Nigeria’s fiscal trap: Reform, revenue and limits of adjustment

Nigeria’s economic debate often descends into absolutes. Supporters of President Bola Tinubu describe his administration as undertaking the country’s boldest reforms in decades, but critics counter that record deficits and persistent inflation expose a government that continues to spend beyond its means.

The evidence suggests a more nuanced picture: Nigeria is undergoing a fiscal adjustment but not yet a fiscal consolidation.

Measured by headline deficits, the government’s finances remain under strain. The proposed 2026 federal budget envisages a deficit of roughly N23.9trn, equivalent to around 3.9% of GDP. While substantial, it is not unprecedented. The Buhari administration ended 2023 with a deficit approaching 4.8% of GDP.

Debt servicing remains the government’s largest constraint. Around N15.8 trillion, roughly 45% of projected federal revenue, is expected to go towards servicing existing obligations.

Calling this “profligacy” therefore depends on definition. If profligacy means financing persistently large deficits through borrowing, the label has merit. Nigeria continues to rely heavily on debt despite removing one of its largest fiscal burdens, the petrol subsidy.

If, however, profligacy implies reckless new spending following a fiscal windfall, the evidence is less convincing. Much of the fiscal space created by subsidy removal has been absorbed not by expanded recurrent expenditure but by servicing inherited debt.

By 2023, Nigeria had reached an extraordinary position where debt service absorbed approximately 97% of federal revenue. Every naira collected was almost entirely consumed by servicing existing obligations, leaving little room for public investment.

The subsequent improvement to roughly 45% of revenue is frequently interpreted as evidence of stronger fiscal discipline. In reality, it reflects something different.

The debt itself has not fallen. Instead, government revenue has risen sharply following three structural changes:

Exchange-rate unification dramatically increased the naira value of dollar-denominated oil earnings. The removal of fuel subsidies redirected several trillion naira annually into public finances. Stronger tax administration expanded collections without significantly increasing statutory tax rates.

The arithmetic changed more than the balance sheet; Nigeria did not halve its debt burden – it enlarged the denominator, improved capital allocation, and weakened its balance sheet.

There is nevertheless evidence that spending priorities have shifted. Recent budgets allocate relatively greater resources toward infrastructure, transport and power than during the final years of the previous administration.

Fuel subsidy savings have largely been channelled into debt servicing and capital expenditure rather than equivalent increases in recurrent obligations.

Meanwhile, the government’s tax reforms aim less at imposing new taxes than simplifying an extraordinarily fragmented system. More than sixty separate taxes are gradually being consolidated into fewer, broader categories, while compliance efforts have intensified.

These changes suggest improved expenditure composition. They do not, however, eliminate the deficit. Nigeria, therefore, occupies an uncomfortable middle ground: more disciplined investment decisions alongside, therefore, an unstable overall fiscal position, the exchange-rate dilemma, and the government’s exchange-rate policy illustrate the constrained position particularly clearly.

Many economists argue that a stronger naira—perhaps around N1,140 to the dollar—would reduce imported inflation, lower production costs and ease pressure on households. That is almost certainly true – imports would become cheaper.

Pharmaceutical products, machinery, food imports and industrial inputs would all cost less; inflation could moderate significantly – improving living standards – but the same appreciation would simultaneously weaken federal finances. Since exchange-rate liberalisation, government revenues have become heavily dependent on the naira conversion of dollar earnings from oil exports, customs receipts and central-bank remittances.

A stronger currency would reduce those revenues substantially in naira terms. Budgets constructed around an exchange rate near N1,500 per dollar would suddenly face large revenue shortfalls unless offset by much higher taxes or spending cuts; borrowing would increase once again. In other words, what benefits households? It could destabilise the treasury.

Why the naira overshot

Many Nigerians expected exchange-rate liberalisation to settle near the parallel-market rate prevailing before reforms. Instead, the currency depreciated far beyond that level.

Several factors explain the overshooting. Before liberalisation, Nigeria effectively operated multiple exchange rates, each rationing scarce foreign exchange differently. The quoted market price never reflected unrestricted supply and demand. Once restrictions were lifted, years of accumulated demand emerged simultaneously. Importers, manufacturers, airlines, investors and households all competed for limited dollars.

Meanwhile, foreign reserves remained constrained, oil production disappointed, and non-oil exports remained modest. Exchange-rate liberalisation therefore occurred before the economy had developed sufficient foreign-exchange supply to support it.

Nigeria now finds itself in a policy cul-de-sac.

Maintaining a weaker exchange rate supports government revenues but prolongs inflationary pressure on households and businesses. Engineering a significantly stronger currency would relieve those pressures but risk reopening large fiscal gaps that the government can scarcely afford.

Neither option offers an easy exit.

The longer-term solution lies elsewhere – higher oil production, stronger non-oil exports, broader tax compliance and sustained limits on borrowing would gradually reduce dependence on exchange-rate-driven revenues. Only then can fiscal sustainability coexist with a stronger currency.

International institutions often distinguish between fiscal adjustment and fiscal consolidation. Nigeria has unquestionably undertaken adjustment; fuel subsidies have been removed, exchange rates have been unified, tax administration has been adjusted, and revenue has risen, yet consolidation, the durable reduction of deficits and debt dependence, is unfinished.

The government’s challenge over the remainder of this decade, independence, remains to raise more revenue but to ensure that additional revenue translates into lower borrowing rather than into higher expenditure.

Only then will Nigeria have moved beyond crisis management towards genuine fiscal stability.

Ebí Bomodi, a real estate investor and economic analyst.