‘Oil Sector Reform Delays Will Add To Fiscal Headwinds In Nigeria’

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Dangote-Petroleum-Refinery

As the Federal Government continues to foot-drag in signing the Petroleum Industry Governance Bill (PIGB) into law, the failure will act as a constraint on state oil revenues over the next 6-12 months.

According Business Monitor International (BMI) report, shortfalls in VAT and other tax revenue indicated that non-oil revenues will also underperform. Spending pressures will remain high as the country heads towards highly contested elections in H119.

“Over the longer term, weaknesses in the oil sector and the need to devote a greater proportion of revenue to servicing debt, could limit growth supporting spending”, it said.

The report revised its fiscal deficit forecast for 2018 from 3.1% to 3.3% of GDP—up from an estimated 2.8% in 2017, and almost double the government target of 1.7%. The upward revision reflects an increase in uncertainty in the oil sector following the failure to sign the Petroleum Industry Governance Bill (PIGB) into law.

The BMI report is forecasting an overall deficit of 3.1%, up from 3.0% previously in 2019, and despite persistent government efforts to consolidate the fiscal accounts, it is expected that the fiscal deficit will remain above 3% of GDP throughout the 2018-27 forecast period.

“From all indication, the latest delays to the PIGB will undermine operator confidence and constrain oil sector revenue. The PIGB forms part of government efforts to offset the maturing of existing fields, and includes new tax laws making it more attractive for oil companies to invest and re-invest offshore”, it said.

It would be recalled that after years of delays, the PIGB hit a new obstacle when President Muhammudu Buhari refused to sign the bill into law in September.

According to the Buhari camp, the president’s objections centre on the continuing role of the country’s Petroleum Equalisation Fund (which subsidises elements of domestic petroleum marketing) and the amount of oil revenues being allocated to the industry’s new regulator.

The bill envisages the creation of a new regulatory body, the Petroleum Regulatory Commission (PRC),  and allow it to retain up to 10% of the revenues from the industry. This would act as a constraint on the government’s growth-supportive spending given that the hydrocarbons sector has historically accounted for as much as 80% of total government revenue.

Spending pressures will remain particularly high in the run-up to elections scheduled for February 2019.

Despite measures in recent years such as the establishment of a department to eliminate “ghost workers” from the government payroll, a large portion of government spending will continue to go towards recurrent expenditure, and particularly public-sector salaries (over 2012-17 recurrent expenditure accounted for an average of 73.2% of total federal government spending).

“In the near term, the new Finance Minister, Zainab Ahmed, will have little room for manoeuvre given that highly contested elections are scheduled for February 2019. The administration is highly unlikely to consider any politically contentious reforms such as eliminating expensive domestic petrol subsidies, even though it would be a net positive for the fiscal account.

“The government’s fiscal deficit target is likely to be exceeded. The 2018 budget, which was only passed in May, projects a deficit of 1.7% of GDP, which is well below our forecast of a deficit of 3.3%. We believe that the government’s assumptions—including expenditure of N9.12trn (22.6% higher than the 2017 budget) and revenue of N7.2trn (more than 40% up on the 2017 budget target)—will prove overly optimistic in the short to medium term”.

Kemi Adeosun, who resigned as finance minister in September, promoted measures such as a tax amnesty in an effort to boost fiagging fiscal revenue. However, progress remains slow—the tax amnesty was extended in April to try to increase the uptake—and any improvements will take place off a low base, meaning that fiscal consolidation will be limited at best.

The fiscal deficit will remain above 3% of GDP over the long term.

Revenue vulnerabilities will persist into the longer term. Efforts to boost non-oil revenue will continue as the government tries to diversify the economy, but we believe that hydrocarbons will continue to dominate in terms of the share of government’s revenue, accounting for approximately 80% of the tax intake.

This leaves the country vulnerable over the long term as we forecast oil production to decline over 2019-27 and that international prices will remain below the 2011-14 highs over the ten-year forecast period.

The fiscal deficit will remain structurally larger than seen over the past decade. Overall, we forecast Nigeria’s fiscal deficit to average 3.1% of GDP over the decade to 2027. While this is below that of peers such as Angola (with an average deficit of 3.6% over the same period) and Algeria (5.7%), it is well above the deficit of 1.7% annually seen in the decade to 2017. Moreover, the structure of government revenues will remain weak, with the hydrocarbons sector continuing to dominate. This leaves the government vulnerable to changes in international prices, and local production trends: for example, oil receipts in August 2018 were 37% below budgeted levels because of repair and maintenance work at various facilities operated by the Nigerian National Petroleum Corporation.

According to Debt Management Office Nigeria, public debt will continue to rise sharply under Buhari.

“Growing debt-service requirements could also act as a constraint on fiscal options. National debt at end-June 2015—a month after the Buhari administration came to office—stood at N12.1trn (around 12.7% of GDP). It has subsequently almost doubled, to N22.4trn (around 17.5% of GDP) as of June 2018. Much of this increase has been in the external stock, as the government tries to rebalance its obligations away from more expensive domestic debt”.

At the end of June 2018 external debt (from international capital markets, and a Diaspora Bond, for example) stood at US$22.1bn, around 30% of the overall debt portfolio—a considerable increase from a stock of US$10.3bn (16.2% of the total) at end-June 2015.

Debt-service targets will prove challenging. Interest and principal payments accounted for nearly 56% of recurrent federal expenditure in the fourth quarter of 2017, according to the Central Bank of Nigeria. The 2018 federal budget targets a debt-service/revenue ratio of around 31.0%, compared with 33.9% at end-2016 and 34% in June 2017, but this is unlikely to be attained given the headwinds to revenue collection. Refinancing and capital markets will remain options, but borrowing costs look set to rise amid tighter monetary policy in the US and wider emerging-market concerns.

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