On Tuesday, 7th November, 2017, President Muhammadu Buhari presented Nigeria’s 2018 Budget Proposals before a joint session of the legislative arms of government. The budget proposed a total expenditure of N8.612 trillion, which was 18% higher than the N7.298 trillion proposed in the year 2017. The key parameters and assumptions underlying the preparation of the budget included an oil price benchmark of US$45 per barrel; oil production estimate of 2.3 million barrels per day; an exchange rate of N305/US$ for 2018; real GDP growth of 3.5 percent; and an inflation rate of 12.4%.
The Budgeted Expenditure
In 2016, the Nigerian federal government began a conscious move towards “laying a solid foundation for sustainable growth” by more than doubling its budgetary allocation to capital expenditure from 12% (in 2015) to 30% in 2016 and 31% in 2017. The current budgetary allocation to capital expenditure was however slightly lower at 28%. Nevertheless, this may not indicate the start of a reduction in the allocation to capital expenditure given that the allocation to some elements of total recurrent expenditure which relates to capital expenditure increased in the budget. Specifically, the allocation to “Sinking Funds to Retire Maturing Loans to Local Contractors” included in recurrent expenditure increased by 24%, while the allocation to “Statutory Transfers” which also includes capital expenditure increased by 9%. In addition, the allocation to capital expenditure in 2018 was an 8% increase over the allocation in 2017.
Similarly, the total recurrent expenditure element of the budgeted expenditure (which includes Debt Servicing, Statutory Transfers, Non-debt Recurrent Expenditure, and Sinking Fund for Maturing Bonds) increased by 22% from 2017 to 2018. In line with the government’s determination to spur economic growth, the allocation to Non-debt Recurrent Expenditure (which includes overheads) declined from 59% in 2017 to 56%. Since 2015, the government has successfully reduced the allocation to non-debt recurrent expenditure from 66% in 2015 despite the fact that the total budgetary expenditure has increased by an annual average of 24% from 2015 to 2018.
The government proposed that the 2018 budget will be partly financed by an estimated total revenue of N6.607 trillion. This represents 77% of the total budgeted expenditure. N2.442 trillion or 37% of the total revenue estimate is projected to come from oil, while the balance of 63% will be from non-oil and other sources. The percentage of total revenue from oil sources declined slightly from 40% in 2016 to the current level of 37%. This may be indicative of the kick off of the policy of the government to develop the non-oil sectors of the Nigerian economy. If the policies are maintained, the revenue estimate from oil is expected to decrease in successive years. While 77% of the total budgeted expenditure in 2018 is projected to be financed by internally generated revenue, this figure was an improvement over the 68% budgeted in 2017.
As shown in the figure above, the budget deficit decreased by 15% to N2.005 trillion in 2018. The budget deficit represents 1.77% of Nigeria’s Gross Domestic Product (GDP), an improvement over the 2017 deficit which was 2.18% of GDP. The deficit is expected to be partly financed by N1.699 trillion debt, 50% of which is projected to be from external borrowing. This was a slight increase over the 46% budgeted in 2017. The government has indicated its intention to increase the percentage of its debts made up of lower cost external debt relative to higher cost domestic debt, and the decrease in the absolute value of the budget deficit and the portion financed by domestic debt is in line with the government’s intention.
Implication for Equity and Debt Markets
Improved budgetary allocation is expected to translate to improved performance in the economy. This will, in turn, translate to improvement in the revenue of companies operating in the economy. In addition, the improvement in the non-oil revenue is expected to translate to the improvement in the performances of many companies in the country.
However, the decrease in domestic debt may translate to lower yield of government bonds coupled with the fact that inflation has been declining persistently since the beginning of 2017. This may lead to a reversal of the high yield trend observed in the Treasury bill market. The financial services, insurance and banking sectors of the Nigerian economy will be affected by this trend as many of them had adjusted their tactics to benefit from the higher treasury yields.