Fiscal Policy Update: Focus on Virement of Funds and Medium Term Borrowing Plan

The 2017-2019 MTEF paper released earlier in August - which included the half year performance review of 2016 fiscal operation of the FGN - first revealed the extent of the pressure on government finances; with FGN revenue in the period evidently short of projections made in the 2016 budget by a significant margin (as much as 50.0%) and as a result, a host of capital and recurrent government obligations remain unfulfilled.

An expansionary N6.1tn budget was approved for the 2016 fiscal year, to be financed by N3.9tn in revenues of which non-oil sources (Taxes and Independent revenue) accounted for 77.2% or N3.0tn. However, the strained business environment and otherwise underdeveloped tax collection framework impacted on tax revenue in the period (which was 56.0% below Half Year projection) while operating surpluses of MDAs (Independent revenue) were also weaker than estimated – 85.8% short of projection. Militancy induced oil production disruption and delayed adjustment in FX rate further compounded the fiscal challenge, with actual revenue collected as at the end of H1:2016 estimated at N951.5bn which represented only 49.4% of Half Year revenue projection.

Against this backdrop, a letter was sent from the Presidency to the National Assembly this week, with regards to the possibility of a virement (or movement) of funds that were initially appropriated for special intervention welfare program - N500.0bn in both recurrent and capital expenditure - to critical recurrent and capital expenditure projects that need to be addressed. The sum of N180.8bn was sought for approval, with N166.6bn going into recurrent expenditure while N14.2bn will be allocated to capital expenditure. From  the recurrent expenditure, Public Sector Wage Adjustment (43.1% or N71.8bn) and Amnesty program (21.0% or N35.0bn) account for the greatest portion while on the capital expenditure end, the Nigerian Airforce under the Ministry of Defence will be appropriated N12.7bn of the funds.

A supplementary budget is typically used in Nigeria to augment inadequate appropriation to projects deemed important. Yet, we view the request for virement of funds necessary given the limited fiscal space for the FGN to raise additional revenue and urgency of projects requiring additional budgetary spending, especially in relation to worker’s remuneration and security infrastructure.

In a related development, another request was sent from the Presidency to the National Assembly with regards to a medium term 2016-2018 External Borrowing (Rolling) Plan worth $30.0bn. The borrowed funds are expected to be invested across all sectors but with major focus on Infrastructure, Agriculture, Health, Education, Water Supply, Growth and Employment Generation. The proposed borrowings are further subdivided into Projects and Programmes Loan ($11.3bn), Special National Infrastructure Projects ($10.7bn), Eurobonds ($4.5bn) and Federal Government Budget support ($3.5bn). The borrowing plan is broadly in line with the plan stated in the MTEF 2017-2019 document that assumes a N9.0tn fiscal deficit (US$31.3bn using MTEF exchange rate assumption - N290.00/US$1.00) between 2016 and 2019. The significant size of the external borrowing plan also explains government’s pivot to more external financed deficits as against a predominant domestic financing of deficits since 2006.

Government has incurred more domestic debt to fund the budget deficit in 2016 and while this may have reduced its exposure to exchange rate risk, the MTEF for 2017 – 2019 vis-à-vis Medium Term Rolling plan for external borrowing suggests that over the medium term, the FGN will focus more on external debt. This might be a positive development for the private sector as less dependency on domestic borrowing by the government typically frees up more funds for private sector lending and lessens borrowing cost. Nonetheless, the FGN still faces high FX risk with increasing external leverage – particularly in-view of the volatile movement of the currency.