Over the years, provisions have always been made for supplementary budgets within a fiscal year after the national budget has been approved. Is this the right approach? Maybe not.
This practice might be linked to macroeconomic dynamics, which often result from economic shocks, either domestic or global. Such shocks can disrupt the initial assumptions and projections made during the budgeting process, necessitating adjustments through supplementary budgets.
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Butis borrowing an imperative measure to cover these gaps? While some economists and public policy analysts think otherwise, some supporters concur. This raises further questions: for how long can we continue this approach without matching it with revenue expansion?
“Unfortunately, in Nigeria, supplementary budgets have often been one-sided—focusing solely on government expenditure without expanding revenue to match it—a significant gap, indeed.”
Borrowing isn’t always bad, mind you; it can address urgent needs in the economy and fund long-lasting projects. However, how it’s managed is crucial.
Unfortunately, in Nigeria, supplementary budgets have often been one-sided—focusing solely on government expenditure without expanding revenue to match it—a significant gap, indeed.
This approach can communicate misleading information about the real national budget figures to the public, affect policy-makers’ decisions, and increase the debt service burden on the economy. This may further impact the allocation to key sectors such as education, health, and agriculture, which are vital for the vulnerable population.
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.
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 deficit is driven by various factors, including substantial non-debt recurrent expenditures (N8.76 trillion), debt servicing (N8.27 trillion), and capital expenditures (N9.99 trillion).
Borrowing, therefore, becomes essential to bridge this gap, ensuring that critical government functions and development projects are not stalled. However, borrowing should not be viewed merely as a stopgap 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.
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 fundamentally sound, but its implementation has been flawed. However, the monetary authorities are making efforts to maintain stability, which is evident, although the naira remains weak.
Presently, inflation has risen to 34.19 percent from 33.95 percent, according to the National Bureau of Statistics (NBS). The highest since March 1996.This acceleration is attributed to the removal of fuel subsidies and a weakening local currency.
Notably, food inflation, which constitutes a significant portion of the inflation basket, reached a record high of 40.87 percent in June. Price increases in staples such as bread, cereal, potatoes, and fish have contributed to this surge.
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.
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The supplementary budget projected for 2024 involves borrowing an additional N6.6 trillion. It is essential for the government to secure favourable terms for these loans, which can be less costly than allowing essential services to collapse or halting critical infrastructure projects.
Furthermore, ensuring that borrowed funds are directed towards productive investments is crucial. These investments can spur economic growth and generate future revenues. Unfortunately, over the years, few of these benefits have been realised, fueling Nigerians’ discomfort with borrowing.
In a similar vein, it is essential for the government to consider reclassifying the term “supplementary budget” to “supplementary expenditure budget.” The current terminology is misleading, as these budgets primarily make provisions for expenditures without considering additional revenue to offset the increased spending. This lack of revenue planning exacerbates the national debt and heightens the impact of debt servicing on the economy, particularly on vulnerable populations.
The fiscal landscape in Nigeria is complex and challenging. According to the Debt Management Office (DMO), the country’s debt profile has surged, with total public debt rising to N121.67 trillion in 2024Q1.
This increase is partly due to the frequent resort to supplementary budgets aimed at addressing urgent and unforeseen expenses. However, without a corresponding increase in revenue, these supplementary budgets add to the national debt, leading to higher debt servicing costs.
In 2023 alone, the Nigerian government allocated a substantial portion of its total revenue to debt servicing. The actual debt service cost for that year amounted to ₦7.66 trillion (approximately $18.1 billion), representing a 16.9 percent increase from the projected amount. This rising debt service cost has implications for Nigeria’s debt sustainability, credit rating, and borrowing costs. While the data from LCCI shows that, in the same year, on the supplementary budget only, N1.8827 trillion was spent on debt servicing, a figure that is unsustainable given the country’s revenue constraints.
Reclassifying the supplementary budget as a “supplementary expenditure budget” would provide greater transparency and accountability. This change would clearly signal to policymakers and the public that these budgets are focused solely on expenditure, necessitating a separate strategy for revenue generation.
Such transparency is critical to building public trust and ensuring that the government is seen as managing the country’s finances responsibly.
Alternatively, if the government decides to retain the term “supplementary budget,” it must then make explicit provisions for how additional revenue will be generated to match the supplementary expenditures.
This could involve strategies like increasing taxes on luxury goods, improving tax collection efficiency, and broadening the tax base. Nigeria’s tax-to-GDP ratio is about 6.7 percent, one of the lowest in the world, according to data from Revenue Statistics of Africa. Improving tax compliance and expanding the tax net could significantly boost revenue.
Another strategy is to increase non-oil revenue. Nigeria’s economy heavily relies on oil, which accounts for about 90 percent of export earnings and over 60 percent of government revenue.
Diversifying the economy by investing in sectors such as agriculture, technology, and manufacturing can generate substantial revenue. For instance, the agricultural sector, which employs about 70 percent of the labour force, has immense potential for growth and export earnings if adequately supported and modernised.
Whether through reclassifying the supplementary budget or planning for additional revenue, the Nigerian government must adopt a holistic approach to fiscal management.
This means addressing immediate \expenditure needs and ensuring sustainable revenue generation to reduce the impact of debt servicing. By doing so, the government can create a more stable and resilient economy, benefiting all Nigerians, especially the vulnerable.
Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).
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