The government of Nigeria, whose revenue could be slashed by more than half this year due to the oil-price slump, finalized plans for a revised budget that keeps spending almost intact, and that will mean more borrowing.
Finance Minister Zainab Ahmed got approval from the West African’s nation’s cabinet on May 13 to go ahead with the new budget that cuts expenditure by only 0.6% from what was proposed before oil prices dropped. The government plans to spend 10.52 trillion naira ($27 billion) this year, even as it reduced the crude benchmark in the budget to $25 a barrel from $57.
Nigeria will have to rely on borrowing to finance the spending plan. The country targets revenue of 5.6 trillion naira, but it has never collected this much, even when oil prices were higher. In 2019, Nigeria hit 58% of its revenue target when crude averaged $61 a barrel, with earnings from the commodity contributing half of income.
The budget deficit of 5.4 trillion naira will be financed by both the local debt market and concessionary loans from the International Monetary Fund, the World Bank, Islamic Development Bank and Afreximbank, Ahmed said. The government also plans to sell assets to cover some of the shortfall.
Nigeria could face a situation where 2.6 trillion naira set aside to service debt consumes almost all of its revenue, unless it gets a waiver from creditors. Interest payments could take 96% of the federal government’s revenue, up from 58% in 2019, according to the IMF
“We have already borrowed and we are going to borrow,” Michael Famoroti, chief economist of Stears Business in Lagos, said by phone. “As long as we can still pay our interest there is no problem, but when we are getting to the point where are spending about 95% of our revenue on servicing debt, then our creditors begin to doubt that we can actually pay back.”
IMF approved $3.4 billion in emergency support to fight the pandemic last month, the biggest for any country on the continent so far. The lender projected public debt will rise to 34.8% of gross domestic product this year, from 29.1% in 2019, and will peak at 37.4% in 2022. Still, government debt is sustainable and there is adequate capacity to repay the fund, it said.
Nigeria’s non-oil revenue, which is already among the lowest in the world according to the IMF, will also take a hit from a slowdown in economic activity due to restrictions imposed to stop the spread of the coronavirus pandemic. The economy could contract 3.4% this year, the lender projects. That would be the worst performance since at least 1991.
“Spending as a percentage of gross domestic product is still pretty low, Nigeria’s revenue as a percentage of GDP is even lower,” Razia Khan, chief economist for Africa and Middle East with Standard Chartered Bank, said by phone. “It is going to be all-important to see what revenue measures underlies the budget assumptions.”
Once lawmakers approve the revised budget, it still has to be signed into law by President Muhammadu Buhari. No date has been fixed for presentation to lawmakers.
Nigeria could boost revenues by merging its official exchange rate, which has been fixed at 360 naira per dollar, with that of the rate offered to investors and importers, which averages 387 naira to the dollar, Khan said. Such a devaluation would mean more naira for every dollar of oil sales.
Earnings from crude sales will plunge 80% to 1.1 trillion naira this year, the budget office said in a presentation last week. In 2014, when oil prices averaged $44.6 per barrel, government income at the federal level stood at 2.1 trillion naira, with crude sales contributing 879 billion naira, according to a 2019 report from the IMF.
“What we don’t know is about how the composition of spending has shifted,” Khan said. “Are we going to see a lot more funding of healthcare for example? That is going to be a crucial detail of the revised budget as a means of managing the Covid-19 crisis.”