By Chinwendu Obienyi
Nigeria’s fiscal landscape stands at a crossroads, shaped by the volatility of global oil markets, declining crude production volumes and the growing strain of debt servicing.
This has fueled growing concerns within economic discussions, signaling the potential emergence of an impending crisis for the economy.
According to the recently published second quarter (Q2) 2024 statistical bulletin by the Central Bank of Nigeria (CBN), FG’s fiscal deficit worsened to N4.3 trillion from N4.2 trillion in Q1 2024 as against N2.6 trillion recorded in Q2 2023, marking the largest quarterly deficit on record.
For context, fiscal deficit is a situation in which the government spends more than it generates in revenue. Cumulatively, fiscal deficit grossed N8.4 trillion in the first half (H1) of 2024 compared to N6.9 trillion recorded in the full year (FY) of 2023, and this translates to a 4.8% outrun on the pro-rata N7.7 trillion estimated deficit for the period (2024 budgeted expenditure plus supplementary: N35.0 trillion, estimated revenue: N19.6 trillion, deficit: N15.4 trillion).
The data also pointed out that government expenditure rose 19.1% quarter-on-quarter (q/q) to N6.6 trillion (+61.8% y/y) with the recurrent component (debt and non-debt) accounting for an outsized share of 87.2% (N5.8 trillion) while capital expenditure took the balance of 12.8%.
A cursory look at the data indicates a staggering growth of 66.2% q/q (133.9% y/y) in debt service – further expanding its share in the total expenditure to 57.0% (Q1: 40.9%) owing to the rise in debt service to high interest rates and the negative pass-through effect of the Naira’s continued slide (Naira lost 15.1% against the dollar in Q2).
Meanwhile, capital expenditure dipped 26.6% q/q (3.2% y/y) to N846.5 billion – further heightening concerns over the legacy low capital investment in key sectors which should drive sustainable economic growth.
However, on the revenue side, the government’s net inflow grew mildly by 4.8% q/q to N3.8 trillion – the first q/q growth since Q1 2023. This was supported by the 14.2% q/q (468.4% y/y) increase in net oil revenue receipt owing mainly to dollar-to-naira conversion gains and the modest 2.3% q/q (8.7% y/y) uptick in average crude oil price to $84.37/bbl even though average crude production fell to 1.41mbpd from 1.59mbpd in Q1.
Conversely, net non-oil revenue extended its three consecutive q/q decline albeit at a slower pace of 5.4% in Q2 2024 (Q1 2024: 23.3%) following a 12.5% decrease in corporate taxes to N895.2 billion and this was not a surprise considering the tough business environment which exerted significant negative pressure on businesses profitability, evidenced by the overwhelming dismal earnings performance in Q2 and Q3 2024 by most players in the real sector.
Given the ballooning expenditure, the government is compelled to rely on loans to meet its obligations and manage debt service. This underscores why Nigeria’s debt stock rose to N121.7 trillion in Q1 2024 (2023 year-end: N97.3 trillion), with preliminary estimates suggesting that the number may have crossed N134.0 trillion at the end of H1 2024.
This suggests that the tax pressure will build more momentum in coming months as borrowing has become extremely expensive for the government. For instance, at the last FGN bonds auction conducted by the DMO, the marginal rates on APR 2029 and FEB 2031 bonds settled at 20.8% and 21.7%, respectively. Likewise, the rates cleared as high as 23.0% for 364-day bills at the last T-bills auction by CBN.
Experts renew calls for multi-dimensional approach
Reacting to the CBN bulletin, financial experts noted that the fiscal imbalance is pushing Nigeria toward unsustainable debt levels. They further added that the decline recorded in capital expenditure may hinder investments in key sectors necessary for sustainable economic growth.
In an emailed note to Daily Sun, analysts at Afrinvest Research explained that although ongoing fiscal measures have resulted in steady improvement in non-oil tax revenues, there may be a further tightening of the tax regime without creating adequate safety net for the outsized vulnerable population which will in (c.63.0% of Nigerians are in multidimensional poverty) turn further devastate the average household living standard and the business environment.
“As such, it is essential that the FG optimises low hanging fruits such as ramping up of crude oil production alongside ending crude oil theft and incentivising the inflow of long-term patient capital & diaspora remittance to deliver near term economic relief. Furthermore, given the slow growth in revenue sources and huge structural gaps, we opine that holistic implementation of fiscal prudence measures would be a good take-off point for the government to better utilize the currently thin resources to turn the economy’s fortune around in no distance period without further burdening the citizens”, they said.
The Group Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, at a forum, whilst pointing out the mixed outcomes in the Nigerian economy, acknowledged that that there has been some growth but structural weaknesses.
Chukwu said, “The fact that only 10 of the 46 economic sectors showed growth in Q2 2024 is concerning, as it suggests limited sectoral diversification and resilience. While there might be some “sprouts” or positive developments in a few areas, the broader economic structure seems to struggle”.
Making recommendations on how to address these challenges, the Cowry boss who also doubles as an economist, noted that it may be beneficial for policy interventions to focus on stimulating lagging sectors and encouraging a more balanced economic development approach.
His words, “First, the government has to rein in insecurity in the northern parts of the country, if that is done, then, there will be an improvement in food production and if there is an improvement in food production, inflationary pressures that came at 27.58% for food will drop because most Nigerians eat homegrown food and we must recall that Nigeria has never complained about food insecurity, rather it is the physical insecurity that we have now is leading to food insecurity, this the government has its work cut out.
Secondly, we have to improve crude oil production and this means that our foreign reserves will be strengthened, the implication of this is that we will have a stronger Naira. Bear in mind that at the end of last year, the exchange rate was about N900/$1 at NAFEM while it was N1,206/$1 at the parallel markets. So assuming we go back to these figures now, this will be a minimum of 30% savings (current exchange rate). This then means that fuel will sell at maybe N1000 per litre and this will help moderate inflation, conserve Nigeria’s household income”.
Corroborating Chukwu, the Managing Director, Infinera Agribusiness Ltd, Kolawole Oye, noted that without decisive action, the FG risks widening its fiscal deficit and exacerbating its debt burden.
Oye recommended, “We have to diversify our revenue sources beyond oil as it has left our economy vulnerable to external shocks. While long-term diversification is necessary, Nigeria cannot afford to ignore the oil sector’s immediate contributions to revenue. Maximizing oil production to meet or exceed the 1.78 mbpd target should remain a top priority. This can be achieved through targeted reforms aimed at improving the operational efficiency of state-owned oil assets and attracting foreign direct investment (FDI) into the energy sector.
Debt servicing remains a major challenge, exacerbated by the weakening naira. The Nigerian government must adopt a more sustainable borrowing strategy that balances domestic and international financing, prioritizing concessional loans and grants over costly commercial borrowing”.
Conclusion
Nigeria’s fiscal situation indeed presents a complex challenge, balancing ambitious revenue targets with the realities of fluctuating oil prices and mounting debt. With oil as a primary income source, Nigeria is particularly vulnerable to global oil market swings, making diversification a critical need.
The strategies recommended by financial experts offer a pathway for Nigeria to manage its immediate fiscal challenges while positioning the country for a more resilient economic future. With careful planning and execution, Nigeria can move closer to achieving sustainable growth and reducing the risk of fiscal instability.