There are fresh danger signs ahead for the draft 2023 appropriation bill following indications from the last debt auction, which was marred by low participation, resulting in the federal government raising only a part of what it went to the market to raise to plug its deficit.
The Debt Management Office’s (DMO) monthly bond auction, which was held on Monday, fell far short of the agency’s target, according to a report by analysts at FBNQuest. It is made worse by emerging data showing that the federal government is falling far behind in revenue collections this year.
The government, which now relies virtually on borrowing for its sustenance, had sought to raise N225 billion, split equally across three maturities – April 2029, April 2032 and April 2037 maturities, ended up raising N108 billion, and the amount raised is the lowest this year.
Analysts at FBNQuest reported that this poor performance implies a sales-to-offer ratio of just 0.48x, compared with the 1.02x at its previous auction in September.
According to an FBNQuest investment note, the low level of demand at the auction was largely due to the tight level of financial system liquidity in recent weeks following the central bank’s monetary tightening measures.
“A secondary and related factor is that the CBN has prohibited financial institutions that access its windows from taking part in bond and treasury auctions,” it said.
At the auction, marginal rates for the papers on offer were 14.5 percent, 15.0 percent, and 16.0 percent for the Apr ’29, Apr ’32, and Apr ’37 respectively. Relative to the prior auction, the marginal rates were about 115 basis points (bps) and c.150bps higher for the longer tenors – the Apr ‘32s and Apr ’37.
The DMO has raised around N2.2 trillion from its auctions so far this year. The gross amount is roughly N2.5 trillion when non-competitive allotments are considered.
If the agency’s net issuance of Treasury Bills are included, this year, estimated roughly at around N660 billion, the DMO would have just around N300 billion to meet its domestic funding target of N3.5 trillion.
Going forward, the analysts say they expect yields to continue to be elevated due to tight liquidity conditions in the market and that the DMO has its work cut out for next year which will witness more challenging market headwinds.
According to the President’s 2023 budget proposal, the 2023 budget is expected to result in a fiscal deficit of N8.8 trillion, which is to be financed by domestic and foreign borrowings of N7.0 trillion and N1.8 trillion respectively.
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Added to this are growing signs of underperformance of federally collected revenues which seemed have worsened in the first half of this year. The most recent budget implementation report for the second quarter of 2022 once again highlights the poor performance of federally collected revenue in comparison with budgeted expectations. The report shows that gross federally collected revenue amounted to N5.4 trillion in H1 2022 or about 32 percent below the pro-rata budget forecast.
The primary source of the underperformance was oil revenues, which brought in a total of N2.2 trillion, around 54 percent below the H1 ’22 budget projection of N4.7 trillion. In contrast, non-oil revenue at N3.2 trillion was broadly in line (-3 percent) with the pro-rata budget benchmark.
The link between oil revenue underperformance and low oil production has been extensively covered by the media. According to data from the CBN, Nigeria’s oil production averaged roughly 1.2 million barrels per day (mbpd) in H1 ’22, much lower than the 1.6mbpd assumed in the 2022 budget.
In terms of non-oil revenue, corporate tax revenue inflow of about N1.2 trillion surpassed the half-year budget target by roughly 19 percent. The positive revenue outturn is due to improved efficiency in tax collections and a widening of the tax base. Revenue from value-added-tax (VAT) of N1.2 trillion was slightly (-3 percent) behind the budget estimate.
However, aggregate revenue from other sources, including electronic money transfer levies, special levies, and other revenue from the federation account fell short by 22 percent. After deductions such as joint venture cash calls, and other collection costs, the net distributable revenue available for sharing among the three tiers of government amounted to just N3.3 trillion. This leaves a significant gap of N2.1 trillion compared with the half-year forecast in the budget.
Notably, net oil revenue (after all deductions) amounted to a low figure of N242 billion. There is a yawning gap between this figure and the N2.3 trillion envisaged in the budget. A significant deduction from gross oil revenue is a sum of N1.7 trillion, which is attributed to federally funded upstream projects.
Net non-oil revenue was about N3.0 trillion, including about N1.1 trillion in revenue from the VAT pool. When annualised, the gross federally collected revenue of N5.4 trillion implies a revenue-to GDP ratio (2021) of 6.2 percent. This is low compared with peers like South Africa, Kenya, and Ghana with ratios of 28.1 percent, 16.8 percent, and 13.8 percent, according to World Bank data.
