Nigeria’s fiscal deficit will widen to a 10-year high this year as high global fuel prices push up petrol subsidy bills while crude oil output remains low, a new report by the Economist Intelligence Unit (EIU) has said.
“We have raised our fiscal deficit forecast for 2022 from 4.5 percent of GDP to 5 percent of GDP, largest since the 1990s, reflecting high expenses related to petrol subsidies and low crude production limiting revenue despite high world prices,” the report said.
A fiscal deficit is the excess of government spending over its revenue.
Nigeria’s rising fiscal deficit is another stark reminder of how the petrol subsidy bills continue to eat into the earnings of the cash-strapped government of President Muhammadu Buhari.
Petrol subsidy payment gulped about N1.67 trillion in 2021, according to data from the Nigerian National Petroleum Company.
The government had initially said the 2022 budget would only provide for subsidy till June but is now set to maintain it for at least another 17 months when the current administration would have left office.
“The cost is unsustainable, but an election in early 2023 has sharpened the government’s resolve to continue with price regulation,” EIU noted.
Oil prices shot above $100 per barrel for the first time in years as Russia invaded Ukraine but this has not benefitted Africa’s biggest oil producer as the country has also been battling with weak oil production.
Nigeria recorded an average oil production of 2.5 million barrels per day (bpd) in 2011 but this plunged to 1.5 million bpd in 2020 and 1.3 million bpd in 2021. According to the Organization of the Petroleum Exporting Countries, Nigeria’s oil production plunged 10 percent to 1.26 million bpd in February 2022.
“Low crude oil production will hold back revenue,” the EIU analysts said.
The report said a large fiscal overhang would be dealt with by the next administration, mainly through tax reform.
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Nigeria’s value-added tax (VAT) is one of the lowest in the world at 7.5 percent, with the EIU saying a tax increase is inevitable during the next administration due to the high debt-servicing costs. They project that after the 2023 elections, VAT will rise to 15 percent.
Nigeria’s total public debt hit N39.5 trillion as at December 2021 from N38 trillion in September 2021, according to data from Debt Management Office.
The International Monetary Fund has projected that Nigeria will spend 92 percent of its 2022 earnings repaying debts. This is higher than the 85.5 percent spent last year. Agusto and Co, a local credit ratings firm, says the figure will be around 90 percent.
Raising VAT to 15 percent may be challenging for a nation where over 40 percent of its citizens live in abject poverty.
“While tax rates are relatively low in Nigeria, it simply is not an excuse to keep increasing taxes,” Akinwumi Adesina, president of the African Development Bank, said recently.
“Take the case of Norway for example. Its tax-to-GDP ratio is 39 per cent but education is free through university. Singapore’s tax-to-GDP ratio is 13.2 percent but has 100 percent access to electricity and 100 per cent access to water,” Adesina said.
“Overall, we expect tax increases to narrow the fiscal deficit from an estimated 5 percent of GDP in 2022 to an average of 2.6 percent of GDP a year in 2023-24. Falling oil prices will then result in a steady widening of the deficit, to 3.1 percent of GDP in 2026,” the EIU added.
