FG Borrowing Falls Short Of Target, Raising New Concerns For The 2023 Budget

Following warnings from the previous debt auction, which was hampered by poor participation and resulted in the federal government raising only a portion of what it went to the market to raise to fix its deficit, there are new danger flags for the draft 2023 appropriation bill.

According to a study by experts at FBNQuest, the Debt Management Office, DMO monthly bond auction that was held on Monday, October 17, 2022 fell significantly short of the agency’s aim. Emerging information demonstrating the federal government’s significant income collection shortfall this year makes the situation worse.

The government, which now mostly depends on borrowing for its survival, had hoped to raise N225 billion, evenly divided across three maturities (April 2029, April 2032, and April 2037 maturities), but only managed to raise N108 billion, the lowest sum this year. The weak performance suggests a sales-to-offer ratio of just 0.48x as opposed to the 1.02x at its previous auction in September, according to analysts at FBNQuest.

“The low level of demand at the auction was mostly attributable to the limited level of financial system liquidity in recent weeks after the central bank’s monetary tightening measures,” claims an investment note from FBNQuest. The CBN has restricted financial institutions that access its windows from participating in bond and other financial transactions, which is a secondary and related factor.

The marginal rates for the papers offered at the auction were, respectively, 14.5%, 15.0%, and 16.0% for the April’29, April’32, and April’37. The longer tenors, the Apr ’32s and Apr ’37, had marginal rates that were about 115bps and 150bps higher than in the previous auction.

The DMO has so far this year raised around NGN2.2 trillion through various auctions. When non-competitive allotments are taken into account, the gross amount is around NGN2.5 trillion.

The agency’s net issue of Treasury Bills is anticipated to be around NGN660 billion this year, therefore the DMO would only need about NGN300 billion to reach its domestic funding objective of NGN3.5 trillion.

In the future, the experts predict that yields will remain high due to the market’s limited liquidity and that the DMO will have its work cut out for it as additional difficult market headwinds are expected.

The President’s proposed budget for 2023 predicts a fiscal deficit of NGN8.8 trillion, which will be paid for by borrowing NGN7.0 trillion from local sources and NGN1.8 trillion from foreign sources, respectively.

Additionally, there are rising indications that federally collected revenues are underperforming, which seems to have become worse in H1 ’22. The most recent Budget implementation report for Q2 of 22 once again emphasizes how poorly federally collected revenue performed in compared to expectations set forth in the budget. According to the study, gross federal revenue for the first half of 2012 totaled NGN5.4 trillion, or around 32% less than the pro-rata budget projected.

The main cause of the underperformance was the oil sector, which generated NGN2.2 trillion in total, or around -54% less than the budgeted NGN4.7 trillion for H1 ’22. The non-oil revenue, however, was roughly in line (-3%) with the pro rata budget target at NGN3.2 trillion.

The relationship between poor oil production and low oil revenue performance has received a lot of media attention. Nigeria’s oil output averaged around 1.2 million barrels per day (mbpd) in H1 ’22, which is significantly less than the 1.6mbpd estimated in the 2022 budget, according to figures from the CBN.

Corporate tax income inflow of about NGN1.2 trillion exceeded the half-year budget objective by about 19% in terms of non-oil revenue. The increase in revenue is the result of increased tax collection efficiency and a wider tax base. Value-added tax (VAT) revenue of NGN1.2 trillion fell only (-3%) short of the budget projection.

However, total revenue from other sources, such as special taxes, charges on electronic money transfers, and other income from the federation account, fell short by 22%. The net distributable revenue that was left over for the three tiers of government to share after deductions like joint venture cash calls and other collection charges was only NGN3.3trn. This results in a large NGN2.1trn shortfall when compared to the budget’s half-year forecast.

Notably, net oil revenue was a pitifully meager NGN242 billion (after all deductions). This amount and the NGN2.3 trillion budgeted for it are vastly different. NGN1.7 trillion, or a considerable portion of gross oil earnings, is deducted for federally sponsored upstream projects.

Net non-oil revenue was around NGN 3.0 trillion, including NGN 1.1 trillion in VAT pool revenue. Gross government revenue of NGN5.4 trillion, annualized, represents a revenue-to-GDP ratio of 6.2% in 2021. According to World Bank data, this is low when compared to counterparts like South Africa, Kenya, and Ghana, where the ratios are 28.1%, 16.8%, and 13.8%, respectively.

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