Budget pain: Nigeria’s financing options ‘increasingly limited’, says Capital Economics

As Nigeria’s budget woes worsen, the options available to the government to finance the higher-than-expected deficit this year are increasingly limited, London-based Capital Economics has said.

“Data published by Nigeria’s Budget Office this week highlighted that, despite what should be a favourable high oil price environment, the public finances are actually getting worse,” Its Senior Emerging Markets Economist, Jason Tuvey, said.

The economic research firm said the figures showed that the federal government budget deficit came in at N3.09 trillion in the first four months of 2022, equal to about 4.5 percent of GDP on an annualised basis.

It said the outturn was much higher than the N2.45 trillion deficit expected in the 2022 budget on a pro-rata basis.

“The breakdown of the data showed that revenues were more than 50 percent below budget projections, largely due to much weaker-than-expected oil receipts. That can be partly pinned on oil production problems – officials based the budget on oil output averaging 1.6 million bpd, but it stood only a little above 1.2 million bpd in June,” Tuvey said,

He said oil revenues would have also been affected by the government’s decision to continue with fuel subsidies, adding that the Nigerian National Petroleum Company had been shouldering the cost of selling fuel at subsidised prices.

“The result, though, is that the NNPC has been making smaller profits than otherwise and thus transfers to the Federation Account (from which revenues are distributed between the federal, state and local governments) have been lower,” he said.

He said the budget position would have been even worse had it not been for expenditure coming in below projections.

Tuvey said, “This is not a major surprise given that the government has failed to fulfil its spending targets for many years. But it was striking that debt servicing costs were nearly 50 percent higher than anticipated and, in a sign of how bad Nigeria’s fiscal problems are, actually exceeded the government’s total revenues! Spending was only kept in check through capital expenditure being nearly 60 percent lower than projected.

“Nigeria’s fiscal woes are not as acute as in other parts of the region, but the options available to the government to finance the higher-than-expected deficit this year are increasingly limited. The surge in external borrowing costs has already forced officials to scrap plans for a Eurobond issue, and domestic borrowing costs are also high. There’s a significant risk that the authorities turn, once again, to central bank financing. But that would merely exacerbate many of Nigeria’s economic problems.”