New Fitch Rating: Debt burden, shaky estimates put 2018 budget at risk

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Continuing trend of mismatch between revenue and expenditure in the in the federal government’s annual fiscal projections, prevailing borrowing spree, poor budget performance indicators and uncongenial operating environment combine to raise formidable pointers against credibility of the 2018 federal budget.

According to President Buhari, the ‘2018 budget will consolidate on the previous budgets to actualise the economic growth recovery plan of this administration. 2018 is expected to be a year of positive and better outcomes.’

Titled the ‘Budget of Consolidation’, the 2018 proposal is up by 16 per cent from N7.44 trillion (N7.44 tn) in 2017 to N8.61tn. According to the financial estimates, federal Government expects total revenue of N6.61tn with non-oil revenue taking the larger component of N4.17tn. Oil revenue is estimated to account for N2.44tn of the budget funding while gap exists for the remaining N2.01tn.

Government plans to spend N8.61tn in the year with recurrent estimates amounting to whopping N3.49tn. Capital expenditure is put at 2.43tn; debt servicing to gulp N2.01tn; sinking funds will suck up N22 billion; while N456 billion is set aside for statutory transfers.

Already, global financial analysts that read the destination compass for international investment capital have started pointing out flaws in the key revenue projections that underpin government’s fiscal predictions for next year.

United States-based credit ratings agency, Fitch which last Friday, cut its 2017 economic growth forecast for Nigeria from 1.5 per cent to 1 percent, had also last September predicted the capping of the country’s oil production output to 1.8mbpd by the Organization of Oil Producing Countries (OPEC).

The report which has now put Nigeria’s credit standings at risk, have also now caused financial analysts to cast worrying expressions on the future country’s proposed 2018 appropriation bill presented to the National Assembly by President Muhammadu Buhari, in addition to the audacious plan by the government to borrow $5.5 billion to fund capital expenditure (CAPEX) projected in the bill.

This is even as secrecy and nondisclosure continue to hover around the 2017 budget in the areas of implementation and funding, as experts query how the 2018 budget will be successfully funded with a looming debt burden and the 2017’s level of implementation still shrouded in secrecy.

Speaking at a Fitch event in London, Jermaine Leonard, a director for sovereigns, said while disclosing Nigeria’s new growth status, that although the country’s 2018 budget had an oil production target of 2.3 million barrels per day (bpd), the Fitch forecast was just above 2 million bpd.

Last September, the statistical rating organization affirmed Nigeria’s long-term foreign currency Issuer Default Rating (IDR) at ‘B+’ with a “negative outlook”, which reflected the fact that there were still a lot of elements which could take it down.

The international rating agency had in that statement explained that Nigeria’s rating was supported by its large and diversified economy, significant oil reserves, its net external creditor position, low external debt service ratio and large domestic debt market.

These, it stated, were balanced against relatively low per capita gross domestic product (GDP), an exceptionally narrow fiscal revenue base and a weak business environment.

According to Fitch, the negative outlook reflected the downside risks from rising government indebtedness, the possibility of a reversal of recent improvements in foreign currency (FX) liquidity, and a faltering of the still fragile economic recovery.

The credit rating firm noted that an anticipated imposition of an OPEC quota might cap Nigeria’s crude production at 1.8mbpd, which could limit the oil sector’s upside potential.

However, as it excludes condensate production, the quota should not affect Nigeria’s near-term production potential, it stated.

Only penultimate Friday, OPEC capped Nigeria’s production to 1.8mbpd from its present 1.75mbpd, despite production capacity of 2.3mpbd which was projected in the 2018 budget, which itself has come under heavy criticisms by economic and financial experts.

They posit that the 2018 budget is covered in unrealizable targets from the high oil output of 2.3mbpd, in the face of the continued restiveness in the Niger Delta in addition to the emerging global trends of world economies exploring alternatives to fossil fuels, to the exchange rate of N305 which is inaccessible in the open market as attested to by the Manufacturers Association of Nigeria (MAN), and then, of course, the borrowing spree the Federal Government has entered into.

The Fitch Ratings report, therefore, is seen as compounding an already gloomy outlook, especially in respect of obtaining the $5.5 billion loan sought by the government.

The Senate, last November, finally approved a $5.5 billion external loan request by President Muhammadu Buhari. The president had in letter dated October 10 sought the Senate’s approval for $3 billion external loan and $2.5 billion Eurobond or Diaspora bond in the international market.

Buhari explained that the bonds would be channelled towards funding of the 2017 budget while the loan would be used in refinancing of maturing domestic debts.

To complicate matters for the economy, it is the 2018’s projected N2.43 trillion capital expenditure (CAPEX) that is at high risk of not reaching implementation for the year, knowing how the last 2017 fared in that aspect.

According to the experts, the 2018 budget would remain a mere expression of figures if the controversial loan itself is not accessed to fund capital expenditure.

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