Nigeria’s 2016 budget is looking increasingly untenable as the slowdown in economic activity led to a huge variance between projected revenues and actual revenues received in the first quarter of 2016.
Actual non-oil revenue from the Federation Accounts Allocation Committee (FAAC) and Value added Tax (VAT) fell by 42.7 percent to N483.63 billion on a pro rata basis in the first three months of 2016, compared to the N845.3 budgeted for the quarter, according to Udo Udoma, minister of Budget and National Planning in a recent presentation at the Federal Executive Council.
This was due to a decline in Value Added Tax (VAT) and corporate tax collections, as companies in Africa’s largest economy gasp for breath amid economic headwinds, BusinessDay findings show.
“The grave decline in collections (actual versus target) was expected,” said Tosin Ojo, head of research, Cardinal Stone, in response to questions. “Many companies are struggling and have therefore reported losses or out-rightly shut down. Also, with a negative GDP growth, consumption and expenditure levels declined which naturally impacted on VAT.”
Household consumption expenditure, which is a dominant component of Nigeria’s GDP growth by expenditure, slumped -8.66 percent in 1Q16.
Unemployment rose to 12.1 percent in the first quarter from 10.4 percent in the previous three months, data from the National Bureau of Statistics (NBS) show.
The World Bank last week in its semi-annual Global Economic Prospects report, cut Nigeria’s economic growth forecast for this year, to 0.8 percent, down from an estimate of 4.6 percent in January.
Foreign-exchange restrictions, fuel shortages and rising unemployment, contributed to the fall in firms’ profits and purchasing power of households, analysts say.
“The reality is that businesses are struggling and defaulting on tax payment,” said Taiwo Oyedele, head of Tax and Regulatory Services, PriceWaterhouseCoopers in response to BusinessDay questions.
“As a result, I don’t see the non-oil revenue meeting up with the budget predication and this will translate to a need to borrow more to plug the budget deficit.”
Analysts see falling revenue projections as a potential clog in the wheel of Nigeria’s drive to diversify and resuscitate an economy that contracted by 0.3 percent in Q1, through capital expenditure, which constitutes 30 percent (N1.8 trillion) of the budget.
Nigeria approved a record N6.1 trillion budget for 2016 with a deficit of N2.2 trillion, or 2.1 percent of gross domestic product.
To plug the budget deficit, Kemi Adeosun, finance minister, is looking to raise as much as $10 billion from the domestic and international debt market.
However, analysts express concerns on the feasibility of the plan following the country’s negative credit ratings and sliding revenue.
“International borrowings will be more difficult, given our increased sovereign risk; so our best bet will be local borrowing.
Therefore, we may likely see an increase in government borrowings at the bond auction in the second half and if supply is typically higher (all other things equal), investors – mainly banks and Pension Funds will demand for higher yield, which will increase government debt service costs in subsequent years,” said Cardinal Stone’s Ojo.
With oil revenue, which made up two-thirds of the total in 2014, plunging along with crude prices, the government was banking on a steep rise in the tax take from other sectors.
“I expect government to seek other ways to cushion the shortfall of budgeted revenue, as government’s overall spending plan is necessary to restart the economy and forestall a deep recession,” Ojo added.
Nigeria may fail to deliver all of the spending promised in this year’s budget in light of “the current economic realities,” Finance Minister, Kemi Adeosun said last week.
Capital projects that are well planned and likely to materialiSe will be given priority, she said.
“I cannot promise that every single agency would receive every money appropriated for them,” Adeosun told parliament in the capital, Abuja, on Thursday, according to an e-mailed statement. “The budget is an estimate and funds would be released based on revenue.”
In reaction to the statement by budget and planning minister Udo Udoma to inject $1.7 billion (N350 billion) this week, Abiodun Keripe, head of research at Elixir Investment Ltd, expressed optimism in the money’s ability to stimulate the economy.
“The money injection into capital projects will help reflate the economy. Apart from the impact of fallen crude price and FX illiquidity, poor infrastructure is another factor hurting the economy and businesses. The monies to be released also will oil some sectors of the economy that are in comatose due to lack of financing,” Keripe said.
PWC’s Oyedele says it is not a long-term solution to the country’s challenges.
“The market will swallow the injected funds in no time. The dollar obligations of firms could exhaust the money in a single day,” Oyedele said.
LOLADE AKINMURELE, STEPHEN ONYEKWELU & CHIGOZIE EGWUATU
