Nigeria’s fiscal deficit reaches 7.6% of GDP; MPC calls for revenue reforms

Nigeria’s fiscal deficit has surged to 7.6% of GDP as of August 2024, far exceeding the government’s approved 3.8% target for the year.

This troubling development was disclosed in statements from the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) members, who highlighted the widening chasm between revenue collection and expenditure.

At the onset of 2024, the National Assembly sanctioned a N28.7 trillion budget, balanced against a projected revenue of N19.5 trillion, forecasting a budget shortfall of N9.1 trillion (3.8% of GDP). However, fiscal pressures intensified as a supplementary budget of N6.2 trillion was later proposed, aggravating the financial strain.

MPC member Aloysius Uche Ordu noted a significant revenue underperformance, with only 37.9% of the year’s target achieved by mid-year.

This underachievement stemmed from shortfalls in Federation Accounts Allocation Committee (FAAC) receipts, impeding the federal government’s fiscal capabilities. Despite a 33.31% increase in retained revenue between January and June compared to 2023, the revenue deficit still stood at a stark 62.1%.

Lamido Yuguda, another MPC member, linked the fiscal deficit to Nigeria’s persistently low revenue base, which constrained financial performance in the first half of the year.

By June, provisional data revealed that the deficit had reached 91.94% of the full-year target, raising red flags over how remaining expenditures would be financed without further exacerbating the shortfall.

Ordu underscored that Nigeria’s budgetary focus was heavily skewed towards recurrent spending, predominantly driven by debt servicing. This allocation has come at the expense of capital expenditure—crucial for stimulating economic growth and long-term development.

The prioritization of recurrent expenses without reprioritization for growth-inducing capital projects has deepened Nigeria’s fiscal challenges.

MPC member Muhammad Sani Abdullahi stressed the importance of a vigilant monetary policy in mitigating the potential fallout from an unchecked fiscal deficit, especially as discussions for a new minimum wage gain momentum.

While he pointed out that the deficit had reached 7.6% of GDP, Abdullahi argued that boosting revenue streams and curbing expenditures could stabilize the fiscal trajectory, ultimately aiding macroeconomic stability.

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Encouragingly, the committee acknowledged that the government had so far resisted resorting to CBN’s Ways & Means financing, a move that has traditionally put additional pressure on inflation. Yet, the sustainability of this fiscal restraint remains in question as revenue challenges persist.

The MPC also noted the implications of heavy FAAC dependency, which not only affects the liquidity within the banking sector but also exerts pressure on the naira’s exchange rate. Nonetheless, there have been positive external sector developments.

A drop in import bills, influenced by the CBN’s tight monetary policy, led to a balance of payments surplus of $2.47 billion, with external reserves growing to $37.44 billion by September and further to $40 billion by November. This bolstered the naira’s value and offered a seven-month import cover, signaling resilience in the country’s foreign exchange position.

Despite these external gains, the structural weaknesses in Nigeria’s fiscal management remain a pressing issue. The MPC’s commitment to stringent monetary policies has managed to curb import demand and reduce vulnerability to external shocks.

However, unless the federal government ramps up revenue collection and practices fiscal prudence, these gains could be undermined by the persisting budget deficit.