Nigeria is currently running down a 13th consecutive year of fiscal imbalance, where annual expenditure surpasses total revenue. While fiscal imbalance or debt financing is not necessarily a cause for worry, the widening gap of this deficit in the past thirteen years with almost no positive on the economy is worrisome. Deficit financing is a technical word for borrowing to support the budget.
Deficit financing is a concept in Keynesian Economics where the government spends more money than it receives as revenue and the difference is made up by borrowing or minting new money. The idea was propounded by John Maynard Keynes, who argues that demand drives supply and that healthy economies tend to spend or invest more than they save.
In other words, Keynes opined that in order to create jobs and boost consumer buying power, the government should increase its spending, even if it requires debt to do so.
Over the past 13 years, according to data culled from the Central Bank, deficit financing has been a tool employed by the federal government to run the economy with the hope that increased government spending through borrowings, investments in infrastructure and capital projects like power, road, rails, education amongst others, would spur growth and pay for itself in the future.
The dividends from these investments can be seen in improved education, job creation, growth in trading activities (locally and internationally), improved ease of doing business, increased foreign investments, and government revenue growth as a result of better tax generation from businesses operating in the country, all of which would trickle down to macro numbers such as inflation rate, unemployment, exchange rate etc.
However, all these are yet to be seen as the fiscal imbalance has continued to widen. Notably, in 2021 Nigeria’s federal government recorded total revenue of N4.39 trillion compared to an aggregate expenditure of N11.69 trillion, indicating a variance of N7.3 trillion, the highest in the past 12 years.
Similarly, in the first four months of 2022, revenue stood at N1.63 trillion against an expenditure of N4.72 trillion, representing a deficit of N3.09 trillion. Based on the approved budget for the fiscal year, the deficit is expected to hit N7.35 trillion in 2022.
The chart below gives a helicopter view of Nigeria’s fiscal numbers in the last twelve years.
What the macro numbers are saying
Nigeria’s GDP grew by 1.96% year-on-year to $440.78 billion in 2021, according to the World Bank, however, GDP per capita stood $2,085 in the same period, representing a 0.58% decline from $2,097 recorded in the previous year.
Also, Nigeria’s population size grew by 2.6% to 211.4 million in 2021 from 206.1 million as of 2020 based on World Bank estimates. This means that despite the GDP growth recorded by the economy, the population growth is outpacing the productivity level in the country.
According to data from the National Bureau of Statistics (NBS), over 23.1 million Nigerians were without jobs as of December 2022, indicating an unemployment rate of 33.3%, while under-employment stood at 22.84% in the same period.
In the month of July 2022, Nigeria’s inflation rate surged to a 17-year high of 19.64%, largely due to the sustained energy and FX crisis.
Similarly, forex scarcity has seen the exchange rate at the official and black market fall to N431/$1 and N700/$1 respectively, with many businesses in need of FX to fund the importation of their raw materials scampering for dollars.
Public debt rose to $100.1 billion in the first quarter of the year, while debt servicing is already overwhelming government revenue. In 2021, Nigeria spent 96% of its revenue on debt servicing, while between January and April 2022, it spent 118%.
Nigerians young and old are also leaving the country in search of greener pastures, while schools have remained shut for over 6 months, due to strike actions by university lecturers.
What the government is spending on
While the aforementioned tells a damning tale about Nigeria’s macro economy and worsening government fiscal imbalance, it is imperative to look at the items that the government spends on.
Nigeria’s expenditure increased by 16.9% in 2021 to N11.69 trillion from N10 trillion recorded in the previous year. However, retained revenue only grew by 9.3%.
A further breakdown of the expenses showed that N9.18 trillion was spent on recurrent expenditure, which had increased by 9.4% from the previous year.
Interestingly, 36.1% (N4.22 trillion) of the total expenditure was spent on debt servicing, 26% (N3.05 trillion) on personnel costs, while only 21.6% (N2.52 trillion) was directed towards capital expenditure.
Looking at more recent data, in the first four months of 2022, the federal government recorded a total expenditure of N4.72 trillion. In the same vein as the previous year, spent 41.1% (N1.94 trillion) on debt servicing, 24% (N1.13 trillion) on personnel cost, and 16.4% (N773.6 billion) on capital projects.
Based on the above, it is safe to say that debt service and personnel expenses gulps the most part of the government expenditure, with only a paltry going into capital projects.
The federal government revenue has also been significantly affected by the continuous underperformance and heavy subsidy payments in the oil sector. According to the Nigerian National Petroleum Commission (NNPC), petrol subsidy payment gulped a whooping sum of N2.04 trillion between January and July 2022, a significant difference of N1.78 trillion from the budgeted N258.3 billion.
Also, rising cases of crude oil theft have also kept Nigeria’s earnings from oil export low despite elevated oil prices.
What experts are saying
In a conversation with Dr. Muda Yusuf, the CEO, the Centre for the Promotion of Private Enterprise (CPPE) he highlighted factors that have widened government fiscal imbalance over the years. He broke the factors in two broad areas, that is the revenue and the expenditure side.
“Our revenue has been grossly underperforming, partly because of inefficiency in the revenue collection process. We hear about leakages in some MDAs. Secondly, the investment environment has also been increasingly difficult for businesses. You know there is a positive relationship between investments and revenue, investors pay the taxes.
“However, when many businesses are struggling because of the macro-economic challenges in the country, inflation, exchange rate etc, this will affect the revenue generation of the country. Then also, there is no good handle on our oil and gas sector, which is supposed to be the major source of government revenue.
“Issues of oil theft is still a major problem in the oil and gas sector, where the DG noted that we are losing about $2 billion monthly to oil theft, you can imagine what that could have done to government revenue.
Dr. Yusuf who is a former DG of the Lagos State Chamber of Commerce and Industry (LCCI), further said that, “The oil and gas have a lot of potential to support the country’s revenue, but we have not managed it effectively. Firstly, from the area of continuous oil theft, loss of investment, not taking full advantage of our gas reserves, and finally heavy reliance on importation of petroleum product as a result of the poor management of the sector, which is putting a lot of pressure on the country’s revenue. Additionally, is the cost of the petrol import and the payment of petrol subsidies.
“On the expenditure side, we have not shown any commitment to running a cost-effective government. The cost of governance is still very high. While we are complaining about revenue, expenditure has remained on the high. And most of these expenses are recurrent, rather than capital expenditure.
“It is understandable if you can justify the deficit by the amount of investments you have made in infrastructure, which would boost your capacity as an economy to pay in the future. Hence, we have not managed the expenditure side properly, and then again is the issue of corruption.
On the borrowing for infrastructure project and Nigeria’s rising debt servicing cost, Dr. Musa said that most of our borrowings is being used to fund recurrent expenditure and service debt. “If you look at the annual finances of the government, you will be lucky to see 20% being spent on infrastructure or capital project.
“Infrastructures are things that is expected to help the economy to grow, like power, railway system, road, waterways and many more. There is a big disconnect between the borrowing and the investments in infrastructure.
“We are at a point when the cost of servicing the loans is already exceeding the revenue. If the cost of servicing debt is exceeding revenue, that means you have to borrow to service the debt, personnel cost, capital project, and overheads. It is a vicious circle, and the cost of debt service and debt stock will be growing, hence re-enforcing itself, except some steps are taken to reform our expenditure, the oil and gas management system, the forex environment, and fix policies around subsidy payments and the importation of petrol.”