EFU 2019 BY DIR PLANNING SENSITIZATION.pptx

DIR PLANNIN

1. Key Considerations 2020 Federation Account Estimates and broader Budget Estimates Sensitizing relevant Kano State Local Government Officials involved in Budget processes on 2020-2022 EFU-FSP-BPS August,2019

2. Overview What is the EFU-FSP-BPS (Economic and Fiscal Update-Fiscal Strategy Paper-Budget Policy Statement)? A Document that is the first major output of the budget preparation process Key part of Top Down Budgeting Context - backwards looking (EFU) on recent economic performance (global, national, state) and fiscal (state) performance Macro-economic Assumptions Analysis and Estimation – forwards looking estimates for major Revenue and Expenditure aggregates Targets, Constraints and Risk Assessment – Fiscal Targets, Risks and Ratios Sector Ceilings and Budget Policy Thrust

3. Overview Cont -- Developing the EFU-FSP-BPS will encompass forecasting techniques and background contextual data and commentary Key Areas to be considered are: Macroeconomic Assumptions ( Real GDP Growth, Inflation, exchange rate ) Crude Oil Benchmarks and Mineral Ratio Any Fiscal Targets or Fiscal Policy Objectives Level of Growth of IGR and Recurrent Expenditures Capital Receipts Level and Sources of Borrowing (taking into Consideration the current debt position) Capital Expenditure

4. Overview Cont -- Developing the EFU-FSP-BPS will encompass forecasting techniques and background contextual data and commentary Key Areas to be considered are: Macroeconomic Assumptions ( Real GDP Growth, Inflation, exchange rate ) Crude Oil Benchmarks and Mineral Ratio Any Fiscal Targets or Fiscal Policy Objectives Level of Growth of IGR and Recurrent Expenditures Capital Receipts Level and Sources of Borrowing (taking into Consideration the current debt position) Capital Expenditure

5. Sources of Information / Relevant Documents Kano State Budget and Accounts Monthly Federation Account Allocation Committee (FAAC) Pack Fiscal Responsibility Law State Development Plan Debt Sustainability Analysis (if available) 2019 Budget Implementation Data Federal Government 2019 Budget and 2019-2021 FSP/MTEF (and 2020-2022 if available)

6. Sources of Information / Relevant Documents Relevant International Commentary IMF World Economic Outlook OPEC Annual and Monthly Reports Relevant Nigerian Commentary NBS Monthly CPI Reports NBS Quarterly GDP Reports NNPC Monthly Reports DPR Annual Reports CBN Statistics and Economic Reports (Quarterly)

7. Forecasting Federation Account Revenues The Macroeconomic and Crude Oil price assumptions will have a direct impact on Statutory Allocation and VAT forecasts Elasticity based forecasting is used for these revenues forecast Factors are: National real GDP growth National Inflation NGN:USD Foreign Exchange Rate Crude Oil Price benchmark Crude Oil Production benchmark Mineral Ratio Federation Account Revenues was forecasted at the aggregate level, then the vertical and horizontal sharing percentages are used to provide forecast for Kano State

8. Vertical and Horizontal Sharing Ratios Statutory Allocation Comprises Companies Income Tax (less 4% Cost of Collection to FIRS), Customs and Excise duties (less 7% Cost of Collection to NCS) Mineral Revenue (less Cost of Collection and 13% Net Derivation) How much do states receive? How much does Kano State receive? States receive 26.72% Kano State receives xx % of State Share

9. Vertical and Horizontal Sharing Ratios VAT 4% Cost of Collection retained by FIRS How much do states receive? And how much does Kano State receive? States received 50% Kano State receives xx % of State Share

10. National real GDP Growth and Inflation CBN Year-on-Year Inflation, NBS Quarterly Real GDP Growth Point of initial divergence was December 2014, coinciding with global Crude Oil Price crash. Divergence accelerated in June 2016 which coincided with the devaluation of the Naira Inflation peaked at 18.72% (year-on-year) in January 2017 Real GDP growth (decline) bottomed out at -2.24% in Q3 2016 Significant improvement in Real GDP and Inflation in 2017 and H2 2018 Stability in both real GDP and Inflation from 2018 Q2 Forecast shows relatively stable real GDP and inflation but not equal to the benchmark

11. Crude Oil Price – Longer Term Trends Spot price from OPEC, Benchmark from federal government Budgets Price per barrel dropped from $114 in June 2014 - $ 48 in January 2015, then $30 by January 2016 High point in October 2018 of $ 82.09 but prices dropped by more than $ 20 to under $60 in last 2 month of 2018 highlighting need for buffer when setting bench mark 2019 FG Budget base on $ 60 Significant factor affecting both supply and demand of crude oil mean outlook is un certain

