BusinessDay

Nigeria’s fiscal deficit hits highest in 21yrs as revenues flop

The Federal Government of Nigeria spent N6.17 trillion more than it earned in 2020, leaving its fiscal deficit at 4 percent of Gross Domestic Product (GDP), the highest in 21 years, according to Central Bank of Nigeria (CBN) data analysed by BusinessDay.

The fiscal deficit, which is the difference between expenditure and revenue, widened to 6.1 percent of GDP in the first quarter of 2021, with analysts projecting 5 percent by year-end.

Nigeria’s rising fiscal deficit is yet another sign of the government’s ailing finances and makes a mockery of Abuja’s insistence to continue with a wasteful petrol subsidy regime that gulps over a trillion naira per annum among other overly expensive ventures of a supposedly cash-strapped government.

’Nigeria is certainly living above its means and that is why the deficit has continued to widen,” a Lagos-based asset manager who does not have authorisation to speak on the matter, says on condition of anonymity.

“It is not such a terrible thing for a country’s fiscal deficit to be widening, especially amid a global health pandemic, but Nigeria’s spending has been wasteful and unproductive,” he states.

Read Also: Nigeria’s fiscal position remains precarious despite rising oil price

Emerging economies, as well as developed ones all, saw their fiscal deficits exceed usual thresholds last year amid record spending to combat the economic impact of COVID-19. The difference compared with Nigeria is that many of these other countries have pumped cash into health infrastructure and meaningful social protection schemes while Nigeria continues to expend all of its cash servicing debt, maintaining an over-bloated civil service and on consumption subsidies.

The widening fiscal deficit and other challenges to revenue in Nigeria are unlikely to scuttle the government’s plans to tap between $3 billion and $6 billion from the international debt market this year, according to Samir Gadio, head of Africa strategy at Standard Chartered Bank.

Gadio says investors are more likely to focus on the country’s low external debt service to revenue ratio and relatively high oil prices, saying, “I think investors can live with an issuance of about $4 billion but anything above that may be a hard sell, given the slow pace of reforms in the country.”

The last time Nigeria’s fiscal deficit exceeded 4 percent was in 1999 when the government opened the taps on infrastructure spending to give the economy a boost after years of military rule. That year, the government spent more on capital expenditure (N498bn) than recurrent expenditure (N449bn). The actual deficit amounted to only N285 billion even though it was 5.2 percent of GDP. In 2020, however, the government spent about 4 times more on recurrent expenditure (N8.1trn) than on capital expenditure (N1.6trn).

“Worth mentioning is that the 6.1 percent deficit in the first quarter of 2021 is tracking ahead of the 3.9 percent envisaged in the 2021 budget,” notes Gregory Kronsten, head of research at FBN Quest, who attributes the wider deficit to lower revenue out-turn compared with the pro-rata share of budgeted revenue.

“The recent approval of the supplementary budget, which provides for additional expenditures of N983 billion and revenue of just N135 billion, takes the implied fiscal deficit up to 4.5 percent. Given the poor track record on revenue collection, the actual deficit will be considerably north of 5 percent,” Kronsten says.

Data from the CBN showed that the Federal Government’s fiscal deficit hit N2.4 trillion in the first quarter of 2021, up from N1.6 trillion in the fourth quarter of 2020 and N1.4 trillion in the first quarter of 2020. That is after the government kept up with its expenditure plans but fell way short of its revenue projection.

The government’s total expenditure in the period was N3.38 trillion, which is roughly in line with the N3.39 trillion quarterly budget run-rates. Personnel costs came in 5 percent below the budget but increased 9 percent compared to last year due to the government’s implementation of the national minimum wage.

However, the government’s retained revenue was N904.3 billion, a 9 percent decline compared to the same period last year and 55 percent off the target set in the 2021 budget.

The government’s overambitious revenue targets have meant it has failed to achieve its budgeted revenue since 2014. The trend looks set to continue in 2021 with analysts tagging the N7.99 trillion revenue targets in the budget as a tad too ambitious. The amount implies a pro-rata quarterly run-rate of almost N2 trillion but there are holes in that projection.

For instance, the government anticipates it will earn N2.7 trillion from government-owned enterprises (GOEs), despite the source’s weak track record. In 2020, the FGN’s expected revenue taken from GOEs was N990 billion. However, no revenue was generated from the source, according to the budget implementation report published by the CBN.

The government’s dwindling revenue has been a long-standing problem that economists say can only be solved by reforms that encourage more private capital to enable the government to deliver on its gaping infrastructure needs. The concept is something the government is beginning to buy into following the creation of the N15 trillion infrastructure company, which will ride on a Public-Private Partnership (PPP) model to deliver investment in infrastructure.

The company, Infrastructural Corporation of Nigeria Limited (INFRACO), which is a partnership between the CBN, Africa Finance Corporation (AFC), Nigeria Sovereign Investment Authority (NSIA) and other private organisations, is expected to begin full operations by the third quarter of the year.

Economists have also urged the government to double down on creating an enabling business environment that allows businesses to thrive. This is expected to increase the taxes they pay to the government thereby giving public revenues a lift.

Concessions and privatisation of redundant government assets as well as reviving the N180 trillion dead capitals trapped mostly in real estate, according to estimates by consulting firm PriceWaterhouseCoopers (PwC), have also been put forward as viable ways of improving government revenue.

Get real time updates directly on you device, subscribe now.