www.pwc.com/ng Economic Alert Assessing the 2021 FGN Budget

NB: Analysis is yearly (y/y) except otherwise stated April 2021

Fiscal Responsibility Act (FRA). The deficit is to be financed Overview through borrowings of N4.9 trillion from the domestic and foreign debt markets. The Appropriation Bill 2021 and the Finance Bill 2020 were signed into law on December 31, 2020. The Appropriation Act About N2.2 trillion is estimated to come from oil receipts. This sets aside about N13 trillion as the 2021 budget for the Federal figure is more than double the N1.09 trillion receipt projected in Government. The Finance Act brought about 80 notable changes the revised 2020 budget. Similarly, the non-oil revenue across 14 tax laws, to support the government’s domestic projection is pegged at N1.49 trillion, lower than the N1.62 revenue mobilisation, and the ease of doing business reforms. trillion budgeted in 2020. This reduction is because of the This brief seeks to assess the 2021 budget and the components, economic impact of the pandemic on revenues anticipated from as well as examine the trends. company income taxes. Many businesses are still grappling with the economic challenges from the COVID-19 pandemic.

Other revenue sources include independent revenues (N1.06 Breakdown of Nigeria’s 2021 budget trillion), revenues from GoEs (N2.17 trillion), signature bonuses (N0.68 trillion), among others. The infographics below show the budget benchmarks comprising oil price and production, GDP growth, exchange rate, and inflation rate. As at the end of 2020, the actual revenue achieved relative to the budgeted figure performed relatively well, with 73% or N3.94 2021 budget benchmarks trillion realised.

Nigeria's oil revenue performance over the past 10 years

01 02 03 4.0 160

Oil price Oil production GDP growth 3.5 140 US$40/barrel 1.86mbpd 3% 3.0 120

2.5 100

2.0 80 04 05 1.5 60

Exchange rate Inflation rate 1.0 40 N379/US$ 11.95% 0.5 20 2.3 1.9 2.4 2.1 1.6 0.7 2.1 3.0 3.7 1.1 Source: Budget Office of the Federation, PwC analysis - 0

Proposed revenue sources for the 2021 budget Budgeted oil revenue (N' trillions) Oil revenue performance (%) The total projected revenue (inclusive of revenues from GOEs) estimated to finance the 2021 budget is about N7.99 trillion, with the Source: Federal Ministry of Finance, Budget and National Planning (FMFBNP), budget deficit at about N5 trillion. The estimated budget deficit Budget Office of the Federation, PwC analysis accounts for about 3.9% of the GDP, above the 3% stipulated in the

About PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 155 countries with more than 284,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more by visiting us at www.pwc.com/ng Nigeria's non-oil revenue performance On average, only about 67% of capital budget has been implemented over the past four years

1.8 100 3.5 120

1.6 90 3.0 100 1.4 80 2.5 70 80 1.2 60 2.0 1.0 60 50 1.5 0.8 40 40 0.6 1.0 30 20 0.4 20 0.5 0.2 10 0.9 0.8 1.0 1.0 1.2 1.6 1.4 1.6 1.4 1.6 - 0 - 0

Budgeted capital expenses (N'trillions) Performance (%) Budgeted non-oil revenue (N' trillions) Oil revenue performance (%) Source: FMFBNP, BoF, PwC analysis

Source: Federal Ministry of Finance, Budget and National Planning (FMFBNP), Budget Office of the Federation, PwC analysis Recurrent expenditure has maintained more than 90% performance level since 2011 About 79% of the non-oil revenue budget was achieved in 2020. The proportion of actual non-oil revenue has been increasing since 2016, from a nine-year low of 52% to 88% in 2019. 8 121 7 Proposed expenditure for 2021 and analysis 101 6 of the expenditure in 2020 81 5 Personnel cost and debt servicing account for the bulk of Nigeria’s 4 61 recurrent (debt and non-debt) expenditure. Historically, recurrent 3 expenses have always recorded nearly 100% implementation. In 41 some cases, actual recurrent expenses tend to exceed the 2 21 budgeted amount by a significant amount. 1 2.92 2.98 3.01 3.17 4.12 4.12 4.83 5.72 6.32 7.59 The same trend happened in 2020 as the FG spent about N11.4 0 1 billion above the budgeted non-debt recurrent expenditure. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Meanwhile, only 48% of the capital budget has been implemented, Recurrent expenditure (Budget) - N'trillions on average since 2016. Except for 2020, which was one of the best Performance (%) years for capital expenditure implementation, as nearly 90% of the amount budgeted was deployed. Source: FMFBNP, BoF, PwC analysis Budget deficit and rising government debt

