Thoughts on MTEF. 3 of Many: What happens if revenue projections fail?

As we already know the MTEF is based on some serious spending plans, above N6tn each year for the next 3 years. This spending is in part going to be backed by the issuing of new debt, N2.2tn in 2016, and about N1.5tn in 2017 and 2018. The rest, according to the framework is supposed to be backed by increased revenues. The MTEF sets very very optimistic revenue projections.


First the crude oil revenue. The MTEF sets an oil benchmark of $38 per barrel and an output target of 2.2m barrels per day. With Brent crude currently trading at $36.8 and with OPEC releasing statements of falling demand until 2020 and an oil glut, it is not too difficult to imagine a $38 benchmark being a bit optimistic. The bigger worry though, is if oil falls below $30 for a significant period of time. Nigeria’s on-shore oil industry is known for having very high production costs, with a rumored break-even price of around $30 a barrel for many fields. If you add the almost non-existent new investment in the oil industry, then it is also unlikely that serious new projects can come on-stream in the next 48 months. So if oil falls below $30 we might have to revisit the 2.2m barrels per day target. In short there are significant price and output risks over the next year.


The MTEF also has very optimistic VAT and CIT revenue projections. CIT is projected to grow by over 50% in 2016 (based on estimated actual CIT receipts by the end of the year). It is then projected to grow by about 9% in 2017 and 9% in 2018. VAT is projected to grow by 80% in 2016, based on estimated actual 2015 VAT receipts. Projections for 2017 and 2018 are 20% and 3% respectively. Customs revenue is expected to grow at 40%, 2% and 3% in 2016, 2017 and 2018 respectively. I’m not going to talk about the N1.5tn “independent revenue” because I am not sure what that is. As you can see, the projections in most cases are very very optimistic, especially the 2016 projections of about a 23% increase in revenue. Put this in the context of an economy that is currently growing at a LVG paced 3%, choked by FX problems and with seemingly unending scarcity issues.


I am not going to predict if the FGs revenue targets will succeed or fail. I hear Fowler (the new FIRS boss) is very well respected and I wish him good luck. Growth in the economy could pick up. The FX controls could end. The fuel supply problems could end. The FG could hit all its revenue targets and more. Hell the oil price could shoot up to $50. But what if they don’t?


Keep in mind we already have a N2.2tn deficit projection which will be the largest we have ever had in naira terms. We already plan to issue debt to pay for recurrent expenditure in 2016. The projected deficit is larger than the proposed capital expenditure. So what happens if the revenue targets fail?


I know everybody plans to succeed but a smart government also plans for failure. What gets cut if the FG doesn’t hit its revenue target? Recall one of the reasons why we had such miniscule capital expenditure in 2015 was because the revenue projections failed. Are we going to end up in the not-so-unlikely scenario where we run the largest deficit in Nigerian history to pay salaries, subsidies and for social programs? These are questions the FG needs to think about.


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