IMF Sees Nigeria Budget Gap Wider Than Government's Outlook

(Bloomberg) -- Nigeria's budget gap will probably be larger than the government estimates this year because the West African nation's revenue from taxes and state companies will be lower than forecast, the International Monetary Fund said.

The federal government's budget deficit may reach 3.7 percent of gross domestic product this year, higher than its projected gap of 2.8 percent, the fund said in a so-called article IV report Wednesday that followed meetings with Nigerian officials. The gap was 2.8 percent last year, preliminary estimates show. It was 4.7 percent on a consolidated basis.

“The larger deficit would likely have to be financed domestically, further raising yields and crowding out private-sector credit,” the IMF said.

Nigeria has proposed a record 7.3 trillion-naira ($23.1 billion) budget for this year to boost infrastructure investment and help its economy recover from a contraction of 1.5 percent in 2016, the first such slump since 1991. The economy of Africa's most populous nation was weighed down by a drop in the price and output of oil, its biggest export, which led to a shortage of dollars.

Revenue Target

The government has a revenue target of 2 trillion naira from oil and 1.37 trillion naira from non-crude sources including tax collections, according to information from the Ministry of Budget and National Planning.

While the state is undertaking tax reforms to increase revenue collected, the impact of those measures will be gradual, Gene Leon, the IMF's mission chief in Nigeria, said on a call with reporters Wednesday.

Although the naira has fallen 36 percent against the dollar since the central bank removed a peg in June, investors say central bank Governor Godwin Emefiele is preventing it from dropping further through trading and import restrictions and regular sales of foreign exchange.

The currency is as much as 20 percent overvalued, Leon said. A depreciation of that size would take it to about 390 per dollar, almost matching the black-market rate of 398.

The average yield on the government's naira-denominated debt has risen 424 basis points over the past year to 16 percent, the highest level among 31 major emerging markets tracked by Bloomberg after Egypt.

Nigeria will probably raise debt from more Eurobond sales this year, the IMF said. These, together with concessional financing from the World Bank and the African Development Bank, will make up 60 percent of external debt. The government will also issue 10-year promissory notes equivalent to 2.2 percent of GDP to settle domestic arrears, it said.

This debt is in addition to a $500 million Eurobond sold last month as part of the 2016 budget and $1 billion raised in February.

Nigeria's cabinet on Wednesday approved a 21-year, $1.3 billion loan with the World Bank, African Development Bank and other institutions at a rate of 2 percent, Finance Minister Kemi Adeosun told reporters in the capital, Abuja. The money will be used for the new Development Bank of Nigeria that will lend small businesses long-term funding.

Previously, the government said it expects budget-support loans of at least $1 billion from the World Bank, and a final, $400 million portion of a $1 billion credit facility from the African Development Bank.

--With assistance from Paul Wallace

To contact the reporter on this story: David Malingha Doya in Abuja at dmalingha@bloomberg.net.

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Ana Monteiro, Pauline Bax