Nigeria has operated on a budget deficit since 1981, except for and about 3.93% of nominal GDP. The growing fiscal deficit has 1995 and 1996, when the federal budget recorded a surplus. necessitated the need to borrow to plug the shortfall, significantly increased the debt stock, and expanded the cost of The 2021 budget deficit is estimated at N5.6 trillion (revised servicing outstanding debts. 2020 figure was N4.98 trillion), roughly 70% of FGN revenues

Budget deficit as a percentage of GDP (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-0.94 -1.36 -1.44 -1.65 -2.02 -1.84 -2.63 -2.84 -3.17 -3.41 -3.57 -3.93

Source: Central Bank, Budget Office of the Federation, PwC analysis

By how much will total debt rise given the borrowing plan in the 2021 budget?

Over the past four years, FGN’s total debt stock has nearly over N5.6 trillion budget deficit. If this plan is executed, it will tripled from N10.9 trillion in 2015 to over N28 trillion as of potentially expand the FGN’s total debt outstanding to more than September 2020. The FGN plans to borrow nearly N4.69 trillion N32 trillion by the end of 2021. (excluding multilateral/bilateral project-tied loans) to finance the

Nigeria's outstanding debt over the past decade

30,000 25,000 20,000 15,000 10,000 5,000 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Central Bank, DMO, PwC analysis Domestic debt (N'bn) External debt (N'bn)

Though positive market sentiments have helped to sustain the Another way the FG has sought to finance the deficit is through recent rise in crude oil prices, the likelihood that the FGN will ways and means advances from the CBN. In 2020, total ways achieve its revenue projections for the 2021 budget remains and means advances to the FG stood at N2.86 trillion, uncertain. representing roughly a quarter of the 2020 revised budget. The total cost of servicing ways and means advances stood at about N912.6 billion in 2020.

The increasing cost of servicing debt continues to weigh on the FGN's revenue profile.

The growth in FGN’s debt stock has led to expansion in debt servicing costs.

Debt servicing-to-revenue stood at 83% in 2020

4000 100%

3000 80% 60% 2000 40% 1000 20% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021** Debt servicing cost (N'trillions) Debt service-to-revenue ratio (%)

Source: BoF, FMFBNP, PwC analysis ** budgeted Actual debt servicing cost in 2020 stood at N3.27 trillion and settle interest payments for outstanding domestic and foreign represented about 10% over the budgeted amount of N2.95 debts within the reference period. In 2021, the FG plans to trillion. This puts the debt-to-revenue ratio at approximately spend N3.32 trillion to service its outstanding debt. This is 83%, nearly double the 46% that was budgeted. This implies slightly higher than the N2.95 trillion budgeted in 2020. that about N83 out of every N100 the FG earned was used to

Finance Act 2020: Leveraging the Unclaimed Fund Trust to plug the budget deficit

One of the key objectives of the FG’s Finance Act 2020 is to The balances in these accounts constitute roughly 2.5% of total shore up revenue to finance expenditure. A critical change in the bank deposits of nearly N30 trillion. This means that the total Finance Act 2020 is the section that grants the FGN the power amount in dormant accounts nationwide stands at about N737 to borrow money in dormant accounts and unclaimed dividends billion. Similarly, the Securities and Exchange Commission of up to six years. The amount realised will be deposited in the (SEC) puts the outstanding unclaimed dividend in 2019 at about Unclaimed Fund Trust Fund, which will be managed by the Debt N158.4billion compared to N120billion in 2018. Essentially, the Management Office (DMO). potential amount of money the FG is targeting is around N900 billion, which can potentially offset about 18% of the fiscal According to the Nigeria Inter-Bank Settlement System (NIBSS), deficit. there are about 44.5 million dormant bank accounts in Nigeria.

