COVID-19 Compels Sharp Fiscal Adjustments

As falling oil prices and economic lockdowns mean weaker revenue prospects in 2020, fiscal policymakers have been compelled to match budget ambitions with current realities. Accordingly, the Federal Executive Council (FEC) on Wednesday approved the revised Medium Term Expenditure Framework (MTEF) for 2020-2022 and the proposed amendment to the 2020 budget, with both awaiting the approval of the National Assembly.

While the revised MTEF is yet to be published, the Minister of Finance highlighted some of the proposed amendments to the 2020 budget. The revised budget assumes a new oil price benchmark of $25.0/bbl., down from $30.0/bbl. in April 2020 and from $57.0/bbl. in December 2019. In our view, this is realistic given the significant dip in oil prices and the uncertainty around the recovery of prices amid COVID-19.

Similarly, crude oil production was revised downward to 1.94mbpd from 2.18mbpd approved in December 2019, partly reflecting Nigeria’s share of the output cuts agreed by OPEC and its allies. Nigeria’s compliance with oil cuts has been weak historically but this could be more pronounced given the prospect for large revenue shortfalls in 2020. The revised budget now assumes the new official exchange rate of ₦360.00/$1.00 from ₦305.00/$1.00.

However, with a weaker exchange rate of ₦386.00/$ at the I&E window, the FG is still leaving money on the table. Overall, the FG’s revenue projection was cut by 38.1% to ₦5.2tn from the ₦8.4tn earlier approved while total spending was slightly lower at ₦10.5tn from ₦10.6tn. While oil revenue assumptions are conservative, we believe non-oil revenue estimates are optimistic given the slowdown in economic activities. Meanwhile, the moderate cut in expenditure is an indication of the outsized share of non-discretionary spending.

The implication of the significant revenue shortfall is a larger fiscal deficit estimated at ₦5.3tn or 3.6% of GDP, more than twice the initial projection of ₦2.2tn and beyond the 3.0% threshold set by the Fiscal Responsibility Act (2007). The deficit is expected to be financed by local loans of ₦1.6tn and multilateral loans of $6.9bn, with $3.4bn already secured from the IMF.

Given our expectation of lower-than-expected non-oil revenues, we expect weak implementation of the proposed capital expenditure. On debt servicing, 9M:2019 numbers show that debt service to revenue trended lower at 45.2% from 64.9% in 9M:2018, but we anticipate a significant deterioration in the near-term given the large borrowing planned this year.