as at Q3:2019.
Our revenue estimate for 2019 is ₦4.2tn with a fiscal deficit of ₦3.4tn. As the FG raised only ₦802.8bn in the debt market in 2019 to fund its budget, we believe the CBN’s sustained monetisation of the deficit drove budget implementation. The latest available data show that the CBN overdrafts to the FG stood at ₦8.5tn as at November 2019 from ₦5.4tn as at year-end 2018.

In line with our recently published 2020 outlook, we believe the revenue challenges of the FG would persist in the near-term. The reprieve expected from the increase in VAT rate to 7.5% from 5.0% would only be marginal given the FG’s paltry share of 15.0%. Similarly, current evidence does not support the claim that land border closure would result in a significant revenue boost. Although revenue from special accounts provided a cosmetic lift in 2019, the sustainability of such an account is in doubt. Accordingly, we expect revenue collection to proceed at a moderate pace in 2020. The monetisation of deficit by the CBN, although likely to be sustained, continues to contravene the CBN Act (2007) with potentially serious implications for the economy if its growth continues at the current pace.