12. Crude Oil Production Actual production from NNPC and EIA (US Energy Information Administration) – both slightly out of data OPEC quota reduced from 2.4 MBPD to 2.2 in 2014 Long term trend of around 2.2 MBPD up to end of 2014 Drop in production due to Niger Delta militancy and production facilities going off line Production has averaged 1.92 MBPD over the last 12 months, but with significant volatility Data from NNPC is not up-to-date – but latest news paper reports suggest 2.1 MBPD – some way off 2019 FG Benchmark of 2.3

13. Crude Oil Production Actual production from NNPC and EIA (US Energy Information Administration) – both slightly out of data OPEC quota reduced from 2.4 MBPD to 2.2 in 2014 Long term trend of around 2.2 MBPD up to end of 2014 Drop in production due to Niger Delta militancy and production facilities going off line Production has averaged 1.92 MBPD over the last 12 months, but with significant volatility Data from NNPC is not up-to-date – but latest news paper reports suggest 2.1 MBPD – some way off 2019 FG Benchmark of 2.3

14. Crude Oil Production Actual production from NNPC and EIA (US Energy Information Administration) – both slightly out of data OPEC quota reduced from 2.4 MBPD to 2.2 in 2014 Long term trend of around 2.2 MBPD up to end of 2014 Drop in production due to Niger Delta militancy and production facilities going off line Production has averaged 1.92 MBPD over the last 12 months, but with significant volatility Data from NNPC is not up-to-date – but latest news paper reports suggest 2.1 MBPD – some way off 2019 FG Benchmark of 2.3

15. Mineral Ratio Very Important Concept – this is the proportion of Crude Oil Sales revenue that accrues to Federation Account for distribution to the three tiers of government Consider – Crude Oil is produced, sold and the proceeds converted to Naira (for exported Crude Oil) – this is Crude Oil Sales Revenue A proportion of this Crude Oil Sales Revenue eventually accrued to Federation Account as (Petroleum Profit Tax) PPT, Production Sharing, etc The balance is cost of production for Nigerian Government (including JV cash call and DPR cost of collection) and the Oil Companies (including NNPC), fuel subsidy etc Question – what proportion of Crude Oil Sales revenue accrues to Federation Account?

16. Mineral Ratio Very Important Concept – this is the proportion of Crude Oil Sales revenue that accrues to Federation Account for distribution to the three tiers of government Consider – Crude Oil is produced, sold and the proceeds converted to Naira (for exported Crude Oil) – this is Crude Oil Sales Revenue A proportion of this Crude Oil Sales Revenue eventually accrued to Federation Account as (Petroleum Profit Tax) PPT, Production Sharing, etc The balance is cost of production for Nigerian Government (including JV cash call and DPR cost of collection) and the Oil Companies (including NNPC), fuel subsidy etc Question – what proportion of Crude Oil Sales revenue accrues to Federation Account?

17. Mineral Ratio Very Important Concept – this is the proportion of Crude Oil Sales revenue that accrues to Federation Account for distribution to the three tiers of government Consider – Crude Oil is produced, sold and the proceeds converted to Naira (for exported Crude Oil) – this is Crude Oil Sales Revenue A proportion of this Crude Oil Sales Revenue eventually accrued to Federation Account as (Petroleum Profit Tax) PPT, Production Sharing, etc The balance is cost of production for Nigerian Government (including JV cash call and DPR cost of collection) and the Oil Companies (including NNPC), fuel subsidy etc Question – what proportion of Crude Oil Sales revenue accrues to Federation Account?

18. Mineral Ratio – Historical Estimates Long term (10 years) trend is around 40$ (or 0.4) However, there is significant monthly volatility Ratio is also proportion to price and production – a higher price and production level would result in a higher ratio (as fixed costs already covered) Ratio dropped in mid-2016 to less than 20%, currently averaging around 30% PIB and recent increases to price and production should help improve the ratio in the medium-long term However, FGN estimates are ambitious

19. Distributed Mineral Revenue (SA and Net Der .) Cont... Data from online FAAC summary sheets ( www.oagf.gov.ng ) Mineral revenues distributed through Statutory Allocation (SA) and Net Derivation (ND) to the crude oil producing states Excess Crude and other ad hoc distributions not included High of over N450 billion in mid-2013 and average of around N350 billion between 2011 and 2013 Low of less than N100 billion in late 2016 and average since2015 of less than N 200 billion Significant rebound the last two years but still high level of variability

