By Nkiruka Nnorom
Analysts at Meristem Securities, a Lagos-based investment banking firm, have said that the decision by the Federal Government to cut capital expenditure in the 2020 budget calls for reform and fiscal discipline in the system.
The firm said in its report, tagged: “Outlook 2020: Finding Alpha Amidst the Haze”, that the action also reinforced the need to cut the cost of governance in the country, even as it said that the likelihood of the Federal Government attaining the N8.16 trillion revenue targets is slim.
“The 2020 budget expenditure is pegged at N10.59 trillion, indicating a 5.16 per cent increase from the 2019 budget size of N10.07 trillion. Despite the increase in the budget size, capital expenditure, unfortunately, went under the knife, taking an 18.72 per cent cut from N2.93 trillion in 2019 to N2.47 trillion in 2020. Capital expenditure, CAPEX, was pressured by the rising cost of debt financing and provisions for the upward review of the minimum wage.
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“The lower capital spending underscores the need for reforms and fiscal discipline; the need to cut the cost of governance cannot be more obvious, in the face of rising debt service charges, which accounts for more than half of revenue,” the company said in the Report.
On the projected revenue target, it said: “Tagged as the Budget of Sustaining Growth and Job Creation, the 2020 budget was presented in October 2019, breaking a 10-year record of delayed budgets, a demonstration of the FG’s resolve to normalize the budget cycle.
The key assumptions of the 2020 budget include an average crude oil production of 2.18 million barrels per day, an oil price of USD57 per barrel, an exchange rate of N305 per dollar, an inflation rate of 10.81 per cent, and a Gross Domestic Product (GDP) growth rate of 2.93 per cent.
“In our opinion, the assumptions on economic growth and crude oil production are overly optimistic, given the current economic realities and the oil production caps by Organization of the Petroleum Exporting Countries (OPEC), which pegs the crude output of the country at 1.75 million barrels per day (mbpd). This already indicates that the chance of attaining the projected 2020 revenue of N8.16 trillion is low, which itself is 7.44 per cent higher than the 2019 revenue projection of N7.59 trillion.”
Recall that the oil revenue is projected at N2.46 trillion or 34.70 per cent of total revenue, non-oil revenue of N1.81trillion, represents 21.55 per cent of total revenue, while proceeds from independent sources, exchange rate differentials and sundry income are expected to make up N3.75 trillion.
The budget shortfall of N2.43 trillion is expected to be financed primarily by borrowings, representing 33 per cent of the total revenue and 3.78 per cent of the GDP versus the 4.46 per cent Economic Recovery Growth Plan (ERGP) revenue projection for 2020.