The devaluation of the naira occasioned by the Central Bank of Nigeria (CBN)’s launch of a liberalised forex policy on June 20 will lead to a narrowing of the N2.2trillion deficit projected for this year’s budget, financial analysts, have said.
In a note obtained by New Telegraph, experts at HSBC Global Research noted that although the budget deficit was likely to remain large in the short term due to disruptions in the oil and gas industry, it (deficit) would eventually narrow in the second half of the year, as the devaluation of the naira will lead to an increase in the revenues shared by the three tiers of government.
The analysts stated: “Federally collected revenue dropped sharply as both oil and non-oil revenues fell in the first quarter of the year, taking total income down to N1.27trillion, just half of what was estimated in the budget. Spending at a federal level, meanwhile, was slightly above budget expectations, as capital spending gained.
Together, these dynamics pushed the federal government deficit higher, rising to N725billion (USD3.6billion) in Q1, equal to 3.2 per cent of Gross Domestic Product (GDP).
“With severe production disruptions in Q2 likely to offset much of the recovery in oil prices during the quarter, we would expect the budget deficit to remain relatively large in the near term, before narrowing in the second half of 2016, as the currency devaluation boosts the naira value of oil revenues.”
According to the analysts, budget deficit will be equal to 3.0 per cent of GDP in 2016. They, however, stated that while a weaker naira: “Provides some upside for fiscal dynamics, we continue to believe that sustainable public finances in Nigeria require deep-seated structural fiscal reforms that boost the non-oil tax take and diversify the tax base.”
The financial experts pointed out that non-oil revenues were less than 3.5 per cent of GDP last year, despite the non-oil economy, accounting for about 90 per cent of the country’s GDP.
In an earlier report, they had highlighted the fact that what Nigeria is getting as revenue from non-oil tax was much smaller compared with other oil producers and that the country’s Value Added Tax (VAT) rate – at five per cent – is substantially lower than peer economies in the West Africa sub-region.
Also, in a note issued last weekend, analysts at FBN Quest pointed out that although the 2016 budget projects external financing of N900 billion to cover the deficit, the devaluation of the naira had allowed the Minister of Finance, Mrs. Kemi Adeosun, to push World Bank component of the funding into 2017.
The analysts stated: “The minister noted that the 2016 budget projects external financing of N900 billion to cover the deficit. The devaluation in June gave the ministry some room for manoeuvre since the fx equivalent is now rather less than the original $4.5billion. The World Bank element of the financing is therefore being pushed back into 2017