…The proposed 2025 budget has the hallmarks of the Federal Government of Nigeria’s
reform agenda.
…The consumer is now paying more for fuel, but the government will save money in fuel subsidies next year.
…Yet the government will spend so much more in 2025 that tax revenues will also have to rise, something that will hit employees and businesses.
…This is a painful process for consumers, but it will be justified if inflation falls and the investment climate improves.
TUE DEC 17 2024-theGBJournal| What are we to make of the proposed 2025 budget? It is 37% larger than 2024’s budget, and this is a bigger increase than inflation (34.60% y/y).
Revenues will not catch up, so the Ministry of Finance plans a 42% increase in the deficit, meaning that the government will increase it dependence on borrowing. Costs will be borne by consumers and companies directly, in the form of elevated taxes.
And they will also bear the cost indirectly by paying more for fuel (from October 2024 onwards) in place of receiving fuel subsidies. The price of reforming the economy is a high one.
The first thing we notice about 2025’s expenditure plan is the near-doubling of the Debt Service item (+91% y/y).
This makes perfect sense because market interest rates have more than doubled this year and, we believe, the CBN will keep them high for most of next year as part of its fight against inflation.
More debt will be required next year, too. 1-year T-bill rates, which we use as a guide to the government’s cost of debt in Naira, began 2024 at 11.8% and are 26.92% now.
The next thing we notice is the 26% increase in Recurrent (non-debt) expenditure, an increase lowerthan the rate of inflation. Certain regional funds will receive much more than this in the form of the Statutory Transfer.
Capital Expenditure is to be kept essentially flat, which means a significant reduction in inflation-adjusted terms. Overall, the budget is to rise by 37% in 2025, more than the rate of inflation.
Revenues are not set to rise as fast, with a 35% increase planned. The most obvious change is the Share of Oil Revenue which is planned to rise by 140%. Of course, if the government is not paying fuel subsidies, then net revenues from oil will rise considerably.
The consumer pays for inflation twice, in our opinion: once as fuel prices rise; and again as taxes rise to contribute towards the rising cost of servicing debt.
The government’s annual deficit is planned to rise by 42% year-on-year, from N9.2 trillion to N13.1 trillion.
This will require extra borrowing.
While this will contribute to the rise in debt service costs, the good news is that foreign investors are showing a renewed appetite for Nigerian debt, with over US$2.0bn in foreign portfolio investment (mainly purchases of OMO bills and T-bills) recorded during October and November, and US$2.2bn in Eurobonds raised a fortnight ago.
It is story of a country taking the pain of the reform process but attracting investment as it does so. By Coronation Research
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