20. Distributed Mineral Revenue (SA and Net Der .) Cont.. Data from online FAAC summary sheets ( www.oagf.gov.ng ) CIT Distributed as part of Statutory Allocation Subject to a 4% cost of collection deduction Overall trend h Distributed Mineral Revenue (SA and Net Der.) as been upwards over the last six years Large spikes in CIT collections each year around June / July Growth in 2017 slower as a result in the economic down-turn, but has rebounded since early 2018 Inflation will also result in growth of revenues in nominal terms Federal revenue reforms will enhance collections in the medium term, but timing of impact uncertain

21. FA Non-Mineral Revenues (VAT and NCS) Data from online FAAC summary sheets ( www.oagf.gov.ng ) NCS Distributed as part of Statutory Allocation, Subject to a 7% cost of collection deduction VAT Distributed on it’s own, Subject to a 4% cost of collection deduction Both on upward trend over last three years, VAT more so than NCS Inflation has significant impact on VAT Exchange rate controls, import policy and devaluing Naira may have affected some Customs receipts Still some short term volatility Federal Revenue reforms should increase collections in the medium term, but timing of impact uncertain

22. International Commentary – IMF WEO April 18 One year ago economic activity was accelerating in almost all regions of the world and the global economy was projected to grow at 3.9 percent in 2018 and 2019. One year later, much has changed: the escalation of US–China trade tensions, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion, especially in the second half of 2018.

23. International Commentary Cont -- World Economic Outlook (WEO) projects a decline in growth in 2019 for 70 percent of the global economy. Global growth, which peaked at close to 4 percent in 2017, softened to 3.6 percent in 2018, and is projected to decline further to 3.3 percent in 2019. Although a 3.3 percent global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential. Growth in emerging market and developing economies will stabilize at around 5 percent, though with considerable variance between countries as subdued commodity prices and civil strife weaken prospects for some.

24. International Commentary - Projections

25. Proposed Macroeconomic and Mineral Assumptions for 2019 and implied Revenue Growth

26. Proposed Macroeconomic and Mineral Assumptions for 2019 and implied Revenue Growth

27. Proposed Macroeconomic and Mineral Assumptions for 2019 and implied Revenue Growth

28. Aggregate FAAC Revenues – 2019 and 2020 Projections

29. Fiscal Targets / Constraints / Policy These should be outlined in some of the following documents: State Development Plan Fiscal Responsibility Legislation Other policy documents Areas to consider are: Fiscal Deficit Debt Stock and Servicing Ratios Recurrent – Capital Expenditure Ratio Recurrent Account surpluses Earmarking / funding certain expenditures with certain revenues Planning and Contingency reserves

30. Fiscal Targets / Constraints / Policy These should be outlined in some of the following documents: State Development Plan Fiscal Responsibility Legislation Other policy documents Areas to consider are: Fiscal Deficit Debt Stock and Servicing Ratios Recurrent – Capital Expenditure Ratio Recurrent Account surpluses Earmarking / funding certain expenditures with certain revenues Planning and Contingency reserves

31. Fiscal Targets / Constraints / Policy These should be outlined in some of the following documents: State Development Plan Fiscal Responsibility Legislation Other policy documents Areas to consider are: Fiscal Deficit Debt Stock and Servicing Ratios Recurrent – Capital Expenditure Ratio Recurrent Account surpluses Earmarking / funding certain expenditures with certain revenues Planning and Contingency reserves

32. Fiscal Targets / Constraints / Policy These should be outlined in some of the following documents: State Development Plan Fiscal Responsibility Legislation Other policy documents Areas to consider are: Fiscal Deficit Debt Stock and Servicing Ratios Recurrent – Capital Expenditure Ratio Recurrent Account surpluses Earmarking / funding certain expenditures with certain revenues Planning and Contingency reserves

33. Fiscal Targets / Constraints / Policy These should be outlined in some of the following documents: State Development Plan Fiscal Responsibility Legislation Other policy documents Areas to consider are: Fiscal Deficit Debt Stock and Servicing Ratios Recurrent – Capital Expenditure Ratio Recurrent Account surpluses Earmarking / funding certain expenditures with certain revenues Planning and Contingency reserves

34. Other Key Issues IGR: Recent Trend Changes / Reforms to Policy/Administration/Systems State Economic conditions and outlook Personnel Expenditure Inflation, Minimum Wage Civil Service structure Overheads Inflation Costs of Operating and Maintaining newly created Assets Debt Servicing Costs (existing debt portfolio and any new draw downs)

35. Thank You