There are indications that Nigeria’s economic situation will bite harder on the people in 2020 fiscal year as the federal government adjusts to the realities of dwindling oil prices. Oil revenue is projected to decline by about N1.32trillion impacting negatively on capital expenditure which is expected to drop by N1.14trillion, thereby slowing down economic growth. Bamidele Famoofo reports
Fiscal 2020 is not likely to be a year of economic boom for Nigeria if the current economic indicators and projections for 2020 are anything to go by. Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, while painting a picture of what Nigerians should expect in 2020 recently in Abuja, said government should not envisage generating enough revenue from oil to fund its proposed N9.78trillion.
The reason for the pessimism is not farfetched: oil, which is the biggest revenue earner for the country is not enjoying a favourable pricing at the moment at the international market. According to the Organisation of Petroleum Exporting Countries (OPEC), there is no hope that there will be a positive change in oil prices in the coming year. So, Ahmed said the most realistic thing to do was for government to backpedal on the $60 per barrel price on which it benchmarked its 2020 budget.
Ahmed, who made the disclosure Tuesday last week in Abuja, at the presentation of the Medium-Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) where N9.78 trillion was proposed for 2020 total budget, said, “Oil revenue is projected to decline from N3.688 trillion in 2019 to N2.367 trillion in 2020.” And because earning from oil will drop below the level in 2019 borrowing will escalate.
“New borrowing is put at N1.605 trillion for 2019, projected at N1.7 trillion for 2020, N1.6 trillion for 2021 and N1.3 trillion for 2022. The borrowings will be 50 per cent local and 50 per cent foreign,” she said. The direct impact of shortfall in oil revenue on the economy and the populace is a downsize in capital expenditure. Investment in capital projects is probably the only means in Nigeria, whereby the citizenry get the benefit of governance. But now, the government, according to Ahmed, will cut spending on capital projects in 2020 to the tune of about N1.14trillion.
According to the finance minister, the aggregate capital expenditure in 2019 was N3.187 trillion, but in 2020, it has been lowered to N2.05 trillion and the next year, the pattern would be the same thing. “Recurrent expenditure for 2019 had scored 100 per cent since the implementation began, while close to N300billion had been released for capital expenditure so far.”
“Key Assumptions of the 2020 Budget Framework: Oil Production 2.18 mbpd; Oil Price $55/b; Exchange Rate N305/$; Inflation Rate 10.81 percent; Nominal Consumption N122.75 trillion; N142.96 trillion Nominal GDP; and GDP Growth Rate of 2.93 percent”. In the meantime, the federal government has also warned Nigerians to brace up as the 2020 to 2022 fiscal years would be challenging with respect to revenue generation and rapid growth in personnel costs. The government, however, gave the assurance was ready to take firm decisions. Regarding rising personnel cost, Ahmed disclosed that “any government staff not captured in the Integrated Payroll and Personnel Information System (IPPIS) by October 2019 should forget their salaries.” The government’s borrowing plan suggests Nigeria’s debt challenge persists, and this may take the country’s debt profile to a new height in the coming year, while capital projects may face some setbacks. Going forward, Ahmed disclosed the Federal Executive Council (FEC) has approved the 2020-2022 Medium Term Expenditure Framework and Fiscal Strategic Paper, which would soon be presented to the National Assembly for approval.
Since non-oil revenue is tipped to grow marginally in 2020 and there is also constraint to the level of borrowing the nation could embark on going forward, given its near limit debt threshold, tax becomes the feasible option to generate revenue. The Federal Executive Council on Wednesday last week, in a frantic effort to increase funding revenue, approved 7.2 per cent as new value added tax (VAT) rate for the country, up from the current five per cent. However, a decision has yet to be taken on the effective date of the new rate.
Ahmed, who spoke with State House Correspondents after the FEC meeting in Abuja, said consultations were in process over when the new rate would apply. She explained that stakeholders, including the National Assembly and the states, would have to agree on the date. According to her, the VAT Act would also have to be amended by the National Assembly before the commencement of the new rate, which she said could be sometime in 2020.
