The Case of the Missing N1.6 trillion

Meet Nigeria's new budget, same as the old one

Nigeria’s Budget Office put out the Q3 2018 budget scorecard which showed that the Federal Government of Nigeria (FGN) posted a fiscal deficit of N2.5 trillion (2.7 percent of GDP) – well clear of the N1.4 trillion it had projected in the 2018 budget for the period. While the feat is not surprising as Nigeria regularly runs fiscal deficits, what is shocking is that the FGN only raised finance to plug N908 billion of the budget shortfall leaving a whooping N1.6 trillion unfinanced.

Since the 2014 oil price shock, it has been clear that the FGN struggles to generate the revenues needed to match the scale of its aspirations. This point is clear in the released Q3 2018 numbers with fiscal revenues over the first three quarters of 2018 at N2.8 trillion - a mere 3 percent of GDP – missing budget projections by 48 percent. Again, regular watchers of Nigerian budget revenue forecasts in recent years are unlikely to be surprised. These budget revenue deviations are not unbiased: the original targets are deliberately set at too high a level to ensure that the overall budget looks digestible to the clueless legislators who approve it and a hapless Nigerian populace unable to do much.

Understanding The Game

For instance, in 2018, while a recovery in oil prices and stable oil production implied that oil receipts should be in line with natural levels of Nigeria’s exploration, the budget planners made sure these natural levels were set higher to match the scale of the hopeless fiscal aspirations in the annual gaming challenge that has come to pass for budgeting. As part of the gaming of the 2018 budget, the Buhari government claimed that it would seek to generate extra revenues from an oil field licensing round (Nigeria has not held one in over a decade) even as it made no arrangements in the budget for scheduled joint-venture cash call payments it promised to international oil companies to clear out the backlog of JV capital contributions.

Though it did make those payments, by deliberately excluding them from the budget it overstated its planned budget revenue estimates. In all, the FGN reported a 36 percent variance between actual and budget oil revenues. On the non-oil side, the misses were starker – as total receipts of N1.1 trillion missed budget targets by a whopping 63 percent. 

In a similar parallel to the oil revenue games, the Budget Office inserted all manner of wishful items such as N533 billion from proceeds of oil assets privatisation/restructuring (even though Buhari had no such plans and would later campaign against oil asset sales in the 2019 elections), the now regular projected recoveries (N380 billion) and an ambitious independent revenue target of N636 billion from perennial loss making Government Owned Enterprises (GOEs). Naturally, all these items failed to deliver leaving the FGN facing a gaping shortfall.

How do you solve a problem like N1.6 trillion?

In response, the FGN was faced with two choices: borrow like crazy to gain credibility (as they did in 2017 when the FGN posted a fiscal deficit of 3.3 percent which was in excess of the 3 percent ceiling imposed by Nigeria’s Fiscal Responsibility Act) or cut back on capital spending.  From the Q3 2018 report, they chose the latter with a reduction in capital spending of 57 percent to N930 billion. Interestingly, capital execution over the period included a N739 billion carry-over from the 2017 budget implying that actual 2018 capex spending was 88 percent off target.

In addition, the FGN trimmed recurrent spending to under 5 percent of its planned target of N4.3 trillion. Put nicely, the FGN dropped whatever pretences it had regarding fiscal expansionism which had informed the move to a record level budget of N9.2 trillion for 2018. In the middle of all this, the whole point of the game remained: debt-service to revenue ratio remained at an eye watering 64 percent. As keen observers of Nigerian data would likely have observed, the key driver of recent upsurge in fiscal deficits has been the unrestrained growth in expensive local borrowings with local debt service now over N2 trillion. Beyond servicing debts and barely meeting salary payments of the civil service, Nigerian budgets do not mean much.

So whodunit?

Though the FGN raised N908 billion from local and Eurobond markets, the unfinanced shortfall of N1.6 trillion had to have been sourced somewhere and the Central Bank of Nigeria (CBN) is the likely culprit. Although the CBN slowed down on back-door fiscal deficit financing in 2017, these underhand dealings resumed in full swing in 2018 with CBN loans to the FGN exceeding FGN deposits by circa N1.6 trillion in April 2018.

The pattern in the line item and the appearance of interest expense associated with Ways & Means (the official name for CBN deficit financing) suggests the FGN leaned heavily on the CBN to provide it cash to fund its spending over 2018. If this is the case, then Nigeria’s fiscal affairs are in a much worse shape than feared and recent increments to the minimum wage for federal workers and continued plans to tap offshore markets for debt suggests problems further down the road.

President Buhari recently admonished his ministers at a recent cabinet meeting that his second four years will be tough. This time, he appears to know what he was talking about.

Brace for headwinds.