As the main contenders for Nigeria’s top job emerge ahead of elections next February, whoever gets the green light to be president has the conundrum of a stretched public budget to solve if he is to avert a financial crisis. brutal in the country of 200 million people.
Nigeria can barely cover its expenses with the extremely low cash it generates, forcing the government to borrow more than it can comfortably repay. But the situation could well get worse.
In the next president’s third year in office, Nigeria will likely spend 100% of its revenue to pay off its creditors. That’s according to the International Monetary Fund (IMF), which predicts that Nigeria’s debt service as a percentage of revenue will reach 100% by 2026 if the country does nothing to generate more cash.
New data from the Central Bank of Nigeria (CBN) giving an overview of the country’s financial accounts for the first month of 2022 highlighted two things. First, federal government revenues have continued to underperform the budget and second, a growing budget deficit, implying that more money will need to be borrowed to fully implement the budget.
CBN data showed that the federal government’s undistributed revenue in January 2022 stood at 406 billion naira, 39% below the pro-rated monthly budget benchmark of 666 billion naira.
The lower-than-expected revenue makes the fact that January revenue jumped 34% from the same period last year and 14% from December 2021 easy to discount.
When annualised, January’s execution rate suggests that the government could end up with less than half of the 10.7 trillion naira in revenue projected in the 2022 budget, leaving a gaping hole to fill.
It also means the government could spend even more than it earns this year on a controversial petrol subsidy, which is now tipped by the IMF to gobble up 6 trillion naira due to rising oil prices. The government has budgeted 4 trillion naira, a quarter of total expenditure.
“One thing that is clear to any savvy person is that the next president must find a way to increase revenue and reduce wasteful spending like the gasoline subsidy,” said economist Taiwo Oyedele, who is also a partner and responsible for taxation and regulation. services at PWC Nigeria, said.
“Our budgeting process needs an urgent review to close the recurring gap between actual revenue and what is budgeted,” Oyedele said.
Although major revenue items outperformed the benchmark, with federation account revenue and VAT up 34% and 18% year-on-year to N249 billion and N28 billion respectively. billion naira, although self-employed revenue also increased by 155% to 126 billion naira, other sources of government revenue, such as special levies and special accounts, were nil, against a pro-rata benchmark of 231 billion naira.
It will not be the first time that the government has made less money than expected. This has been the case for six consecutive years, which has resulted in reduced spending on investment projects and created a wider budget deficit that has been mainly financed by borrowing.
The government’s strained public finances are why critics of the petrol subsidy practice question its very existence.
“A government with such a huge deficit every year has nothing to do with such frivolous spending; it just doesn’t make sense,” said Egie Akpata, chairman of Lagos-based financial advisory firm Skymark Partners Ltd, referring to the practice of petrol subsidies.
“The big disparity between actual income and budget has been there for years and mocks our economic planning,” he said.
Whenever revenues do not match budget projections, the government invests less in critical capital projects and this was again the case in January.
Capital spending fell 30% in January from the same period last year, accounting for 29.7% of total spending. Ordinary expenses, which dominated total expenses at 65.9%, increased by 2.4% during the period.
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Total expenditure was N951 billion, compared to last year and 16% lower than the monthly expenditure target.
The mismatch between revenue and expenditure left the government with a deficit of N545.6 billion during the month, 16% above the target set in the budget. It was, however, a marked drop from the 1.1 trillion naira recorded during the same period last year, when spending by ministries and government agencies surged following the renewal and release of allowances ( capital) exceptional to ministries, departments and agencies in 2020. budget. Declines in revenue, particularly from non-oil sources, due to the lingering effect of the pandemic also contributed.
Nigeria spends most of its money on recurrent expenditure, ranging from workers’ salaries to debt interest payments.
Development economists have long argued that developing countries like Nigeria should spend more on investment projects to fill a serious infrastructure gap that limits business and economic growth.
For Nigeria, the African Development Bank estimates that an annual investment of $100 billion for the next 30 years is needed to close its infrastructure gap. That’s more than three times the federal government’s annual budget, and it’s why analysts prescribe a public-private partnership as the most realistic way to address the deficit.
“That’s why the next president must look for better ways to collaborate with the private sector,” said Muda Yusuf, CEO of the Center for Promoting Private Enterprise. “Our future as a country depends on what we start doing now to avoid financial collapse.”
The government collects only 6% of GDP in annual revenue, less than half of what frontier market governments collect (15%), according to World Bank data.