“We also reported to council and council has agreed that we start the process towards the increase of the VAT rate,” she noted. The only justification given to increase VAT was that: “The states need additional revenue to be able to meet the obligations of the minimum wage.” According to the finance minister, the federal government only retains 15 per cent of the VAT while 85 per cent goes to the states and local governments.
She added, “This process involves extensive consultations that need to be made across the country at various levels and also it will involve the review of the VAT Act. So, it is not going to be implemented immediately until the Act is reviewed.” Total expected revenue for 2020 was N7.5trillion, “and N2.09trillion that will be accruing to the Federation Account and the VAT respectively.”
Ahmed said, “The federal government will be receiving proposed aggregate of N4.26trillion from the federal account and the VAT pool, while the states and the local governments are expected to receive N3.04trillion and N2.27trillion respectively. “The 2020 budget has a debt service estimated at N2.45trillion and a sinking fund to retire maturing obligations issued to local contractors and other creditors in the sum of N296billion. “So, there is a total sum of N3.43trillion that is provided for personnel and pension cost inclusive of N218billion for the top 19 government-owned enterprises in the country.”
The Organisation of Petroleum Exporting Countries has said Nigeria and other oil-producing countries must support market stability to avoid unwanted volatility and a potential relapse into market imbalance. OPEC, in a feature article published in its Monthly Oil Market Report for September, reviewed global economic developments and highlighted major challenges to growth including the ongoing trade dispute between the United States and China.
It said an important support factor so far this year had been the relatively stable oil market, which continued to benefit from the on-going efforts under the OPEC-Non-OPEC Declaration of Cooperation. OPEC said it pumped 29.74 million barrels per day in August, up 136,000 bpd on July, according to an average of the six secondary sources used by the organisation to track member output.
Crude oil output increased mostly in Saudi Arabia, Nigeria, Iraq and the UAE, while it declined mainly in Venezuela, Iran, Libya, Kuwait and Algeria. Nigeria’s oil production rose to 1.91 million barrels per day in August from 1.83 million bpd, based on direct communication.
OPEC, Russia and nine other allies in July agreed to extend their collective 1.2 million bpd supply cut agreement through the first quarter of 2020. The group, on Wednesday, lowered its estimate for the demand for its oil this year, but left its 2020 outlook little changed ahead of a key OPEC/non-OPEC ministerial meeting set to review its current output curbs and country level quotas.
Global demand for OPEC’s crude will average 30.61 million bpd, 80,000 bpd below its previous forecast, the producer group’s analysis arm said in its latest monthly oil market report. OPEC said it saw world oil demand in 2019 growing by 1.02 million bpd, which is also 80,000 bpd lower than last month’s forecast.
The group pointed to an economic slowdown in the US and the Eurozone, lower-than-expected growth in India, rising sovereign debt issues in Argentina, and the continuation of the US-China trade dispute.
Looking ahead, OPEC left its estimate for the average demand for its crude in 2020 little changed at 29.40 million bpd despite a downward revision to expected US shale growth. However, OPEC cut its estimate of demand for its oil sharply by 390,000 bpd in the second quarter of next year to 29 million bpd. According to OPEC, world oil demand is projected to increase by 1.08 million bpd in 2020, a downward adjustment of 60,000 bpd from its previous assessment.
A nine-country Joint Ministerial Monitoring Committee, co-chaired by Saudi Arabia and Russia and scheduled to meet last Thursday was tasked with monitoring market conditions, assessing compliance with production quotas, and making policy recommendations to the wider coalition. OPEC revised its non-OPEC oil supply growth forecast for 2020 by 136,000 bpd 2.25 million bpd to reflect to a large downward revision to the US oil supply, which is now expected to grow by 1.54 million bpd.
“The forecast for next year remains subject to many uncertainties, mainly relevant to capital-spending discipline and a slowdown in drilling and completion activity in the US,” OPEC said. OPEC also trimmed its non-OPEC supply estimate for 2019 by 10,000 bpd to 1.99 million bpd with upward revisions to production from Russia, Kazakhstan, Australia and Canada offsetting the downward revision to its forecast for US. This Day
Pix: Zainab Ahmed, Nigeria’s Finance Minister