Nigeria’s Fiscal Position Improves but there are Issues to Resolve

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Recent happenings appear to be in favour of Africa’s most populous country as activities both globally and locally have improved Nigeria’s fiscal position. This position, which gives information on the revenue and the expenditure of the country, is stronger than a few months ago due to the twin developments of rising crude oil prices and interest-saving on government debt.

Data from the Central Bank of Nigeria (CBN) shows that crude oil and gas account for 94% of total exports from Nigeria and are therefore the major source of revenue for the country. As a result, movements in the price of this ‘black gold’ has the capacity to influence the direction of the economy. When crude oil prices are falling, the economy is negatively affected, which was the situation that played out in 2016. The recession witnessed in Nigeria in 2016 through 2017 saw the value of the US Dollar rise to an all-time high of nearly N500 in the parallel market. Conversely, when crude oil prices are rising, the economy is positively affected. Recently, the price of crude oil has been rising in the global market due to various reasons including violence and insecurity in Libya, a cut in oil production by Organization of the Petroleum Exporting Countries (OPEC), and US sanctions on Venezuelan and Iranian crude oil.

Sources: Central Bank of Nigeria (CBN), Budget Office of the Federation (BOF), Thomson Reuters, and FSDH Research B – Budget

Since the start of 2019, the price of crude oil has jumped by 46% and Nigeria has gained from this rise. The nation’s external reserves have risen by 4% since the start of the year and have the capacity to cover 13 months of imports. Also, the foreign exchange market has been relatively stable. However, FSDH Research points out that with the increase in crude oil price, the cost of under-recovery (petroleum subsidy) rises too. Although this recent increase in crude oil price may be a temporary development, FSDH Research notes that with the increase in crude oil receipts, government revenue also increases. The current crude oil price at US$75.95/b is higher than the 2019 budget benchmark of US$60/b.

Sources: Central Bank of Nigeria (CBN), Budget Office of the Federation (BOF), Thomson Reuters, and FSDH Research B – Budget

The drop in the interest rate in the Nigerian financial market has also improved the fiscal position of the Federal Government of Nigeria (FGN) through interest-savings on domestic debts. The FGN is currently borrowing funds cheaper through the Nigerian Treasury Bills (NTBs) and FGN Bonds than it borrowed in January 2019. FSDH Research estimates that the government has been able to save over N9bn in interest cost between February and April. This represents a drop in government expenses, leading to an improvement in the country’s fiscal position, other things being equal.

Sources: Central Bank of Nigeria (CBN), Budget Office of the
Federation (BOF), Thomson Reuters, and FSDH Research B – Budget

Despite the increase in the crude oil price and the interest-savings made by the government, FSDH Research identities certain issues that need to be resolved. These include the funding of the new national minimum wage of N30,000; the implied increase in subsidy on Premium Motor Spirit (PMS), which is a drain on government’s resources, and the existing electricity tariff which does not reflect current costs. These important issues have the capacity to erode the gains the nation is making from the rising crude oil price and the drop in interest rate.

Against this backdrop, FSDH Research stresses that the rise in crude oil price may be temporary and could witness a reversal without warning since the current drivers are not based on strong global demand. If Nigeria does not put adequate measures in place, a possible drop in crude oil price below US$60/b may weaken the economic performance of the country. As a result, the government should continue to develop structures that would improve the business environment in order to attract more investments and increase the profitability of businesses in Nigeria. Specifically, we recommend that the government should increase efforts to reduce administrative delays in obtaining licences and approvals, invest in infrastructure through a partnership with the private sector, and remove multiple exchange rate systems.