Balancing borrowing and revenue expansion: Nigeria’s path to fiscal stability

“Unfortunately, Nigeria tends to spend more than it saves.”

For too long, Nigeria has embraced a dangerous habit: excessive borrowing to plug gaping holes in its national budget. While borrowing may offer a temporary fix, it’s a strategy riddled with risks, especially when not accompanied by a robust plan for long-term revenue generation.

Nigeria has not clearly shown why borrowing is beneficial for its economy. Compared to similar nations, it often leans towards being problematic. Looking ahead to Nigeria’s fiscal year 2024, with just quarters remaining, bridging budget gaps through borrowing is crucial. But equally important is boosting revenue to handle debt payments effectively. Unfortunately, Nigeria tends to spend more than it saves. Achieving economic stability in Nigeria means finding the right balance between borrowing wisely and ramping up revenue generation. This balance is key to ensuring the country’s long-term financial health.

Borrowing necessity

In the face of substantial budget deficits, borrowing emerges as an indispensable tool for the Nigerian government. The 2024 Federal Government budget highlights this necessity, revealing a deficit of N9.18 trillion, equivalent to 31.9 percent of the total budget. This reliance on borrowed funds creates a vicious cycle. We borrow to maintain our current spending habits, but then a significant chunk of future revenue gets swallowed by servicing that debt, leaving even less for critical investments.

However, borrowing should not be viewed merely as a stop-gap measure but as a strategic tool to stimulate economic growth and build infrastructure that can drive future revenue generation. As noted by the International Monetary Fund (IMF), when used prudently, borrowing can finance projects that enhance economic productivity and create a robust foundation for sustainable development.

The short-term benefits

In the short term, borrowing allows the government to maintain fiscal stability and address immediate financial obligations. It ensures that salaries are paid, public services are maintained, and infrastructure projects continue unabated. This immediate infusion of funds is crucial for maintaining public confidence and economic stability. For instance, the adoption of a market-determined exchange rate by the Central Bank of Nigeria (CBN) aims to stabilise the naira and improve investor confidence. However, this policy also necessitates significant financial resources to buffer any short-term economic shocks.

The policy is good, but its implementation has been poor. In Nigeria, inflation has risen to 33.95 percent, according to the National Bureau of Statistics (NBS). While the naira appears stable at N1500-N1600, the new equilibrium price is difficult for most Nigerians to reach. The vulnerable cry out for food daily, and despite increasing government expenditure, there is no relief for them. However, borrowing at favourable terms can be less costly than allowing essential services to collapse or halting critical infrastructure projects. The key is to ensure that borrowed funds are directed towards productive investments that can spur economic growth and generate future revenues. Unfortunately, fewer of these benefits have been realised, fueling Nigerians’ discomfort with borrowing.

Strategically allocating borrowed resources can create a multiplier effect, boosting economic activity and, subsequently, government revenue, all other things being equal.

The long-term strategy: Revenue expansion

While borrowing is a necessary short-term measure, it is not a sustainable long-term solution. Expanding revenue is imperative to reduce the impact of debt servicing on the national budget. Currently, Nigeria’s debt servicing obligations consume a significant portion of government revenue. Moody’s Investor Service Report has warned that interest payments could account for up to 36 percent of government revenue in 2024. This high debt-to-service ratio limits the government’s ability to invest in essential services and development projects.

To address this, the Nigerian government must focus on diversifying its revenue sources. Reliance on oil exports, which are subject to global price fluctuations, has proven to be a significant vulnerability. The recent volatility in oil prices, driven by geopolitical tensions such as the Russia-Ukraine conflict, underscores the need for a more resilient revenue base. The Nigerian Economic Summit Group (NESG) projects that effective non-oil revenue strategies could help external reserves reach $40 billion and inflation decline to 21.5 percent. Achieving these targets requires concerted efforts to improve tax collection, reduce oil leakages, and implement innovative revenue-generation measures. For example, effective digital tracking systems to curb crude oil theft and enhance transparency in the oil sector can significantly boost government revenue. The harsh reality is that Nigeria has only two quarters left, but the NESG forecast seems bleak.

Enhancing tax efficiency

One of the most effective ways to expand revenue is by enhancing tax efficiency. Nigeria’s tax-to-GDP ratio remains one of the lowest in the world, indicating substantial room for improvement. Strengthening tax administration, broadening the tax base, and combating tax evasion can significantly increase government revenue. Additionally, introducing progressive tax policies that ensure higher-income individuals and profitable corporations pay their fair share can enhance revenue without overburdening the lower-income populace.

Encouraging economic diversification

Diversifying the economy beyond oil is crucial for long-term fiscal stability. Investing in sectors such as agriculture, technology, and manufacturing can create new revenue streams and reduce dependency on oil. All these efforts will be sustainable if, and only if, insecurity is minimised. The government must create an enabling environment that encourages private sector investment and innovation in these sectors. Providing infrastructure, improving ease of doing business, and offering incentives for industries with high growth potential can drive economic diversification.

Nigeria cannot continue to borrow its way out of trouble. This unsustainable addiction must be broken. The path to prosperity lies in diversifying revenue, plugging financial loopholes, and fostering a business climate that attracts investment. Only then can we build a future where Nigeria thrives on its own merits, not on borrowed time.

The road ahead is long, demanding both prudent fiscal policies and a commitment to transparency. Investments in education, healthcare, and infrastructure are crucial to building a skilled workforce and a productive economy.

Empowering small businesses and leveraging natural resources responsibly are also key.

By strengthening governance, fighting corruption, and engaging with the world, Nigeria can build resilience and self-reliance.

It is time for bold action. Together, let’s transform Nigeria into a beacon of prosperity, a strong nation standing on its own foundations, for the benefit of all its citizens.