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.

Declining Excess Crude Account Balance Indicative Of Fiscal Deterioration
Nigeria - Components Of Excess Crude Account & Sovereign Wealth Fund, USDbn

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.

Declining Excess Crude Account Balance Indicative Of Fiscal Deterioration
Nigeria - Components Of Excess Crude Account & Sovereign Wealth Fund, USDbn

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.

Oil Production Below Target
Nigeria - Targeted & Actual Production & The Difference Between The Two, mn b/d

However, we do not think that inadequate oil production is the only, or even the main cause of the deterioration in Nigeria's fiscal buffer. As the chart above illustrates, the country's production routinely falls below the level targeted in the budget and this has not always been accompanied by a decline in the excess crude account/sovereign wealth fund balance. At the same time, below-target production volume has been compensated for, to some extent at least, by above-target oil prices. The authorities set the benchmark oil price at USD77.50/bbl in the budget. During the first six months of the year, Brent crude prices, which can be used as a proxy for Nigeria's Bonny Light, averaged USD109.10/bbl, around 40% above the Nigerian government's benchmark assumption.

But Oil Prices Above Target
Nigeria - Benchmark Budget Oil Price, Brent Crude Prices & The Difference Between The Two, USD/bbl

With these things in mind, we believe that there are other explanatory factors for the deterioration in the excess crude/sovereign wealth fund balance. Although difficult to confirm or quantify owing to a lack of data, we believe that spending has exceeded targets at all levels of government over recent quarters. The Central Bank of Nigeria's first quarter economic report estimated that total official fiscal expenditure surpassed budgeted spending by 1.0% during the first three months of the year. In reality, we think that spending - both official and unofficial - probably exceeded the budget plan by far more than that. Elections are scheduled for February 2015 and therefore the incentives for additional spending by politicians to bolster support are undeniable. At the same time, the country is facing significant security challenges in the north of the country owing to an upsurge in activity from militant group Boko Haram. These are likely two major sources of spending pressure.

Limited Short-Term Risk But Significant Long-Term Challenges

Nigeria runs a small fiscal deficit. We are forecasting a shortfall of 2.2% of (newly rebased) GDP in 2014, up from an estimated 1.2% in 2013. These figures are manageable, especially when considering low levels of government debt, which totalled around 10.6% of GDP in 2013 according to our estimates. We therefore do not believe that a fiscal crisis is imminent.

However, the risks will build over time if the issue of fiscal expenditure opacity remains unchecked. Our oil and gas analysts are forecasting only tepid production growth over the coming years and for oil prices to drift lower. Nigeria's oil sector is also vulnerable to rising production in the US, its main export destination, and to a resumption of production in Libya, which produces oil of a similar, high quality to Nigeria.

We also believe that these fiscal issues are indicative of some of the broader challenges for Nigeria's economic, social and political development. Most of the additional spending is apparently going towards political patronage and personal enrichment for politicians rather than productive or socially beneficial projects. This is increasing the already skewed distribution of income in the country and will lead to more intense competition for political power and the control of these resources that comes with it. Also, the fact that greater resources are not being used to invest in infrastructure, which is crucial for the development for job-creating activities like manufacturing, means that unemployment will remain problematic, again contributing to political risk.

Fiscal Policy (Nigeria 2010-2018)
Country Indicator 2010 2011 2012e 2013e 2014f 2015f 2016f 2017f 2018f
Nigeria Revenue, % of GDP 5.7 5.6 5.1 4.4 3.6 4.4 4.3 4.3 4.2
Nigeria Fiscal expenditure, NGNbn 4,194.6 4,712.1 4,605.3 4,558.7 5,292.9 6,122.9 7,084.6 8,199.1 9,491.3
Nigeria Expenditure, % of GDP 7.7 7.4 6.5 5.7 5.8 5.9 6.1 6.2 6.4
Nigeria Current expenditure, NGNbn 3,109.4 3,314.5 3,325.2 3,657.7 4,572.1 5,257.9 6,046.6 6,953.6 7,996.6
Nigeria Current expenditure, % of total expenditure 74.1 70.3 72.2 80.2 86.4 85.9 85.3 84.8 84.3
Nigeria Current expenditure, % of GDP 5.7 5.2 4.7 4.6 5.0 5.1 5.2 5.3 5.4
Nigeria Capital expenditure, NGNbn 883.9 918.6 874.8 901.0 720.8 865.0 1,038.0 1,245.5 1,494.7
Nigeria Capital expenditure, % of total expenditure 21.1 19.5 19.0 19.8 13.6 14.1 14.7 15.2 15.7
Nigeria Capital expenditure, % of GDP 1.6 1.5 1.2 1.1 0.8 0.8 0.9 0.9 1.0
Nigeria Budget balance, NGNbn -1,105.4 -1,158.5 -975.7 -996.0 -2,016.7 -1,552.1 -2,041.1 -2,589.1 -3,347.3
Nigeria Budget balance, % of GDP -2.0 -1.8 -1.4 -1.2 -2.2 -1.5 -1.7 -2.0 -2.3
Nigeria Primary balance NGNbn -689.8 -631.3 -296.4 -248.7 -1,194.7 -648.0 -1,046.5 -1,495.1 -2,143.9
Nigeria Primary balance % of GDP -1.3 -1.0 -0.4 -0.3 -1.3 -0.6 -0.9 -1.1 -1.4
National Sources/BMI

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Sector: Country Risk
Geography: Nigeria
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