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NIGERIA OCTOBER ECONOMIC REPORT - Government finances take center stage

Government finances take center stage                                                                              

October was a relatively muted month for the Nigerian economy as 2019 election season came into focus. Purchasing Managers’ Index data from the Central Bank of Nigeria suggested that the economy expanded at a faster pace in October, with manufacturing and non-manufacturing PMI rising from 56.2 and 56.5 in September to 56.8 and 57.0 in October. However, other variables pointed to underlying economic weaknesses. Annual inflation inched up as base effects weakened, and yields climbed in the fixed income market. In addition, external reserves suffered their largest monthly decline ($2 billion) this year as pressure on the naira intensified.                                                                            

The Budget Office released the 2019-2021 Medium Term Expenditure Framework (MTEF), the government’s medium-term fiscal strategy paper. The disclosed forecasts and plans paint a gloomier picture of the economy compared to the 2017-2020 Economic Recovery & Growth Plan (ERGP) released 18 months ago. The Federal Government now expects the Nigerian economy to grow by 3.0% y/y and 3.6% y/y in 2019 and 2020, compared to 4.5% and 7.0% in the ERGP. This reflects tepid economic growth in recent times as the Nigerian economy grew by just 1.5% y/y in Q2’18, a long way from the 2018 Budget forecast of 3.5% y/y. The MTEF also includes the government’s fiscal plans, some of which we find perplexing. Budget revenues are projected to grow by only 9% between 2018 and 2021, with oil still accounting for a disproportionate share (47% on average) while remaining volatile. Non-oil revenues are also expected to grow but not quickly enough; in 2021, non-oil revenues would only cover 38% of projected spending. Meanwhile, government spending is projected to remain relatively unrestrained. Including spending on Government Owned Enterprises (GEOs), the 2019 Budget will be ₦10.2 trillion (2018: ₦9.1 trillion), with most of the increase coming from recurrent expenditure as capital spending (capex) will actually decline from ₦3.1 trillion in 2018 to ₦2.8 trillion in 2019.