After a series of delays, Nigeria’s expansionary 2016 budget, which President Muhammadu Buhari submitted to the National Assembly in December 2015, was approved in March 2016. The proposed N6.08trn ($19.2bn) budget represented a 22% increase over the previous year.
Revenue in 2016 will take a major hit from continued low oil prices, reducing projected oil revenue by 50% from N1.64trn ($5.2bn) in 2015 to N820bn ($2.6bn) in 2016.
Encouragingly, the budget envisions a N240bn ($757.7m), or 20%, increase in non-oil revenue, partially stemming from the government’s efforts to further diversify the economy. Total revenue of only N3.86trn ($12.2bn), however, will leave a N2.2trn ($6.9bn) hole in the budget, the highest deficit in Nigeria’s history.
Nigeria expects N1.84trn ($5.8bn) in new borrowing to fill the deficit, approximately half of which will be sourced outside of Nigeria, from multilateral institutions and the eurobond market. The remaining N380bn ($1.2bn) is expected to come from management and efficiency gains and the sale of government assets.
In a push to jump-start the economy, capital expenditures, such as badly needed infrastructural improvements, accounted for a full 30% of the 2016 budget. Infrastructure-focused ministries that are in line to benefit from the over-200% increase in capital expenditure relative to 2015 include the Federal Ministry of Power, Works and Housing (MoPWH), which will receive N433.4bn ($1.4bn), and the Federal Ministry of Transport, which has been allocated N202bn ($637.7m). “Better infrastructure leads to more efficient logistical operations, as well as an easier commute for employees, which improves productivity across the board,” Niyi Yusuf, country managing director for Accenture, told OBG.
The rationale behind this is clear. More than half of all Nigerians have no access to electricity, for example, and those that do face frequent power interruptions. Businesses often need to supply their own electricity or maintain secondary sources in the form of diesel generators, driving up costs of operation by as much as 30%.
According to a 2013 report produced by the MoPWH, Nigeria needs 40,000 MW of power to achieve its Vision 2020 development goals. However, as of December 2015 the sector was generating just under 5000 MW.
The 2016 budget includes provisions to bring an additional 2000 MW on-line by early 2017 by improving the nation’s gas pipeline system. The MoPWH also expects to complete 22 power transmission projects, but it has not yet detailed how much additional capacity that will bring to market. “Reforms in the power sector have been a great step forward to improving the country’s utilities,” Lazarus Angbazo, CEO of GE Nigeria, told OBG.
The minister of power, works and housing, Babatunde Fashola, has also announced plans to expand and resurface Nigeria’s road system, with a focus on completing a projects that are already in progress, rather than initiating new ones (see Transport chapter). Through this effort, Fashola envisions the completion of as much as 2000 km of new roads each year for the next three years.
The MoPWH is also looking at increasing private participation in the transport sector to reduce the fiscal burden on the state for road funding, reintroducing the road toll system. Improving the rail system would also help drive growth. Indeed, much of Nigeria’s extant railway network is non-operational at the moment and an effective railway system would be a key enabler of economic growth and critical for successful industrialisation.
Eme Essien Lore, country manager for Nigeria at the International Finance Corporation, told OBG, “Government officials recognise that there is a huge gap between the need for infrastructure and the government’s ability to fund infrastructure. That gap will be filled by the private sector. They recognise the need to get the incentives right, but the correct signalling is there.”
Nigeria’s budget for 2015 was based on revenues of N3.6trn ($11.4bn). Expenditure was broken down into recurrent (non-debt) costs at N2.6trn ($8.2bn); capital outlays (N634bn, $2bn); debt servicing (N943bn, $3bn); statutory transfers (N412bn, $1.3bn); and the subsidy reinvestment programme (N103bn, $325.2m), for a total expenditure of N4.4trn ($13.9bn).
Capital expenditure accounted for only 14.5% of aggregate expenditure in the 2015 budget, representing a significant decline from 2014, when it came to 23.7%. However, the deficit-to-GDP ratio was 0.79%, down from 1.24% in the 2014 budget and below the 3% specified in the Fiscal Responsibility Act of 2007. The deficit of N755bn ($2.4bn) in 2015 was financed largely by domestic borrowing.
The government’s ambitious budget for 2016 touches on many of the country’s key development priorities, but it also comes with a projected N2.2trn ($6.9bn) deficit that the government must address.
Adding a layer of uncertainty, the projected deficit is based on an oil price of $38 a barrel, which could prove to be overly optimistic in light of continued weakness in projected global demand. The US Energy Information Administration, for example, recently lowered its projected average price for 2016 from $37 per barrel to $34, citing increasing global inventories.
Funding The Deficit
At 2.16% of GDP the deficit is larger than in recent years, but the government is not expected to have much difficulty financing the gap. It plans to fund around half of the deficit through domestic borrowing. Much of that capital will likely come from banks, which have traditionally preferred the safety of government securities to the complexities of private sector lending, especially in times of economic uncertainty.
The other half of the deficit will be funded from external sources. With one of the lowest ratios of external debt to gross national income (GNI) in Africa, Nigeria has the capacity to take on additional debt, despite its weakening revenue position. For example, as of 2014 the World Bank reported that Nigeria’s external debt position stood at a meagre 4.9% of GNI, compared to 28.6% and 47.7%, respectively, for nearby Gabon and Ghana, while this figure was at 42.3% for South Africa, Nigeria’s nearest rival in terms of total economic size. The government plans to limit its interest obligations associated with the issuance of external debt by first seeking up to $3.5bn from multilateral institutions, such as the World Bank and African Development Bank, which may offer lower interest rates than the open market. The government is considering tapping the eurobond market for the remainder, following a successful four-times oversubscribed $1bn issuance in 2013.
However, the currency pressures faced by Nigeria may complicate this. Unlike the domestic debt, which will be issued in naira, the external portion will be denominated in dollars or other foreign currency. If the country’s current account balance continues to deteriorate, the government may face increasing foreign exchange risk as it secures dollars to service existing and new external debt obligations. The costs from this will exacerbate Nigeria’s overall debt financing costs, with a record N1.36trn ($4.3bn) devoted to debt service in 2016, a steep increase from N943bn ($3bn) in 2015.
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