Nigeria’s fiscal deficit has continued to widen, with recent figures showing a budget deficit of 7.6% of GDP as of August 2024, far surpassing the 3.8% target approved by the National Assembly at the start of the year. This growing fiscal gap highlights the country’s ongoing challenges in balancing revenue generation with escalating spending and debt servicing costs.
Key Details of Nigeria’s Fiscal Strain:
- Budget Overview: At the beginning of 2024, the Nigerian government approved a N28.7 trillion budget with a revenue target of N19.5 trillion, resulting in a projected deficit of N9.1 trillion (approximately 3.8% of GDP). However, the fiscal deficit has already surged beyond projections, reaching 7.6% of GDP by mid-year.
- Revenue Shortfall: According to statements from members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), Nigeria’s revenue collection underperformed significantly, reaching just 37.9% of the target in the first half of 2024. This shortfall was mainly due to challenges within the Federation Accounts Allocation Committee (FAAC), which hindered the federal government’s ability to meet its financial obligations.
- MPC Members’ Concerns: Aloysius Uche Ordu, a member of the MPC, highlighted that while there was a 33.31% increase in retained revenue compared to the same period in 2023, the country still faced a 62.1% shortfall in overall revenue. This underscores the deep-rooted fiscal challenges Nigeria faces, particularly the structural weakness in its revenue base. Lamido Yuguda, another MPC member, noted that Nigeria’s low revenue base contributes significantly to the weak fiscal performance observed in the first half of the year.
- Deficit Projections: Provisional numbers indicate that by June 2024, Nigeria had already incurred 91.94% of its projected deficit, raising concerns about how the government plans to finance the remaining budgeted expenditure without further exacerbating the deficit.
Impact of Recurrent Expenditure and Debt Servicing
- Recurrent Expenditure Dominance: The NLC’s growing deficit is largely attributed to recurrent expenditures, primarily driven by debt servicing costs. Despite government assurances of prioritizing capital expenditure, spending on recurrent needs continues to take up a large share of the budget, undermining efforts to promote long-term economic growth and development.
- Capital Expenditure Lag: Capital expenditure, which is critical for infrastructure development and sustainable economic growth, has continued to lag behind recurrent spending. The reluctance to reprioritize the budget towards capital investments only exacerbates the fiscal imbalance.
Government’s Response and Concerns over Fiscal Sustainability
- Monetary Policy Tightening: Muhammad Sani Abdullahi, another MPC member, emphasized the need for proactive monetary policy measures to counter the negative effects of the fiscal deficit, especially as discussions on a new minimum wage gain traction. He stressed that narrowing the fiscal deficit would help stabilize the macroeconomic environment and reduce pressure on the Naira.
- Ways & Means Financing: While the government has avoided resorting to the Central Bank’s Ways & Means financing, which could further fuel inflation and weaken the naira, concerns remain about how long this approach can be sustained in the face of persistent revenue shortfalls and mounting fiscal obligations.
The External Sector’s Positive Outlook
While Nigeria’s fiscal deficit continues to widen, there is some optimism in the external sector:
- Balance of Payments Surplus: Nigeria recorded a balance of payments surplus of $2.47 billion for the period, which was partly attributed to the CBN’s tight monetary policy that curbed import demand. This was complemented by the rise in external reserves, which reached $37.44 billion as of September 2024, and continued to climb to $40 billion by November 2024. This signals a degree of resilience in Nigeria’s foreign exchange reserves, offering over seven months of import cover.
- Naira Stabilization: The naira has experienced some appreciation, supported by improved foreign exchange reserves and reduced import demand. This development has provided some relief in the face of domestic fiscal strains.
Implications for Policy and Market Stability
- Structural Fiscal Challenges: Despite some positive developments in the external sector, Nigeria’s domestic fiscal situation remains precarious. The country’s revenue volatility and expenditure imbalances underline a structural weakness in the national fiscal framework that will require urgent reform.
- Monetary Policy and Fiscal Coordination: The MPC’s tight monetary policy has provided some buffer against external shocks and import demand pressures, but the persistent fiscal deficits could erode the positive impacts of these monetary measures if the government fails to increase revenue generation and exercise spending discipline.
- Future Outlook: Without significant improvements in revenue collection and better management of public spending, Nigeria faces the risk of prolonged fiscal instability. Additionally, while the external reserves offer some buffer, the domestic fiscal challenges remain a significant hurdle for the country’s economic stability in the coming months.
Nigeria’s fiscal deficit is clearly on an unsustainable trajectory, with the gap between revenue and expenditure continuing to widen. While the country’s external sector shows some signs of strength, the government will need to prioritize fiscal reforms—especially in terms of revenue diversification and capital expenditure prioritization—to avert further macroeconomic instability. Without these critical reforms, the fiscal and monetary challenges are likely to persist, potentially undermining the gains made in the external sector.
