2020 Budget: FG Building Castles in the Air- Afrinvest Research

The 2020 appropriation and finance bills of the Federal Government (FG) were presented to the National Assembly by President Muhammadu Buhari on Tuesday, the earliest time for such after November 2017. The quick submission of the bill to the legislators should give ample time for deliberations and hasten final approval, especially as the current leadership of the National Assembly is supportive.
The appropriation bill seeks to sustain growth and job creation, which we think is an ambitious leap from the current cycle of weak growth and increasing unemployment. The budget is underpinned by four pillars including fiscal consolidation, infrastructure & human capital development, incentivizing the private sector and enhancing social investment programmes. These goals seem laudable at first glance, but budget allocations and the minuscule sizes suggest a shaky foundation that could affect progress. We are slightly comforted by the finance bill which proposes the increase in Value Added Tax (VAT) rate from 5.0% to 7.5% as well as business-friendly tax reforms.

Revenue Expectations… Clutching at Elusive Fortunes
The 2020 budget ignores lessons from the recent dire straits of the FG and budget performance. For context, FG’s revenue projections underperformed actual collection by 47.8% in 2017 and were little changed at 44.7% in 2018 and 41.6% as at H1:2019. The FG projects revenues of N8.2tn in 2020, which is 17.1% higher than N7.0tn in 2019 and more than twice the actual collection of N4.0tn in 2018.
Oil revenue projection was lowered 29.7% to N2.6tn (vs. 2019: N3.7tn), reflecting prudent adjustments in the wake of lower for longer oil prices and weak oil production due to the slow pace of oil and gas reforms. Specifically, crude oil price and production assumptions were revised downward to US$57.0/bbl. and 2.18mbpd (vs. 2019: US$60.0/bbl. and 2.3mbpd) respectively. Oil revenue would be higher if the exchange rate assumption of N305.00/US$1.00 is adjusted to the market rate of US$365.00/US$1.00. On the other hand, non-oil revenue projections (customs & excise duties, VAT and CIT) increased by 28.6% to N1.8tn (vs. 2019: N1.4tn) while we observed a marked 94.7% surge in independent and other revenues budgeted at N3.7tn (vs. 2019: N1.9tn). Although the recent trend in core non-oil revenue has been positive, the projected increase is steep and unlikely to be achieved. We await the full breakdown of non-oil revenue for further analysis. The projections for non-core, non-oil revenues such as independent revenue, asset sales, recovery and fines, which have historically underperformed, are ambitious. Looking at 2017, 2018 and H1:2019 budget performance, total collection from the non-core, non-oil revenue lines was zero if we exclude independent revenue. We believe these unrealistic assumptions set up the budget for poor implementation.
The expected improvement from VAT revenue would be poorer than we initially anticipated given the much overdue VAT reforms now proposed. The FG is planning to raise the VAT registration threshold to N25.0m in annual revenue while the exemption list has been expanded to cover more food items. The FG’s share of the VAT increase is now expected to be below our initial estimate of N81.8bn. In addition, although the FG has once again revealed its plans to collect more revenues, this is likely to take time given that growth remains weak. We reiterate that the removal of petrol subsidies is key to boosting government revenues in the immediate term.

Planned Expenditure… Banking on Financing from CBN
The planned spending of the FG at N10.3tn for 2020 represents a 13.2% increase from the previous year’s N9.1tn. This is aggressive when we consider FG’s recent revenue woes which is likely to persist. In the broader context, the proposed expenditure is neither large enough nor supportive of the country’s growth aspirations at 6.7% of GDP. Nigeria’s gross expenditure to GDP which we estimate at 12.2% compares poorly with peer economies such as South Africa (33.6%), Egypt (29.9%), Kenya (25.4%) and Ghana (23.6%).
Non-debt recurrent expenditure is high at N3.6tn or 35.0% of the budget, considering the FG’s fiscal consolidation plans. The non-discretionary minimum wage increase partly influenced this. The size of debt servicing cost at N2.45tn or 23.8% of the budget would continue to be a drag to human capital and infrastructure spending. Meanwhile, the N2.5tn or 24.3% allocations to capital spending are unsupportive of the boost needed in infrastructure. Notably, this capital allocation falls short of the 30.0% target stipulated in the Economic Recovery and Growth Plan (ERGP). The budget deficit is projected at N2.2tn, but our estimate of N3.8tn exceeds this by a considerable margin as we expect revenues to underperform by 43.9%. We also expect debt service to revenues to be elevated at 53.3% compared with the budgeted 29.9%. In addition to borrowing to cover the shortfall in revenues, we expect increased financing of FG’s operations by the CBN.