Nigeria’s fiscal deficit has seen a notable reduction as of the first quarter of 2024, decreasing by 29% from N3.96 trillion in the same period of 2023 to N2.83 trillion.
According to data from the Central Bank of Nigeria (CBN), the country’s revenue in the first quarter of 2024 increased to N1.76 trillion, up from N1.32 trillion in the same period of 2023. Expenditure for the same period stood at N1.53 trillion, reflecting an ongoing struggle to balance the budget.
The reduction of the deficit comes as a reprieve against Nigeria’s growing ordeal of budget deficits, a reality that profoundly impacts the government’s ability to implement policies effectively. However, while a positive development, the deficit reduction still reflects a broader issue of revenue shortfalls relative to the country’s ambitious spending plans.
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A fiscal deficit occurs when a government’s expenditures surpass its revenues, forcing it to borrow to cover the shortfall. This situation has become a recurring theme in Nigeria’s financial management, where the government often finds itself running multiple budgets concurrently.
Currently, Nigeria is juggling four budgets simultaneously due to the accumulation of deficits over the years. This multi-budget scenario creates a complex environment where financial resources are stretched thin, leading to delays and inefficiencies in policy implementation.
In a bid to bridge the fiscal gap, the Nigerian government introduced a 50% windfall tax on banks’ foreign-currency revaluation profits in 2023. This tax, which was later increased to 70% by the Senate, is intended to generate additional revenue for infrastructure and other critical spending.
While this measure provides a temporary boost to the government’s coffers, analysts warn that it is not a sustainable long-term solution to the deficit problem.
“The purpose of the windfall tax on banks is to support the budget. Given this, there will be an extra source of income to the government for the given period and in effect reduce the budget deficit,” said Emeson Kelvin, a Lagos-based finance analyst. He further noted, however, that “bank FX gains in the 2023 full year should not be seen as an extra source of income for the federal government of Nigeria.”
Tobi Ehinmosan, a macroeconomic and fixed-income analyst at FBNQuest Merchant Bank, also weighed in on the issue, stating that it is not certain how much the Federal Government will gain from the banks’ realized foreign exchange gains.
“The potential revenue from banks will not meet the country’s rising expenditure plans,” Ehinmosan said.
The FBN Quest analysts, in a daily morning note entitled, ‘A lower fiscal deficit in Q1 ’24,’ which was released on August 1, said: “Improved crude oil production, efficiency in tax revenue mobilization, and the 70% windfall tax on banks’ forex revaluation gains could potentially boost the Federal Government of Nigeria’s revenue purse. We anticipate an expansion of FGN’s expenditure profile due to the recent increase in workers’ wages and elevated debt servicing costs resulting from the government’s reliance on borrowings to finance its budget deficit because of revenue underperformance. As such, we expect the FGN’s fiscal operations to remain in deficit in subsequent quarters.”
The fiscal deficit issue is compounded by broader economic challenges. Since President Bola Tinubu’s removal of petrol subsidies in May 2023, the country has faced soaring fuel prices and a depreciating currency. The Central Bank’s decision to merge all segments of the FX market into the Investors and Exporters window and reintroduce the willing buyer, willing seller model has added to the economic volatility.
An Accelerated Stabilization and Advancement Plan draft report presented by Finance Minister Wale Edun indicates that Nigeria may spend up to N5.4 trillion on petrol subsidies in 2024, up from N3.6 trillion in 2023.
“At current rates, expenditure on fuel subsidy is projected to reach N5.4 trillion by the end of 2024. This compares unfavorably with N3.6 trillion in 2023 and N2.0 trillion in 2022,” the report said.
Although Bayo Onanuga, the president’s special adviser on information and strategy, dismissed the viral document, describing it as unofficial and merely a policy proposal still under review at the highest levels, the projection underscores the immense fiscal pressures facing the government, as it attempts to balance the need for subsidies with the imperative of reducing the deficit.
Analysts note that while the recent reduction in the deficit is a good sign, the broader challenges of managing multiple budgets, rising debt, and economic instability continue to hinder effective policy implementation. These continue to strain the government’s capacity to execute its programs and policies as intended.