The 2021 appropriation bill, which is targeted at boosting economic recovery and resilience amid COVID-19, was presented to the National Assembly by President Muhammadu Buhari on Thursday, exactly same period a year ago and the earliest since November 2017. Much like the 2020 budget, this would hasten passage and implementation. Additionally, the President noted that the Finance Bill 2020, which sets out revenue and fiscal policy plans for 2021, would be sent to the National Assembly for final consideration and approval. Also, the President revealed plans to provide more clarity on the estimated cost of tax exemptions, incentives and rebates by publishing an annual ‘Tax Expenditures Statement’ in line with the Fiscal Responsibility Act (FRA) 2007. We believe this is a positive initiative that would improve the efficiency of tax incentives and ultimately reduce the many vague areas in tax administration in Nigeria.
Revenue Projections… Ambitious but How Unrealistic?
The 2021 budget is overly optimistic considering weak prospects of strong revenue collection due to the pandemic and the historical trend of poor budget performance. For context, FG’s revenue projections underperformed actual collection by 47.8% in 2017 and was little changed at 44.7% in 2018, 41.1% in 2019 and 28.2% as at H1:2020 based on the revised budget. Although revenue collection in H1:2020 was significantly impacted by the weak oil price and COVID-19, currency devaluation provided reprieve. In 2021, the FG is projecting revenues of ₦7.9tn, which is 36.2% higher than the 2020 revised budget target of ₦5.8tn and almost double the actual collection of ₦4.1tn in 2019. The total revenue projection is inclusive of an estimated ₦354.9bn inflow from grants and aid as well as ₦1.4tn revenue from Government-Owned-Enterprises (GOEs) which have now been expanded to 60 from 10 in 2020.
While the revenue assumptions seem quite conservative, the broader weakness in the non-oil economy would affect collection. The FG projects oil revenue at ₦2.0tn, which is 4.8% lower than the ₦2.1tn in the revised 2020 budget. The oil revenue forecast is based on an oil price assumption of $40.0/bbl, estimated oil production of 1.86mbpd and exchange rate assumption of ₦379.0/$1.0. On the other hand, non-oil revenue projections (customs & excise duties, VAT and CIT) was also lower by 6.2% to ₦1.5tn (vs. 2020: ₦1.6tn) while independent revenue was budgeted at ₦0.9tn (vs. 2020: ₦0.9tn).
Planned Expenditure… Weak Implementation Capacity
The FG’s planned spending in 2021 is ₦13.1tn, representing a 21.3% rise from the previous year’s ₦10.8tn (inclusive of a ₦1.35tn planned expenditure by GOEs as well as grants and aid funded expenditures of ₦354.9bn). The planned expenditure is staggering given FG’s revenue challenges, which has been compounded by COVID-19. In the broader context, the proposed expenditure is expected to hasten the path of economic recovery by reining in the ongoing stagflation. However, FG’s proposed expenditure is not large enough to support the country’s growth aspirations at 8.0% of GDP.
Non-debt recurrent expenditure is high at ₦5.7tn, or 43.5% of the total budget, reflecting increased payroll obligations. Debt servicing cost at ₦3.1tn or 23.7% of the budget is 14.8% higher than the previous year’s allocation, driven by recent expansion in debt and currency devaluation pressures. The outsized spending on debt and non-debt recurrent expenditure continues to be a drag to human capital and infrastructure spending. Total capital expenditure, on the other hand, is projected at ₦3.9tn or 29.7% of the budget. While the proportion of the capital allocation is commendable, revenue challenges mean that implementation might suffer as it is discretionary.
The budget deficit is projected at ₦5.2tn, or 3.6% of GDP, higher than the 3.0% threshold stated in the Fiscal Responsibility Act 2007. This marks the second fiscal year the FG is exceeding the fiscal deficit threshold due to the unprecedented economic shocks brought by the pandemic. However, this is likely to be the trend going forward, with implications for debt sustainability risks. Debt service to revenues stood at 66.9% as at H1:2020 compared with the budgeted 51.2%, and we expect that this would remain elevated in 2021. We also expect the FG to finance its budget deficit mainly through domestic borrowing (₦4.3tn) from the debt market and the CBN as well as through multilateral and bilateral sources (₦709.7bn). The current low interest rate environment domestically would provide a respite to debt servicing cost in the short term to medium term.