Unclaimed dividend in Nigeria (N' billions)

158

120 109 80 60 2 5 34 41 18 2002 2003 2008 2010 2011 2012 2013 2016 2018 2019

How realistic is the new crude oil price in the face of changing global energy market?

The 2021 budget is based on an oil price benchmark of US$40 As of April 16, 2021, the Bonny Light price traded slightly above per barrel and oil production output of 1.86 million barrels per US$65 per barrel, higher than the US$40 per barrel day. The current global situation may support the realisation of benchmarked in the 2021 budget.2 this target, in the short to medium term. For instance, increased rate of vaccinations against COVID-19, the OPEC+ oil Nigeria will have to shed off about 313,000 bpd for the first half production cut, a new United States President, declining U.S. of 2021 in line with OPEC+ cut agreement to stabilise global oil crude inventories, China’s strong economic growth as well as prices. While this cut has already been factored into the oil geopolitical tensions in major oil producing countries such as production benchmark of 1.86 mbpd, the potential challenge lies Russia/Ukraine and Israel/Iran are factors driving the recent rally in the possibility of another cut, should the other variants of the in oil price. COVID-19 virus become more pronounced, and certain countries impose another lockdown. For instance, as at April 16, Market analysts and global energy organisations are projecting 2021, a new variant referred to as a double mutation, has relatively strong crude oil demand, as economic activities resulted in India reporting more than 14.5 million COVID cases commence in many countries. In a recently released report, and over 175,600 fatalities so far. As a result, Nigeria’s fiscal OPEC increased its global oil demand projection by about space could be tightened, if these weak sentiments prevail. 190,000 bpd while the International Energy Agency (IEA) ramped up projections by 230,000 bpd.1

Bonny light oil price (US$ per barrel)

150

100

50

0

Jul-08 Jul-13 Jul-18

Apr-07 Oct-09 Apr-12 Oct-14 Apr-17 Oct-19

Jan-06 Jun-06 Jan-11 Jun-11 Jan-16 Jun-16 Jan-21

Feb-08 Mar-10 Feb-13 Mar-15 Feb-18 Mar-20

Dec-13 Aug-20 Nov-06 Sep-07 Dec-08 Aug-10 Nov-11 Sep-12 Aug-15 Nov-16 Sep-17 Dec-18

May-09 May-14 May-19

Source: OPEC Monthly Report, PwC analysis

1. https://oilprice.com/Latest-Energy-News/World-News/Oil-Soars-5-As-Bullish-News-Mounts.html 2. https://oilprice.com/oil-price-charts/ Beyond crude oil, receipt from gas sales could well provide reduction in global carbon emissions. Nigeria needs to ramp up relative stability to FG's revenue. In 2020, actual gas receipts investment in domestic gas production and expand its capacity exceeded its projection by 79%. The fundamentals for gas for gas exports. remain strong especially in the light of the ongoing call for a

Conclusion

COVID-19 has led to a fragile economic growth globally and pursuing institutional reforms that would drastically reduce the exposed the domestic economy’s vulnerabilities to external cost of governance and ensure productivity in the public sector. shocks arising from fluctuations in oil prices. While the pandemic More importantly, relentlessly implementing the 2021 budget will presents risks, it nevertheless offers the country another go a long way in averting an impending recession as a result of opportunity to diversify its economic base while aggressively the pandemic outbreak.

Contacts

Andrew S. Nevin Ph.D Omomia Omosomi Kelvin Umweni Partner, West Africa Financial Manager/Economist Associate Services Leader and Chief Economist [email protected] [email protected] [email protected]

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