PwC Nigeria, a professional services firm, has raised concern that Nigeria’s 2018 non-oil revenue projection of N4.2 trillion, while ‘aggressive,’ may be difficult to attain based on the trend and reasons for revenue underperformance in prior years.
In a note sent to BusinessDay, signed by Andrew Nevin, the firm stated, “Relative to the 2017 budget, the target is 44.6% higher; this variance could be close to 100% when compared to our estimate of the actual non-oil revenue collected in 2017.”
PwC Nigeria opines that the country’s low tax to GDP ratio at around 6% is a consequence of a poor and inefficient tax collection system. “While the government has implemented specific measures to address this by expanding the tax base and increasing tax compliance using various incentives, the impact is yet to materialise. As a result, we estimate that the fiscal deficit could overshoot projections by as much as 67.7% to N3.4 trillion.”
PwC Nigeria further said while the Federal Government’s budget estimated the 2018 deficit at N2 trillion but following trends of revenue underperformance, it expected a higher-than-expected deficit, which could bring the government’s debt stock to N20.9 trillion in 2018.
Nigeria’s total debt stock is currently at N20.37 trillion according to the Debt Management Office. This shows a marginal increase of 3.6 percent from the N19.64tn as of June 30. A breakdown of the debt stock shows that domestic debt accounted for 76.96 percent, while external debt accounted for 23.04 percent.
Reactions have trailed the announcement of the 2018 budget proposal on November 7 by President Muhammadu Buhari. The Federal Government plans to spend a record N8.6 trillion to consolidate on the improvement in economic growth in 2017 by sustaining the reflationary policies of the past two budgets.
The budget assumes an oil price benchmark of $45/bbl, oil production of 2.3 million barrels per day, and an exchange rate of N305/$. It is to be funded with revenues projected at N6.6 trillion, a 30% year on year increase, with oil and non-oil accounting for 37% and 63.0%, respectively.
“We believe the FGN would rely more on the domestic debt market to finance this deficit, given the availability of a stable domestic investor base, which includes the Pension Funds. Moreover, external financing could be tight in 2018 due to the uptrend in interest rates in advanced economies, particularly in the US and UK.
“Following this, we estimate that debt to GDP could rise marginally to 15.1% as against the current 14.6%. This is closer to Nigeria’s country-specific threshold of 19.4%, but still far below 2 the IMF’s recommended threshold of 56%.
“Although the low debt-to-GDP ratio is reassuring, the debt service to revenue ratio which is often cited as a better measure of debt sustainability is projected at 30.1% in 2018 (threshold: 28%). Based on our estimates, this could rise to 45.9% in the event the budget deficit reaches 2.4% of GDP,” Nevin said.
Given a reduction in core inflation to 12.1% y/y in September 2017, and our expectation of a continued moderation in inflation in the near term, PwC believes there is sufficient headroom for a rate cut in Q1’18.
“However, this reflationary budget which provides for a 12.0% increase in personnel costs raises inflation expectations. Likewise, history suggests that the commencement of the election cycle ahead of the 2019 general elections could portend significant inflationary risks, thus reducing the scope for monetary easing,” said the professional service firm.
