Finally! Some Form of Fiscal Direction

The Medium Term Expenditure Framework (MTEF) of the Federal Government of Nigeria (FGN), a precursor to the 2016 Budget, was forwarded to National Assembly this week. The MTEF highlights the FGN's revenue and expenditure framework for the next 3 fiscal years and provides a sketchy view of the policy direction of the fiscal arm of the government. We believe this is a sigh of relief from the one-sided drive of the economy embarked on by the monetary authority since the inception of the new government. We observe that FGN's policy thrust is centred on implementation of policies to ensure fiscal stability, improve fiscal non-oil revenue, lower inflation rate and ensure real sector growth.

Accordingly, the FG is proposing an expansionary fiscal policy in 2016 in a bid to reflate the economy through investment in key infrastructures and social welfare spending. Thus, a total expenditure of N6.1tn was proposed for the year 2016, a 34.6% and 38.8% jump relative to the N4.5tn budgeted in 2015 and our N4.4tn estimate for the fiscal year based on actual expenditure as at Q3:2015. 30.0% of total expenditure (N1.6tn) has been budgeted for capital expenditure as against 16.0% in the previous year. Non-Debt recurrent expenditure as well as Statutory Transfers were proposed to decline 6.5% and 9.4% to N351.4bn (38.6% of total expenditure from 54.7% in prior year) and N2.3tn (5.8% of total expenditure from 8.3% in FY:2015) respectively. A N300.0bn Special Interventions Fund is also proposed for Conditional Cash Transfers (CCT) and other social welfare spending programs. Debt service is the only item of recurrent spending expected to increase; proposed to grow 42.8% to N1.4tn.

On the revenue side, FGN's retained revenue is forecast to increase by 11.7% to N3.8tn in fiscal 2016. Oil revenue is to contribute 18.6% (N717.5bn) to the bulk as against 47.5% in the 2015 budget (N1.6tn). The decline in oil revenue projection is not coming as a surprise given the persistent decline in the price of oil which closed at US$38.03/b today (11/12/2015). Moreover, the 2015 budget was made with an assumption of US$53.00/b, with the decline in oil prices during the year. The 2016 budget was however prepared with an assumption of US$38.00/b. Production volume is forecast to average 2.2mbpd in 2016 from the average of 2.0mbpd so far in 2015. We suspect that the projected increase in average production volume is anticipated from efficiency gains given increased supervision by the presidency. Nevertheless, a further decline in oil prices on over-supply in the global crude oil market remains a high probability risk.

Non-oil revenue is expected to contribute a greater portion to the total FGN revenue, in line with the drive to diversify the revenue base. The FG's share of federally collected non- oil (from taxes, customs and levies) is estimated to increase by 19.8% to N1.5tn (39.1% of total revenue) while independent revenue is projected to grow exponentially by 207.8% to N1.5tn (revenues from other federal MDAs not part of FAAC). The increased estimates of non-oil revenue items are expected to be driven mainly by strengthening of the Tax allocation and collection framework plans to improve on the revenue collection framework as well as plug in the leakages within the system (especially through the implementation of the Treasury Single Account).

As against the proposed 34.6% growth in expenditure, revenue is estimated to increase  by 11.6%, hence, the MTEF document estimates fiscal deficit to increase to N2.22tn (2.2% of GDP) in 2016 from N1.08tn (1.0% of GDP) as at September 2015. The deficit will be majorly funded by domestic borrowing proposed at N1.22tn (55.0% of the deficit) while foreign borrowings will account for N635.9bn (26.6% of deficit). The "recoveries from misappropriated fund", sale of government properties and privatization proceeds will fund the remaining. As a result, Afrinvest's true estimate of proposed fiscal deficit in 2016 is N1.8tn (1.8%).

We consider the fiscal plan of the FG to reduce recurrent spending and simultaneously increase capital vote positively and broadly in line with the objectives of the budget to achieve infrastructural development and inclusive growth. Nonetheless, the expenditure numbers appear a bit ambitious relative to revenue sources, given the lower oil revenue environment and deteriorating macroeconomic fundamentals that have weighed on company earnings and taxable revenues of companies and individuals already in the tax net. Thus, for the revenue generating agencies such as the Customs and FIRS to achieve their revenue target, a conscious effort needs to be made in expanding the tax base and deploying more efficient collection platforms to effectively ensure compliance.

The projected doubling of domestic borrowing (mostly by issuance of bond instruments) in our view may likely trigger an upward re-pricing of yields in the fixed income market in 2016 given the anticipated increase in supply of fixed income instruments. The uncertainties in the foreign exchange market also run against the fiscal plan of government as foreign capital inflows would remain stunted, leaving the domestic market to fully fund the domestic component in 2016. Thus, even as we view the planned fiscal expansion to be positive for company earnings, sentiment for equities would remain guided by foreign exchange rate dynamics, success of government effort to diversify the revenue base and implementation of the capital-vote component of proposed budgetary plan.