CardinalStone Research President Muhammadu Buhari presented the 2020 federal budget proposal at a joint session of the National Assembly yesterday. The budget presented largely resembles the Medium-Term Expenditure Framework (MTEF) released in September, with a few revisions to key assumptions and forecasts, the only points of difference. The budget proposal was accompanied by the presentation of a Finance Bill, which proposed an increase in Value Added Tax (VAT) rate and outlined the specific products and businesses that will be exempt from the VAT register. Below, we highlight some key features of the 2020 budget and the 2019 finance bill. Budget assumptions \tThe proposed 2020 budget adopted a $57 per barrel oil benchmark price, which represents a $2 increase from the benchmark outlined in the MTEF document. However, the oil production and exchange rate estimates remained aligned with the MTEF assumptions of 2.18 mbpd and N305\/$. Similarly, GDP and inflation forecasts were held at 2.93% and 10.81% respectively.FG revenue objective reliant on non-tax related inflows \tIn line with the proposed increase in the oil benchmark price and the VAT rate, the Federal Government (FG) estimated revenue of N8.1 trillion in the 2020 budget document is c.N500 billion higher than MTEF forecasts (N7.6 trillion) and c.N600 billion higher than the provision of the 2019 budget (N7.5 trillion). Specifically, the upward revision of oil benchmark price resulted in a N270 billion increase in projected oil revenue to N2.6 trillion (vs. MTEF forecasts). Similarly, non-oil tax revenue is now projected N260 billion (vs. MTEF forecasts) higher on the back of the proposed VAT increase. \tWe highlight that, for the first time, the bulk of FG\u2019s revenue is expected to come from \u201cother revenues\u201d i.e. revenues other than oil and non-oil tax revenues. These revenue sources include; independent revenue, FGN balances in special levies accounts, signature bonus\/renewals, domestic recoveries+ assets+ fines; earmarked funds, stamped duty, grants and donor funding. \u2018Other revenues\u2019 (N3.7 trillion) is estimated to comprise 45.6% of total FGN revenue. As outlined in our previous report \u2018VAT increase could be a smokescreen for something larger\u2019, FG\u2019s record on these non-tax related revenue sources have been dismal in past years. Collectively, the aforementioned \u2018other revenue\u2019 sources have not exceeded over N500 billion annually in the last 5 years. This track record is not consistent with FG\u2019s plan to raise c.N3.7 trillion from \u2018other revenues\u2019 in the coming fiscal year. However, we note that the recent push by the FG to renegotiate its profit-sharing contracts with oil majors leaves legroom for some one-off payments in coming years. Nigeria is likely to record a higher than the projected budget deficit in 2020 \tThe budget deficit including project tied loans (N2.18 trillion) in the proposed budget is marginally higher than MTEF\u2019s forecast but below the 2019 budgeted deficit of N2.5 trillion. The deficit represents 1.5% of estimated GDP and is well below the 3.0% threshold set by the Fiscal Responsibility Act of 2007. \tAs alluded to earlier, the dependence on other revenue sources leaves room for significant underperformance on the revenue front, which could also lead to an increase in the budget deficit and associated borrowings. Thus, future debt service obligations are likely to be higher (debt service accounted for 54.3% of actual FG revenue in 2018). Furthermore, the prospect of a higher debt service burden will have the opportunity cost of lower capital expenditure spending and difficulty of reaching GDP growth expectation. Finance bill proposes a VAT rate hike to 7.5% from 5.0% \tThe presented finance bill proposes a VAT increase of 2.5pps to 7.5%, and this increment was factored into the 2020 appropriation bill. It is important to note that the bulk (85%) of revenues generated from VAT will accrue to the state and local governments, while the remainder will be remitted to the FG. The VAT increase is also expected to help states implement the new minimum wage increase. \tIn addition to the current VAT exemptions on pharmaceuticals, educational items, and basic commodities, the Finance bill also granted VAT exemptions to fish, meat, poultry products, and various cereals. \tFinally, the proposal aims to raise the threshold for VAT registration to N25 million turnover per annum to protect micro, small, and medium scale businesses from the early tax burden. Click here for the full report.