The key fiscal challenges in Nigeria

Government policies are put in place to stimulate output growth, boost employment level, provide equitable distribution of income and wealth, both investment level and manage the country’s debt.

However, the government faces several macroeconomic challenges that impede the economic goals the policies intend to achieve.

One of the critical macroeconomic challenges the government faces is the output gap problem. The output gap is a situation where the real GDP growth is expanding, and at the same time, the recession gap continues.

Another key fiscal challenge is the monetary gap and budgetary imbalance that makes the government experience a continuous increase in the fiscal deficit. In most cases, the income or revenue available to the government is always less than the expenses they incur, which often prompts the need to borrow to cover the excess expenditure.

To make matters worse, the government has been officially at war due to widespread security threats. This has demanded large expenditures on security equipment and operations, adding to the fiscal deficit as the defense and security sector accounts for 22% of the 2021 budget.

However, among the leading African economies, Nigeria has the lowest Budget Deficit/GDP (-4.3% in November 2021) and Debt/GDP ratios (The percentage of domestic debt to GDP has been on the increase. Debt/GDP ratio was 23.41% in 2016, 25.34% in 2017, 27.69% in 2018, 29.17% in 2019, 35.05% in 2020 and 30% in September 2021). Also, Nigeria’s Public Expenditure/GDP ratio is also the lowest among Africa’s major countries.

In the same vein, the country has had to spend its way out of two economic downturns, which significantly contribute to the increase in the national debt. Nigeria had the highest debt service/revenue ratio of 76 percent among the top African economies in November 2021.

This implies that despite low government revenue, the Nigerian government has increased the debt service fee, indicating that the country is spending virtually all of its earnings on debt servicing, potentially putting the country up to more loans in the future. It’s, however, doubtful if we would have recovered as quickly from each of the two recessions if the government hadn’t continued to spend money it didn’t have.

Furthermore, COVID-19 has also resulted in shaky global economic development and exposed our domestic economy’s susceptibility to external shocks resulting from oil price swings. While the pandemic poses a threat, it also provides an opportunity for the government to diversify its economic base while pursuing institutional reforms that would substantially decrease the cost of governance and ensure public sector productivity.

Diversifying the country’s revenue base is also crucial in increasing injection in the country. The discovery of oil in the 1970s caused the neglect of other economic sectors and the over-dependence on oil revenue as the primary source of wealth. Currently, oil still accounts for over 50 percent of government revenue and more than 80 percent of the foreign exchange earnings.

However, horizontal and vertical export diversification is essential for Nigeria. Horizontal diversification is the expansion of a country’s export by increasing the share of products in the market or creating additional new goods that will be attractive in the world market.

Read also: Is fiscal deficit sustainable for development in Nigeria?

On the other hand, vertical diversification implies the transformation in the value-adding of primary exports. Thus widening the country’s revenue base by increasing the productive capacity and reducing the dependency on oil will boost financial resilience and reduce the vulnerability of oil price shocks.

The government can also provide quality investment in the productive sector. Investment stimulates growth through its multiplier effect on the economy. Providing quality investment in the economy will thus help unlock idle resources, boost productivity, enhance output growth, and increase government revenue.

Furthermore, fiscal consolidation, reducing government deficit and debt accumulation, can help increase the funding in the economy. Although, Keynes advocated the need for government to use counter-cyclical fiscal policy during economic depressions.

The expansionary fiscal policy is based on the idea that government adopts a deficit budget to boost aggregate demand and stimulate output growth. However, incurring more debt to finance the excess expenditure not meant for the capital project will not help the country.

While the debt-to-GDP ratio is within acceptable limits, there is a growing concern about the government’s debt service-to-revenue ratio, which indicates that the country may be on the verge of a debt crisis if borrowings continue despite limited resources to meet existing debt obligations.

Therefore, reducing the leakages in the economy through eliminating subsidies, maintaining accountability and transparency in public finance, and increasing the injections in the economy through an increase in investment and export base will help mitigate the fiscal challenges in Nigeria.