Small Fiscal Deficit Belies Profligacy
BMI View: Increased spending, much of which relates to upcoming elections, is as much to blame for Nigeria's recent fiscal deterioration as lower-than-planned oil production. The deficit will remain small at only 2.2% of GDP in 2014 and a low debt-to-GDP ratio means that a fiscal crisis is not imminent. However, challenges to the oil sector over the longer term mean that risks will build if the issue of fiscal opacity is not dealt with.
Although the country only runs a small deficit, Nigeria's fiscal accounts are under relative pressure, illustrated by a dwindling excess crude account balance. Declines in this fiscal buffer are often attributed to below-target oil production; while this is certainly a factor, unbudgeted spending, mostly associated with approaching elections, is also playing a major part. These pressures do not pose an immediate threat to macroeconomic stability, but they could begin to do so the longer they remain unchecked. Furthermore, they also represent some of the broader challenges facing Nigeria's economic, political and social development.
Nigeria's perennially volatile oil sector has been facing significant challenges in the form of theft and sabotage over recent quarters and this has led to shortfalls in production. According to the US Energy Information Administration (EIA), Nigerian monthly crude production averaged 2.0mn barrels per day (b/d) during the first five months of 2014, some 20% below the 2.38mn b/d targeted in the budget. Given that receipts from oil production are scheduled to make up around 60% of total fiscal revenue in 2014, production shortfalls will inevitably lead to below-target fiscal collection.
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