The Medium Term Expenditure Framework: Notes Excerpts and Remarks

(Compilations, Notes and, Remarks By Chinedu Okoye)

Overview:

The Medium Term Expenditure Framework (MTEF), sets the tone for the Federal Government's fiscal policy direction over the next three years. The focus is on; Stability, Efficiency and Sustainable Growth. 

We find that though current reforms may have led to market-driven in the foreign exchange market, improving access, unifying exchange rates and curbed speculation, and the subsidy removal may have created fiscal space, these developments are not without consequences.

We make remarks on the MTEF highlighting significant points and in the paper from which we draw out suggestive conclusions.

Domestic Economic Environment:

Overall: Real GDP grew 2.8% in Q1 2024, this was lower than the previous quarter (Q4 2023), but higher than Q1 2023. This was driven mainly by the services sector which increased 4.32% and made up a higher percentage of GDP relative to Q1 2023.

Non-Oil Sector: The Non-Oil Sector grew 2.8% driven by Financial Institutions, Telecommunications, Crop Production, Food and Beverage and Tobacco. It was marginally lower in contribution to GDP given the rise in Oil sector for the Quarter relative t the previous year.

Oil Sector: The Oil Sector climbed 991 basis points to +5.7% from negative -4.21%. Oils contribution to GDP was also up by 17 bps to 6.38% from 6.21% (of GDP) in Q1 2023 and 4.21 in the preceding quarter (Q4 2023).

The growth in Overall output for the quarter outlined in the paper was driven by increased services sector and improvements in the Oil output. Thus Oil and services sectors were the major tailwinds behind the higher annual growth in Q1

Monetary Indicators:

Inflation saw a brief cooling in July and August, a disinflationary phase it seemed, but unsustainable as the major drivers; food, energy and FX rates continue to weigh on consumer prices.

Exchange rates have been on the down trend as the Naira has weakened 15% since July against the US Dollar, adding pressure to prices (most especially core CPI). 

(USD/NGN BDC Rates May - November)

This has led to the an expectation of a tighter monetary environment going forward, implying higher debt servicing costs in the coming year as yields adjust to the new Monetary Policy Rates. And possibly there could be one more, per Zero Equilibrium Economists recommendations.

Fiscal Indicators:

In Reviewing the 2024 budget implementation, it was noted that oil revenue fell 25.73% short of targets, but non oil revenues outperformed by 49.3%.

Total Non-Oil revenues came in at 160% performance, as of August 2024. However the jor contributor are the yet to be realized windfall taxes. 

Overall Revenue Performance as of August 2024:

• Oil Revenues: 75% Performance

• Non Oil Revenue: 160% 

○ CIT: 74.5%

○ VAT: 55.1%

○ Customs Rev: 95%

Expenditure Overturn:

Of the N35.06 trillion amended 2024 spending budget, the August pro-rate was N23.4 trillion. However the actual expenditure for August was N16.98 trillion, falling by almost a third (27.43%).

• Debt servicing: N7.4 trillion (43.58% of Actual August pro-rata spending)

• Personnel Costs: N3.73 trillion (21.96%).

• Capital Expenditure: N2.55 trillion actual spend from the N3.65 trillion budgeted ( 15%)

Non-Oil Revenue Assumption:

The new tax reforms are targeted more at broadening the revenue base in view of low revenue from crude. The paper implies that the tax reforms are more about improving collection than increasing tax rates. 

Given that overall revenue performance is owed primarily to taxes (some unrealized), the undershoot in oil revenues realized and the other non tax income put a drag on expenditure performance. Government revenue is dependent on Non-Oil taxes and debt in the medium term.

Macroeconomic Projections:

The table below shows that GDP is expected to growth 3.68% in 2025 and above 4% afterwards through 2025, when it is expected to grow at 5.5%> Inflation is expected to average 16.94%, exchange rates budgeted at N1400/$1and Oil prices $75/per barrel.

These are very optimistic projections that fall contrary to ours and the government risks repeating the same error where it missed 2024 exchange rate target by over a hundred percent as of today.

Because a lot depends on exchange rates, a more realistic and prudent rate would have been N1800/$1 making for a more accurate inflation projection. Inflation affects budgetary expenditure calculations as well, so under forecasting inflation is bound to weigh down future budgetary performances.

Zero Equilibrium Remarks:

The primary focus of the government remains to maximize and improve fiscal space, whilst fostering economic stability and sustainable growth.  The quickest way to do that is to increase Oil Revenues and taxes (by way of improving collections).

Leveraging (Oil and Non-Oil) Resources:

Without a significant increase in Total Revenues, the budget deficit will be wider than projected as debt servicing payments and personnel costs crowd out capital expenditures as seen in the notes on budget performance. 

The government would have to leverage its resources begining with oil, if deficit or debt dependency is to be curtailed, as interest rates are likely to stay elevated, carrying high risk premium.

Driving up FDI:

The federal government needs to make more intentional moves to foster non oil revenue growth by leveraging foreign capital and know-how in the exploration and development of other resources. 

We also recommend sales of Federal Assets at discount prices to entrepreneurs willing and able to take on such ventures, not to raise more revenue, but to promote investments into fixed assets, and decongest the budget of the overhead costs.