lAll revenue heads in huge decline —Budget OfficelSays measures are now in place for recoverylCurrent fiscal policy trajectory is unsustainable — Analysts
By Emeka Anaeto, Business Edior & Emma Ujah
The fiscal operations of the Federal Government in the first quarter of 2022, Q1’22, has yielded a massive deficit of N3.55 trillion as revenue fall far below budget estimates.
This is contained in the Q1’22 report of the Budget Office of the Federation, which stated that the figure represents a huge 128.5 per cent (about N2.0 trillion) rise beyond the projected deficit for the period.
The Office attributed the pressures on the FG’s finances to oil sector failures including subsidy costs as well as the on-going war between Russia and Ukraine.
In the 2022 Fiscal Framework, quarterly fiscal deficit is estimated at N1.55 trillion, which is expected to be financed through earnings from privatization proceeds as well as foreign and domestic borrowings.
However, the inflow and outflow of funds for the Federal Government resulted in a fiscal deficit far above the projection.
Only N950 billion was financed through domestic borrowing, mainly by way of Federal Government Bond. This resulted in a N2.6 trillion net deficit financing for the review period.
This, according to financial experts, indicates that the government’s deficit financing especially from the international debt market, may have run into troubled waters, while domestic borrowing escalates.
Also the rising domestic borrowing in the second quarter has escalated debt servicing to revenue ration at about 138 percent.
Analysts at Afrinvest West Africa, a Lagos based investment firm stated: The DMO (Debt Management Office) has turned to the domestic debt market to plug the gap in FG’s deficit financing. As a result, the share of external debt declined by 116 bases points to 38.8% in the second quarter of 2022 and 39.9% in the first quarter while the domestic debt’s share rose by an equal magnitude to 61.2% in Q2:2022 and 60.1% Q1:2022. The trend of rising domestic share is not expected to last beyond 2022 should the global tightening thrust cool off. That said, we expect the domestic share in the debt mix to steadily increase throughout Q3 and Q4: 2022.
‘‘Based on available data on debt service and retained FG revenue in Q1:2022, annualized debt service-to-revenue for 2022 sits at 138.0% against 96.0% in full year 2021 which translates to the deployment of all FG’s revenue and part use of new debt to offset interest payment on borrowings.
‘‘In our view, the current trajectory of fiscal policy is unsustainable, especially with the inefficient structure of the budget which prioritizes recurrent spending over capital expenditure due to the high debt burden and cost of governance.
‘‘In addition, the poor revenue generating capacity of the FG has encouraged the use of debt stock (up 2.5x since 2016) to plug fiscal deficits.
‘‘We project debt-to-GDP ratio to reach 26.0% by end of 2022 as FG draws more debt to compensate for floundering revenue (-22.5% year-on-year on an annualized basis) while expected Naira depreciation and rising interest rate environment should add to the upward pressure in debt stock.
‘‘To avert worsening the fiscal crisis, we recommend the implementation of prudent fiscal frameworks to curb wasteful expenditure while the FG stems the tide of large-scale oil theft and dwindling production due to poor oil infrastructure, vandalism, and subdued oil investment inflows’’.
The Budget Office lamented that all revenue heads recorded significant shortfalls from what was budgeted just as all expenditure heads overshot the budgeted estimates.
Giving some breakdown in the inflow and outflow of funds during the period, the Budget Office stated: ‘‘Based on the amended Budget Framework, the sum of N8.24 trillion was projected to fund the Federal Budget in 2022, indicating a quarterly share of N2.1 trillion. A total of N969.54 billion was received in the first quarter of 2022. This amount was N1.1 trillion (52.94 percent) lower than the quarterly projection of N2.1 trillion. It was also N121.88 billion (11.17 percent) below the N1.1 trillion recorded in the first quarter of 2021.
‘‘The sum of N167.64 billion that was received from oil sources in the first quarter of 2022 was lower than the quarterly estimate of N547.59 billion by N379.95 billion (69.39 percent). Similarly, FGN’s share of Dividend of N46.85 billion, Company Income Tax of N159.86 billion, Value Added Tax of N74.35 billion, Customs of N168.16 billion, Independent Revenue of N235.18 billion, Draw Down from Special Levies Accounts of N32.14 billion and Education Tax of N10.64 billion were all below their corresponding quarterly estimates of N48.93 billion, N227.33 billion, N79.17 billion, N208.53 billion, N654.05 billion, N75.0 billion and N76.50 billion by N2.08 billion (4.25 percent), N67.48 billion (29.68 percent), N4.82 billion (6.08 percent), N40.37 billion (19.36 percent), N418.87 billion (64.04 percent), N42.86 billion (57.15 percent) and N65.86 billion (86.09 percent) respectively.
‘‘On the other hand, Signature Bonus/Renewals of N70.21 billion was equal to its quarterly estimate while no inflow was recorded under FGN’s share of Solid Minerals & Mining, Federation Account Levies, Electronic money Transfer Levy, Oil Price Royalty, Domestic Recoveries and Grants & Donor Funding in the quarter under review.
‘‘The net distributable revenue of the Federation stood at N1.21 trillion in the first quarter of 2022. This signified a shortfall of N1.5 trillion (55.05 percent) from the N2.7 trillion projected for the period.
‘‘This was driven largely by the significant reduction in the inflow into the Federation Account from the oil sector.
‘‘The non-oil revenue accruing to the Federation account also decreased by N316.87 billion (31.90 percent) adding to the oil sector shortfall of N785.14 billion (69.54 percent) during the review period. Oil Revenue, VAT, CIT, and Customs & Excise Duties contributed 28 percent, 16 percent, 27 percent and 29 percent respectively’’.
The Budget Office particularly lamented the weak revenue performances which show major decreases across almost all unites during the period.
It stated: ‘‘Revenue generation remains the major fiscal constraint of the Federal Government. The systemic resource mobilization problem has been compounded by recent economic recessions’’.
However, according to the report measures are now in place to correct the defects that resulted in the adverse fiscal balances during the period.
It stated: ‘‘Several measures are being implemented under the administration’s Strategic Revenue Growth Initiatives to improve government revenue while efforts to entrench fiscal prudence is being prioritized with emphasis on achieving value for money.
‘‘The target over the medium term is to grow the Revenue-to-GDP ratio from about 7.0 percent currently to 15 percent by 2025. At that level of revenues, the Debt Service-to-Revenue ratio will cease to be worrying.
‘‘Put simply, we do not have a debt sustainability problem, but a revenue challenge which we are determined to tackle to ensure our debts remain sustainable’’.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, in her comment of the BIR said, “Overall, the growth of the nation’s economy in the first quarter of 2022 represents an improvement in economic performance and a gradual economic stability.
“Considering the various stimulus economic packages being implemented by the Federal Government, the economy is expected to further improve in subsequent quarters of 2022 despite deleterious effects of higher food and crude oil prices owing to the recent Russia-Ukraine conflict and numerous sanctions against Russia.”
According to the Minister of Finance, The 2022 Budget titled “Budget of Economic Growth and Sustainability”. It was prepared taking into consideration the key parameters and policies/strategies contained in the 2022–2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP).
“Allocations to Ministries, Departments and Agencies (MDAs) were also guided by the core objectives of the National Development Plan (NDP) 2021 – 2025.”
While commending Mr. Ban Akabueze and his team at the BOF for preparing the report, she urged the public to sustain their active interest in tracking the utilization of public resources and the attainment of government’s goals and objectives in the budget implementation.