FG May Exceed Revenue Target Of 7.89 Trillion Won In 2021 Due To Rising Oil Prices

FG May Exceed Revenue Target Of 7.89 Trillion Won In 2021 Due To Rising Oil Prices

There are indications that the federal government may be on track to meet and possibly exceed the 2021 oil revenue target if the recent rise in crude oil prices continues into the new year.

Investment analysts noted that in addition to meeting its oil revenue target, Nigeria also has the potential to cut its projected budget deficit to N5.2 trillion. And public debt to finance the budget if growth continues. world oil prices remain unchanged until the end of 2021.

Last week, Brent crude prices topped $ 50 a barrel (20% above the budget target) amid optimism that global gross domestic product (GDP) is recovering from the Covid-19 pandemic. after the vaccine was discovered and hopes for its distribution, and also reflects the ability of the Organization of the Petroleum Exporting Countries (OPEC) and Russia (OPEC +) to impose a certain level of collective production cuts.

Meanwhile, the federal government estimates that oil revenues will be at least 25.5% of its 2021 revenue target after the projected oil revenues are set at N2.01 trillion.

In line with forecasts, the federal government has also set the benchmark oil price at $ 40 per barrel, while the daily oil production is estimated at 1.86 million barrels per day.

Vanguard Public Finance analysis shows that oil revenues for the third quarter ended September 30, 2020 (Q3 2020) were 953.09 billion Argentine pesos, 1.06 trillion. Argentine pesos or 52% and 63.9% lower. to the revenue targets for 2020 and 2021, respectively.

Despite the deficit, investment analysts said the FY could still meet the target, but said that meeting the target would also be contingent on maintaining oil production targets throughout the year.

Further breakdowns showed that third-quarter 2020 oil revenues were 25 percent and 28.9 percent lower than second-quarter 2019 and third-quarter revenues, respectively, but represented an increase of 7.6 percent. above the revised target of $ 886.16 billion for the period.

Expert opinion

Financial experts who spoke to Vanguard Public Finance explained that a global oil price above $ 50 would allow the country to meet its oil revenue target and lead to better dollar flows into the country.

Victor Chiazor, Head of Research, FSL Securities, said: “The rise in crude oil prices remains a positive factor for the Nigeria economy. With a base oil price of $ 40 per barrel in 2021, a global price above $ 50 a barrel will effectively allow Nigeria to reach its oil revenue budget when oil production declines. suffered during the period.

“The higher oil price in FY2021 will also help cut the budget deficit and reduce the public debt needed to fund the 2021 budget.”

However, he said the government should focus on revenue streams to cushion the impact of any unpredictable oil market developments that could negatively impact revenue targets.

He said: “However, we must remain wary of oil prices, which remain above the $ 40 budget target for the full fiscal 2021, as strong headwinds persist that could drive oil prices down. in the short term, and therefore we need to focus on other sources of revenue for the federal government besides crude oil. “

Confirming this, Ayodeji, Ebo, Senior Economist / Head of Research and Strategy, Greenwich Merchant Bank, said: “The upward trend in crude oil prices is positive for Nigeria given its high dependence on oil revenues and declines. history of non-oil revenues. If the price of oil is above the budget target, the government will be able to secure its projected oil revenues.

“However, the opposite risk is OPEC + production cuts, which are significantly lower than the projected budget for 2021. Remember that the excess of the oil price above the benchmark is stored in the Surplus Crude Oil Account, which saves for a rainy day. To avoid the persistent vulnerability of revenues from crude oil prices, more efforts are needed to improve the target for non-oil revenues. ”

According to them, analysts at Coronation Merchant Bank said: “Generally, Nigeria’s public finances work well when oil is consistently trading above $ 50 a barrel. Oil provides (in a good year) over 60 percent of the federal government’s revenues and provides the country with over 80 percent of its export revenues.

Since most of this proceeds are deposited by the Nigeria National Petroleum Corporation (NNPC) at the Central Bank of Nigeria (CBN), it is an important source of foreign exchange (FX). For example, a long period of low oil prices from late 2014 to mid-2017 (the average price of Brent crude oil was $ 45.10 per barrel in 2015 and $ 56.09 per barrel in 2017) foreign exchange reserves CBN.

This led to two devaluations of the interbank exchange rate: from N199 per USD 1 to 316 N per USD 1 in mid-2016 and from 316 N per USD 1 to 357 N per USD 1 in August 2017.

“Thus, the recent rise in Brent prices is a good moment for CBN. This year, CBN escaped the fate that befell it in 2016 and the first half of 2017, when the level of reserves is less than $ 30.00 billion (current reporting level is $ 34.97 billion). The cost of this hold was a sharp decline in the supply of CBN USD to the NAFEX market since March. If the price of oil surpasses $ 50 a barrel in 2021, it will be tempting to think that the country will return to normal.

Normal in this case means a healthy inflow of US dollars from oil, which supports government revenues and allows CBN to be the supplier of last resort for the foreign exchange markets. the prospect of improving the inflow of US dollars “.

Source: – Vanguard

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