Nigeria is facing one of its highest budget deficits on record even after the removal of fuel subsidies that were once a major drain on the country’s finances.
The drain of the petrol subsidy on the cash-strapped government’s earnings made a compelling case for its removal on President Bola Tinubu’s first day in charge, yet despite its removal, the federal government is now projecting to spend N9.18 trillion more than it will earn next year.
Analysts say the high cost of governance and pockets of inefficient spending within government continue to widen the budget deficit, wiping some of the gains of the wasteful subsidy removal.
The implication of the increased budget deficit in 2024 is that the government may end up spending less on capital projects and human capital which are critical in spurring economic growth and delivering jobs.
“Fuel subsidies had to go for Nigeria’s economy to survive. Having done it, what’s the sacrifice for our political elite? The cost of governance is too high,” Kingsley Moghalu, founder and president of IGET and a former deputy governor of the Central Bank of Nigeria said on X, formerly known as Twitter.
The 2024 budget proposed an aggregate expenditure of N27.5 trillion for the Federal Government in 2024, of which the non-debt recurrent expenditure is N9.92 trillion naira, while debt service is projected to be N8.25 trillion naira and capital expenditure is N8.7 trillion.
Lekan Ademola, a Lagos-based asset manager, said Nigeria is certainly living above its means with the non-debt recurrent expenditure.
“Nigeria has ignored its revenue challenge by going on a recurrent expenditure spree. Yet, this has not impacted the economy, which has been stuck in a low growth path despite the higher cost of governance,” Ademola said.
In his first budget speech to lawmakers on Wednesday, President Bola Tinubu, at the budget presentation on Wednesday, November 29, said the Federal Government would work towards reducing the rising debt.
Nigeria’s total debts now stand at N87.7 trillion, according to data from the Debt Management Office (DMO), which puts pressure on inflation and worsens Nigeria’s currency problems.
For the 2024 budget estimates, the deficit is projected at N9.18 trillion in 2024 or 3.88 percent of gross domestic product (GDP). This is lower than the N13.78 trillion deficit recorded in 2023, representing 6.11 percent of GDP.
The President said the deficit budget would be financed by new borrowings totalling N7.83 trillion, N298.49 billion naira from privatisation proceeds, and N1.05 trillion drawdown on multilateral and bilateral loans secured for specific development projects.
He further said the national social safety net project would be expanded to provide targeted cash transfers to poor and vulnerable households.
Commenting on reforms, Tinubu said tax and fiscal policies would be reviewed to meet Nigeria’s revenue targets.
“Our target is to increase the ratio of revenue to GDP from less than 10 percent currently to 18 percent within the term of this administration,” he said.
Key Budget assumptions
The President noted that the world oil market and domestic conditions informed the government’s adoption of a conservative oil price benchmark of 77.96 US dollars per barrel and a daily oil production estimate of 1.78 million barrels per day.
Since 2022, Nigeria’s daily oil production has averaged 1.2 mbpd.
“Achieving a daily average increase of more than 500,000 barrels per day in one year is a substantial challenge, given the recent decline in oil production, activities of illegal refineries, oil theft, and weak market confidence in the government’s ability to reverse these and other unsavoury economic trends,” Cheta Nwanze, partner at SBM Intelligence said in a note.
He stressed that the economy was expected to grow by a minimum of 3.76 percent, above the forecast world average.
“Inflation is expected to moderate to 21.4 percent in 2024,” he added.
Concerns over economy
Experts are at a loss as to how Nigeria will generate enough revenue to fund its proposed N26.01 trillion budget for 2024, which is 18 percent higher than this year’s.
This is because, for many years, the country has struggled to meet its revenue target and the variance keeps getting wider ever since the 2014 global collapse in oil prices that sent the oil-dependent nation to its first recession in a quarter of a century.
“All the government programmes to increase revenue have failed. Except for growing ‘independent revenue’ from Federal Government-owned agencies,” a senior public finance analyst, said. “Even if the new tax reform committee is relatively successful, I expect it will take a few years to really show results.”
Prior to 2014, the federal government’s revenue shortfall – that is the variance between actual and budgeted retained revenues – was in the billion-naira range but with the collapse in oil prices, the difference has stayed within the trillion-naira range.
In 2014, the government’s actual retained revenues stood at N3.727 trillion, based on data obtained from the Central Bank of Nigeria’s quarterly reports. This led to a shortfall of N3.5 billion when compared to the N3.731 trillion projected in the 2014 budget.
In 2015, when the country started feeling the heat from the fall in crude oil prices, the difference between actual and projected revenues ballooned 19.58 percent to about N675.89 billion. In that year, Nigeria realised N2.776 trillion, compared to a target of N3.452 trillion.
The gap, however, widened further at the thick of the economic recession that forced Africa’s biggest oil producer to look to the non-oil sector to lift the economy from its precarious state. For the first time in many years, the non-oil sector brought in the highest amount of revenue for the government while the oil sector played a second fiddle.
However, the dwindling revenues have not stopped Nigeria from increasing its recurrent expenditure, which has more than tripled.
“So again, I ask, what if 2024 expected revenues don’t materialise? What’s the plan for the downside scenario? Will there be a fiscal consolidation-focused contingency plan or will the CBN be raided again? I sincerely hope that “hope” is not the only strategy,” a senior financial analyst said.