Crude oil price decline can’t seem to find a bottom and Nigerian government revenue stream appears to be going down with it. At market close on Thursday, bonny light crude oil price stood at $24.83, a sharp decline from around $67 that the Nigerian crude traded at start of the year.
While the significant drop in crude oil prices has inspired an emergency downward review of budget spending and revenue targets, it appears Nigeria’s fiscal deficit may once again exceed revised budgetary targets as crude oil price continues to decline below the revised oil price benchmark. In the last 2 years, accumulated budget deficit has exceeded N4.5trillion.
On Thursday, crude oil price traded at 17% below our revised oil price benchmark, further compounding the woes of Nigerian federal government who had earlier warned that oil revenue could slip about 45% below budgetary target in 2020 approved national budget where oil revenue was estimated at N2.63 trillion. Thus, bringing the revised budgetary target to N1.44 trillion in oil revenue. With bonny light oil prices now sub $25, analysts say that oil revenue could drop by more than 50% due to the fact that crude oil price today is about 56 percent below the initial benchmark price of $57.
The downward trend in Nigeria’s oil revenue could signal higher budget deficit for the country who have recently made progress in reducing the fiscal deficit from a record high of N2.98 trillion in 2018 to just N1.48 trillion in the first 9 months of 2019 according to data sourced from the national budget office. Based on analyst’s expectation, Nigeria finished the year 2019 with a budget deficit around N2.08 trillion, suggesting a fiscal deficit contraction of about N900 billion.
In response to a projected drop of around N1.2 trillion in crude oil revenue, Minister of Finance, Budget and National Planning, Zainab Ahmed said the government are looking to cut recurrent expenditure by 25 percent and capital expenditure by 20 percent which translates to a budget spending reduction of around N1.7 trillion, which is a more aggressive cut than the expected drop in oil revenue. Asides the drop in oil revenue, the government is also expecting 50 percent decline in revenue from privatization proceeds and customs revenue which was initially projected at N1.5 trillion.
While the revised budget benchmark of $30 appears to be a 47% decrease from the initial $57 benchmark the country had adopted for its 2020 benchmark, the impact on total government revenue may not be as steep as many Nigerians fear. Budget performance reports for 2019 show that oil revenue to total government revenue reduced from about 57 percent in 2018 to 34 percent in 2019 as years of economic diversification and tax collection strategies have now began to yield results.
Still with oil revenue contributing up to one third of Federal government revenue, year to date oil price decline of more than 50 percent could mean Nigeria’s revenue generation this year could contract by at least 15 percent. Non-oil revenue will also decline significantly as statewide lockdowns in several states of the country to slowdown the coronavirus outbreak is expected to reduce business revenues and economic activities which will cause a decline in sales tax and company income tax for government this year.
Analysts also fear that the growing health pandemic and oil price war could cause oil prices to continue trending lower, meaning the government may once again revise the price benchmark downward for the 4th time in 2 years if crude oil prices fall below $20 in Q2 as Goldman Sachs is currently forecasting. Some analysts are even speculating that the oil price benchmark could be reduced before approval for the $30 benchmark is obtained from the National Assembly.
The revised budget is yet to be approved by NASS which is dangerous for the federal government who must continue spending as initially projected by the approved 2020 budget until the revision is approved. Any delay in approving the revision may prove very costly to the Nigerian government, making its approval urgency very critical.
