The 2023 budget estimate of N20.51 trillion presented to a joint session of the National Assembly by President Muhammadu Buhari on Friday, October 7, 2022 showcased a spending plan that would be confronted with revenue challenges. It also puts the private sector in a tight corner as the sector is bound to spend more in the coming year than it would receive, because it is going to bear the brunt of the aggressive tax drive that the budget has created.
The provisional budget is the largest in the history of Nigeria’s fiscal policy administration. It is massively expansionary. Compared with the 2016 budget of N6.06 trillion first formulated by the Buhari administration in 2016, the 2023 budget estimate is 238.5 percent higher.
An expansionary budget, theoretically, is expected to stimulate growth by way of creating jobs, increasing productivity, reducing poverty and expanding infrastructure to boost productive activities. However, increasing budgetary allocation over the years has not positively impacted the economy as expected. Instead, the key economic indices have negative outcomes.
The total proposed size of the 2023 budget is N20.51 trillion, as against the current year’s budget of N17.3 trillion, reflecting an increase of 18.6 percent. The sum of N6.31 trillion was budgeted for debt servicing as against N3.97 trillion in the current budget which shows an increase of 59 percent. The budget for personnel cost also witnessed an increase from N4.16 trillion in the current year to N4.9 trillion in 2023, showing an expansionary spending plan.
Budget deficit rose to N10.78 trillion from N7.15 trillion in the current year, an increase of 50.8 percent. This represents 4.78 percent of estimated GDP, above the 3 percent threshold set by the Fiscal Responsibility Act 2007. According to Buhari, the government needed to exceed this threshold considering the need to continue to tackle the existential security challenges facing the country.
The President revealed that government plans to finance the deficit mainly by new borrowings totalling 8.80 trillion Naira, 206.18 billion Naira from Privatization Proceeds and 1.77 trillion Naira drawdowns on bilateral/multilateral loans secured for specific development projects/programmes.
“Over time, we have resorted to borrowing to finance our fiscal gaps. We have been using loans to finance critical development projects and programmes aimed at further improving our economic environment and enhancing the delivery of public services to our people”, the President said. But revenue is challenged because of the headwinds that have dogged the economy in recent years.
The President revealed that as at the end of July 2022, the fiscal operations of the Federal Government resulted in an estimated budget deficit of N4.63 trillion. This represents 63 percent of the estimated deficit for the full year. This is largely attributable to revenue shortfalls and higher debt service obligations resulting from rising debt levels and interest rates.
The deficit was mainly financed through domestic borrowing amounting to N4.12 trillion. Hence, total public debt stock increased from N39.6 trillion as at the end of December 2021 to N42.8 trillion as at the end of June, 2022.
The budget expects to ensure that the private sector is adequately taxed to raise non-oil income. But key private sector operators have been battling to remain in business. For instance, investigation by THEWILL showed that Nigeria’s major Fast-Moving Consumer Goods (FMCG) firms were severely impacted by a tough operating environment in the first quarter of the year (Q1 2022). Spiral inflation, decline in consumer demand, wrong-headed policies, among the others, combined to create a regime of high operating costs for the companies surveyed by this newspaper.
An analysis of the Q1 2022 interim reports revealed that the companies struggled to lift margins. Their profit and revenue haul showed an average 50 percent growth year-on-year, while the key six cost/expenses indices revealed an average 92 percent increase. The selected key cost areas include Tax Expenses, Cost of Sales, Administrative Cost, Sales/Marketing Distribution, Raw Materials/Inventory and Employee Expenses/Entitlements.
Data from the firms’ interim reports posted on their websites showed a significant increase in their operating costs which could lead to downscaling in the firms’ operations, or outright downsizing to remain in business. Stakeholders and industry experts believe that the firms must take drastic measures to avoid sinking in the miry clay of high operating expenses as inflation rages.
The six quoted major FMCG firms surveyed include Nigerian Breweries Plc, Unilever Nigeria Plc, Nestle Nigeria Plc, Guinness Nigeria Plc, Cadbury Nigeria Plc and Dangote Sugar Refinery Plc. They have a combined market capitalisation of N2.3 trillion and constitute over 60 percent of total market capitalisation of the Consumer Goods Sector amounting to N3.36 trillion as of Friday May 13, 2022.
The combined revenue of the six firms for Q1 2022 was N462.2 billion as against N328.4 billion reflecting a 40.8 percent increase, while profit after tax (PAT) rose by 60.5 percent to N50.3 billion year-on-year against N31.4 billion in the corresponding period. On the average, the two income-yielding windows, combined, grew by 50 percent in the first quarter of 2022.
