Nigeria’s fiscal position remains precarious despite rising oil price

Bullish crude oil prices since the beginning of the year have raised hope of a better global fiscal performance after severe disruptions caused by COVID-19 pandemic that unsettled oil-dependent economies.

The price rise of more than 75 percent since November 2020 has been on account of major economies reopening and vaccinating their populations after the pandemic shut down factories and grounded the aviation industry in March 2020.

But with the positive sentiments associated with rise in oil price, celebration from the Nigerian economy, sadly, comes off as premature as the country’s fiscal position still remains precarious.

Analysis shows that as of today, Nigeria’s economy can attain fiscal break-even position only if oil prices climb as high as $103 per barrel.

This was attained by incorporating the current official exchange rate at N380/$1, Federal Retained Oil Revenue to Gross Oil Revenue at 37 percent, Average Daily Production of 1.7 million barrels per day (OPEC quota), the current budgeted expenditure as well as budgeted Non-Oil + Other Revenue and Unfunded Revenue at N4.6 billion and N8.9 billion, respectively.

Over the years, the Federal Government has struggled to finance its budget mainly due to low revenues, which have been susceptible to oil price volatilities.

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At year-end 2020, the Federal Government’s retained revenue was N3.94 trillion, indicating 73 percent of target of the revised N10.805 trillion 2020 budget, which reflected the effects of the COVID-19 pandemic.

This has resulted in an increasing budget deficit for the country and an increased borrowing culture by the government from both domestic and international sources.

Figures from the Debt Management Office (DMO) indicate that Nigeria’s total public debt as of December 31, 2020, was N32.915 trillion, including those for Federal and State Governments, as well as, the Federal Capital Territory. Debt stock is further projected to hit N38.68 trillion by December 2021, according to Zainab Ahmed, minister of finance, budget and national planning.

The Federal Government projects overall budget deficit to stand at N5.60 trillion for the year 2021, representing 3.93 percent of GDP. With the planned borrowing of N4.69 trillion to finance the budget deficit, total public debt is expected to rise to N36.89 trillion by December 31, 2021.

Over the years, the Federal Government has been known to exceed its budgeted deficit for the budget year, amid pessimism on the ability to even achieve its revenue target of N7.99 trillion in 2021 – the highest in the history of Nigeria.

While the debt-to-GDP ratio remains within the acceptable threshold there are increasing concerns about the nation’s debt service to revenue ratio, which shows the country may be heading towards a debt crisis should the borrowings continue in face of limited finances to support existing debt obligations.

With N3.3 trillion budgeted for debt servicing in the assented 2021 budget, Nigeria’s Federal Government has been envisaged to spend about a quarter (24.3%) of the entire N13.6 trillion budget on debts.

This trend has been consistent since 2016. In 2015, N943 billion was spent on debt while N1.36 trillion was spent in 2016 and N1.66 trillion in 2017. In 2018, the government spent N2.23 trillion on debt servicing, while in 2019, it spent N2.14 trillion. In 2020, the government planned some N2.6 trillion on debt servicing.

As a result of this maladaptation, benefitting from the current oil price bloom becomes more of a mirage than a reality.

The implication of the above is premised on the fact that if oil prices do not meet the $103 per barrel threshold, the government would continue operating at a deficit that would have subsequent fiscal ripple effects.

Oil currently trades higher than the price most exporters’ need to balance their budgets; however, the reverse is the case for some other exporting countries like Nigeria.

Budget deficits in the Arab Gulf and Nigeria, where economies are reliant on oil, widened after prices crashed in 2020.

Although Nigeria’s total production capacity is 2.5mbpd, crude oil production is projected to increase from 1.80mbpd in 2020 to 1.86mbpd in 2021. However, current crude production is about 1.7mbpd, including the 300,000bpd of condensates, in compliance with the quota ceiling by the OPEC.

Despite the constraints of low revenue from oil exports, the aggregate revenue available to fund the 2021 budget is projected at about N7.99 trillion, about 36.9 percent higher than the 2020 revised budget of N5.84 trillion.

The finance minister stated that the budgets of the 60 government-owned enterprises would be integrated into the government’s 2021 budget proposal, with 31 percent of the projected revenue expected from oil-related sources, while 69 percent would be from non-oil sources.

Oil revenue constitutes about 65 percent of government’s revenue and 90 percent of Nigeria’s source of foreign exchange earnings, even though it accounts for just 9 percent of the nation’s GDP.

Low oil revenues have also had significant impact on foreign reserves, which continue to deplete as the Central Bank of Nigeria (CBN) tries to defend the local currency from a free fall. CBN figures indicate that foreign reserves fell by $2 billion between January 19 and March 15. Before recording a gradual slump, the reserves had peaked at $36.5 billion from $35.4 billion at the start of the year and settled at $34.5 billion by last Monday.

Khatija Haque, head of research and the chief economist at Emirates NBD, stated, “Compliance with OPEC restrictions may deteriorate, resulting in smaller decline in average crude oil production this year relative to 2020.”

Some analysts raise the hope that OPEC may likely decide to increase production more aggressively later this year, and governments could choose to increase spending to support the economic recovery in the non-oil sectors this year.

“It is not ‘uhuru’ yet. With what we are seeing, efforts should be made to raise non-oil revenues and maximise available resources to make up for the losses incurred from oil’s lag,” Emeka Ucheaga, an analyst at EU Intelligence, told BusinessDay.