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Nigeria Politics October 2019

Nigeria: President Buhari presents record budget in effort to kickstart economy

On 8 October, President Muhammadu Buhari presented a record NGN 10.3 trillion 2020 budget to the National Assembly, the first of his second term after winning re-election in February. Although his All Progressives Congress party controls an absolute majority in both chambers, parliamentary approval could take months before it is signed into law. The spending plan, which is over 15% higher than the one adopted this year, rests on forecasts of 2.9% GDP growth, crude production of 2.2 million barrels per day (mbpd) and an oil price of USD 57 per barrel next year. Overall, it aims to boost growth in the continent’s top oil producer and largest economy as it still struggles to fully recover from the 2016 recession induced by the crash in oil prices. That said, many analysts question whether the budget is dependent upon overly optimistic growth and revenue targets.

The budget forecasts revenues of NGN 8.2 trillion, a marked 7% increase from this year’s estimates, yielding a budget deficit of NGN 2.2 trillion, slightly above the NGN 1.9 trillion shortfall that was penciled in for this year. Notably, in a bid to reduce reliance on crude sales and tap into non-oil sources of revenue, authorities are planning to raise the VAT to 7.5% from 5.0%, currently among the lowest rates in the world. Furthermore, in his speech President Buhari said he would reintroduce a bill to lawmakers that reviews the fiscal terms for deep offshore oil fields, which has the potential of adding an extra USD 500 million to government coffers. That said, the higher revenue projections come despite the government undershooting its revenue targets in recent years.

On the spending side, recurrent expenditure received the largest chunk of the budget, amounting to NGN 4.9 trillion, in part reflecting the implementation of the minimum wage hike which to a large extent affects civil servants. However, capital expenditure, which is key for enhancing productivity and long-term growth, was allocated a lower amount compared to the 2019 budget and amounted to NGN 2.5 trillion, with housing, power and transportation receiving the greatest allotment. Lastly, NGN 2.5 trillion was set aside for debt repayment, with most of it channeled towards servicing domestic debt.

All in all, the slightly expansionary budget could spur economic activity, particularly by stimulating domestic demand. However, concerns linger over the government’s capacity to reach its revenue goals. Moreover, the assumptions on which the budget rests may be too optimistic, especially in light of a challenging external environment that has been marked by increased volatility in oil prices, elevated trade tensions and a weakening global economy, which could in turn stifle growth at home. Against this backdrop, FocusEconomics panelists project the economy will expand a more moderate 2.5% in 2020, which is down 0.1 percentage points from last month’s forecast, and 2.9% in 2021.

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