Nigerian Breweries, Nestle and Dangote Sugar recorded the highest revenue haul of N137.8 billion, N110.3 billion and N94.5 billion respectively during the period; while Nestle, Nigerian Breweries and Dangote Sugar posted the highest PAT of N17.9 billion, N13.7 billion and N8.9 billion respectively.
The highest expenses window recorded by the six surveyed firms was in cost of sales (COS) which jumped from N216.3 billion in Q1 2021 to N269.9 billion in Q1 2022, representing a 24.8 percent increase. The COS is the accumulated total of all costs used to create a product or service which has been sold. It represents the direct costs related to the manufacturing of goods and services that are sold. Nigerian Breweries, Dangote Sugar and Nestle posted the highest COS of N75.4 billion, N75 billion and N67 billion respectively.
The companies’ raw/packaging materials inventories showed a total of N161.4 billion during the three months of the year, a 20 percent rise from N134.7 billion spent in the corresponding period in 2021. Nigerian Breweries report showed N54.7 billion worth of raw/packaging materials inventory during the period. Others are Dangote Sugar and Nestle with N48.2 billion and N32.3 billion respectively.
Employee expenses/entitlements during the period grew by 23 percent to N63.6 billion from N51.8 billion posted in Q1 2021, with Unilever recording the highest employee/personnel expenses/entitlements of N37.9 billion followed by Nigerian Breweries with N13.6 billion. The other higher number was that of Nestle which recorded N8.4 billion.
Sales/marketing/distribution expenses by the six firms totalled N57.9 billion against N40.5 billion in the corresponding period which reflects a 43.3 percent increase. Nigerian Breweries recorded N32.2 billion, followed by Nestle and Guinness with N14.3 billion and 8.3 billion respectively.
Tax expenses by the surveyed firms rose by 66.5 percent to N26 billion from N15.6 billion in Q1 2022 with Nestle, Nigerian Breweries and Dangote Sugar posting the highest: N9.9 billion, N7.2 billion and N4.8 billion respectively. Two companies recorded net losses on foreign exchange transactions: Nigerian Breweries N1.9 billion and Guinness N286 million.
With their profit/revenue windows showing an average 50 percent growth year-on-year, against an average 92 percent increase in the sampled six key cost/expenses indices, experts express concern over the ability of the sector to cope with the impending headwind. The immediate past director-general of Lagos Chamber of Commerce and Industry (LCCI) Dr Muda Yusuf expressed concern that some firms may shut down if their customers can no longer afford to buy their products.
“It calls for a lot of creativity and innovation on the part of the firms so that they can continue in business”, Yusuf said, explaining that the trend could create four scenarios.
He posited that the firms may find a means of breaking their products into smaller units that the consumer can buy or scale down their operations by reducing the size of their workers or reducing their working hours. Also, they may pass the extra cost to their consumers by increasing the price of their products.
“In a worst case scenario, the firms may shut down because it is better to be on zero than to be running negative”, Dr Yusuf, who is now the CEO, Centre for the Promotion of Private Enterprise (CPPE) told THEWILL by telephone.
The high operating cost will reverse the gains of recovery by the FMCG firms after the double tragedy of the 2020 COVID-19-induced recession and the 15-months land border closure which offered a ray of hope for the small firms engaged in the backward integration policy. Backward integration is a practice where companies are encouraged to cultivate their own raw materials by purchasing their suppliers or establishing farms to grow produce for their factories.
Commenting on the 2023 budget proposal, Professor of Capital Market, Uche Uwaleke, commended the efforts of the government to sustain the January to December budget cycle.
“It’s equally noteworthy that the Finance Bill will be considered alongside the 2023 Appropriation Bill as well as the fact that the budget of Government Owned Enterprises is integrated to promote transparency.
I think the oil price benchmark of $70 is conservative in line with budget principles. I also think the oil production benchmark of 1.69mbpd is realistic given the assurance by the President that the NNPC Limited is doing something to curb oil theft and pipeline vandalism. It is however worrisome that capital expenditure as a proportion of total spending has gone down well below the government target of 30% while debt service at over N6 trillion is in excess of the amount budgeted for capital expenditure.
“As the President rightly noted, the greatest threat to budget performance is the revenue side. This is why every effort must be made to improve revenue collection efficiency as well as monitor closely the MDAs and government independent revenues. I also think the fiscal deficit of over N10 trillion can be trimmed especially by pruning down the over N1 trillion overhead costs”, Uwaleke said.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
