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Nigeria’s actual earned revenue for January 2017 has missed the target by as a much as 50 percent, an indication that the country will struggle to meet its revenue projection as presented in the 2017 budget.
The disappointing revenues also signal the possibility of increased borrowing, even though the country’s debt to revenue ratio is already as high as 35 percent, which will put further pressure on the private sector, already under pressure from a significant rise in government borrowing in the last one year.
The Federal Government earned N200.59 billion in the month of January, according to data provided on request, by the Office of the Accountant-General of the Federation, over 50 percent below a pro-rata estimate of N411.66 billion monthly, required to meet an overall revenue ambition of N4.7 trillion in 2017.
If this trend is sustained for the rest of the year, the country could underperform its revenue projections by as much as 50 percent.
Lower than planned revenues could push up the 2017 budget deficit from 2.8 percent of Gross Domestic Product (GDP) to 3.7 percent, stoke already high naira yields on the back of increased government borrowing domestically and ultimately crowd out private sector lending, according to Washington-based lender, the International Monetary Fund.
“The flaws in the full-year 2017 budget emerge when we look at the revenue projections,” said Yvonne Mhango, sub-Saharan Africa economist at investment bank, Renaissance Capital.
“Between January and November 2016, actual revenues never met the 2016 budget forecast, due to low price and output of oil, so it is difficult to see how the Federal Government will meet its 2017 projection,” Mhango added by email.
In January to September 2016, total revenues for the account of the Federal Government amounted to N2.17 trillion, 43 percent short of the full-year target of N3.8 trillion for that year, according to most recent data available on the Central Bank website.
The underperformance was down to sabotage of pipeline infrastructure, which reduced oil output by a third, and the steep blow dealt by weak corporate earnings on non-oil revenues.
Despite the fact that the Federal Government did not meet its revenue mark in 2016, it increased its revenue projection by 28 percent in the 2017 budget to N4.7 trillion, from the N3.8 trillion projections made last year.
The government raised oil revenue projections by 140 percent to N2 trillion, from N820 billion in 2016. The increase is derived from an upward revision in oil prices from $38 per barrel in 2016 to $44.5 per barrel in 2017. Output is unchanged at 2.2 million barrels daily.
The country however trimmed independent revenue projection by almost 50 percent to N807 billion, while non-oil revenues- largely comprising Companies Income Tax, Value Added Tax, Customs and Excise duties, and Federation Account levies- are estimated to contribute N1.373 trillion, 5 percent lower than 2016’s forecast.
“It may look good on paper but actual oil revenue is likely to be let down by production rather than prices,” said Dolapo Oni, head of energy research at Ecobank Group.
“Oil prices are estimated to average $55 per barrel this year, which is good for us, but production has consistently underperformed the 2017 budget predications since the beginning of the year,” Oni added.
Between January and March, Nigeria’s average oil production was 1.55 million barrels daily, according to OPEC data. Prices averaged $53 in the period, up to a 20-month high, according to Bloomberg data, thanks to OPEC’s decision to cut output by 1.2 million barrels to shrug off a supply overhang and boost prices.
This effectively means that while prices are 19 percent higher than budgeted, production is running at a deficit of 700,000 barrels daily, using OPEC’s data, or even much steeper at 900,000 barrels, using Bloomberg data.
Oni argues that Nigeria needs to attract new foreign investments into the oil sector, in order to boost production, after which he urged government officials to pass an oil-industry bill – the Petroleum Industry Bill (PIB) – which has been stuck for seven years in parliament.
While oil revenue seems set to miss its target, Taiwo Oyedele, a partner and head of tax and regulatory services at Price Waterhouse Coopers (PWC) insists non-oil revenue will also underperform, and fears the government may have to borrow more to plug the budget deficit.
“I am not bullish about non-oil revenue either, given that company income tax receipts will underperform and fiscal authorities have hesitated to raise Value Added Tax (VAT) and vigorously drive better tax compliance,” Oyedele said by phone.
“The reality is that companies are struggling and defaulting on tax payment, and even though some are gradually returning to profitability (on the back of their cost-cutting measures, improved access to dollars, and a relative exchange rate stability) it won’t translate to higher tax revenues for government just yet, until these companies have made up for the losses they posted in previous years,” Oyedele added.
Hard hit by rising operation costs and the aftermath of a naira devaluation last June, most Nigerian companies suffered unprecedented profit declines and losses in the first half of last year, for the first time in four years, according to Bloomberg data.
In the long term, however, Oyedele argues that “it is important that fiscal authorities grow tax to GDP ratio by expanding the tax net and enforcing better compliance, in order to boost non-oil revenue.”
Nigeria’s tax to GDP ratio, at six percent, is the lowest of countries tracked by the World Bank, and it compares with 14.9 percent in neighbouring Ghana and 25 percent in South-Africa.
Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham, advices that “government can sell some public assets and raise Value Added Tax (VAT) by 5 percent,” to cushion underperforming actual revenues.
Ayo Teriba, CEO of consulting firm, Economic Associates, says ramping up value added exports would also come in handy.
“Relying on oil in the long-term is not sustainable amid an increasing shift to renewable energy sources which will dampen oil demand and hurt prices” said Teriba. “Therefore, Nigeria must reposition to generate more revenue from exports of value-added products rather than raw commodities.”
For Pascal Dozie, chairman of MTN Nigeria, policies that attract foreign direct and portfolio investments must be looked at.
“We need to harness private capital to deliver on infrastructure needs, as government spending alone is no panacea to the country’s economic downturn,” Dozie said in response to questions.
Nigerian President Muhammadu Buhari presented the country’s 2017 budget- outlining expenditure of NGN7.3 trillion- last December, but is yet to be approved by lawmakers.
The President tagged the budget as “A budget of recovery and growth,” and says will take the economy, which contracted by 1.5 percent in 2016, compared to the same period a year ago, out of recession.
The IMF estimates that the economy will grow by 0.8 percent in the first quarter of 2017, and government officials say they are targeting 2.5 percent growth for the full year.
LOLADE AKINMURELE
