On 8 October President Muhammadu Buhari presented a record NGN 10.33 trillion budget at a joint session of the National Assembly (legislature).

Three key risk points:

1.The National Assembly is likely to pass the budget – albeit with some revisions – given the ruling All Progressives Congress (APC)’s parliamentary majority.

2. Increased borrowing to fund recurrent spending and the government’s infrastructure projects will continue to fuel sovereign risks.

3. A push to raise revenues through various new tax laws will drive elevated regulatory risks in the coming months, particularly in the telecommunications and oil and gas sectors.

Ambitious budget

The 2020 budget marks an increase on the NGN 8.83 trillion budget for 2019 and assumes that crude oil production will be maintained at 2.18m barrels per day at a price of USD 57 per barrel. The National Assembly is likely to pass the budget given the APC’s parliamentary majority in both the Senate (upper house) and House of Representatives (lower house), and the fact that Buhari allies lead both houses.

Buhari stated that about 20% of the budget would be allocated to capital expenditure, including the ambitious infrastructure projects he promised in his re-election campaign. His government has previously struggled to fund ambitious spending plans due to lower oil production than assumed and a failure to boost non-oil exports. For example, by June the government had met only 58% of its revenue target for this year.

Nonetheless, the 2020 budget increases revenue targets by roughly 7% to NGN 8.155 trillion, fuelled by an anticipated rise in non-oil revenue. Buhari said in his budget presentation that this reflects confidence in the government’s diversification strategies and improved tax collection. However, diversification strategies and efforts to improve tax collection are likely to have limited success. With limited plans to expand the tax net, the government is therefore likely to focus on extracting more taxes from large corporations and wealthy individuals.

Debt financing

The government is also likely to increase borrowing on foreign and domestic markets to fund the budget. In September, the World Bank said that the government had sought a USD 2.5bn loan to tackle problems in the country’s power sector. This comes after the Senateapproved the government’s plans to raise the share of loans it draws from foreign markets in October 2018. Increased indebtedness will mean that greater amounts of the annual budget will be used to service loan repayments. The proposed NGN 2.45 trillion to be spent servicing debts surpasses the government’s total budget of NGN 2.14 trillion allocated to capital expenditure.

The government is unlikely to default on its external debts in the short term, since it maintains about USD 40bn in foreign exchange reserves. However, its increasing appetite for foreign debt, coupled with an overreliance on oil that makes its currency vulnerable to fluctuations in the oil price, will continue to drive elevated sovereign risks in the coming years.

Taxing times

The draft budget included a proposal for an increase in value-added tax (VAT – sales tax) from 5% to 7.5%, as part of its increased revenue projections. However, the Senate has reportedly rejected this proposal, and is instead considering imposing a 9% tax on charges payable by consumers of electronic communications services. The proposed communications service tax (CST) would apply to voice calls, short message services (SMS), data services, and pay television subscriptions from telecommunications and internet services providers.

The Senate has also proposed a number of other revenue generation measures, including a 5% levy for banks and service providers involved in online payments, a levy of 0.005% on company profits to go towards a police trust fund, a tax on online advertising, the introduction of road tolls, and a rise in electricity tariffs. Although these proposals are awaiting endorsement from the legislature, they are unlikely to be enough to meet the targeted rise in the tax-to-GDP ratio from 6% to 12% in the coming years.

Two days after the budget was presented, Attorney-General Abubakar Malami said that the government was seeking USD 62bn in back taxes that it claims are owed by international oil companies operating in the country. The government is relying on a 1990s law that enables it to review the revenue it gains from production-sharing contracts if the oil price exceeds USD 20 per barrel. On 10 October Malami said that there was “no limit” to what the government could do to settle the dispute. Nonetheless, the move is unlikely to lead to widespread cancellations of existing production-sharing contracts or attempts to nationalise assets, given the administration’s desire to encourage investment.

Part of the Big Picture Series, taken from Seerist.

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