Nigeria’s fiscal deficit has grown to alarming levels, reaching 7.6% of GDP as of August 2024, far surpassing the approved target of 3.8% for the year, according to recent statements from members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC).

The MPC members attributed the widening deficit to a combination of sluggish revenue generation and high government spending.

The National Assembly initially approved a 2024 budget of N28.7 trillion, with a revenue target of N19.5 trillion. This created a projected budget deficit of N9.1 trillion, equivalent to 3.8% of GDP. However, as the year progressed, the government introduced a supplementary budget of N6.2 trillion, pushing the deficit far beyond expectations.

According to MPC member Aloysius Uche Ordu, Nigeria’s revenue generation fell significantly short, achieving only 37.9% of the annual target in the first half of 2024. The shortfall is largely due to lower-than-expected allocations from the Federation Accounts Allocation Committee (FAAC), limiting the federal government’s ability to meet its financial obligations.

Even though retained revenue increased by 33.31% from January to June compared to the same period in 2023, it still fell 62.1% short of the 2024 target. Ordu cautioned that the government’s spending priorities continue to lean heavily towards recurrent expenditures, with debt servicing costs consuming a significant portion of the budget.

Reliance on Recurrent Expenditures

Nigeria’s budget allocations reveal a strong bias towards recurrent expenditures, primarily to cover debt servicing costs, while capital expenditure, essential for economic growth, remains a lower priority. This imbalance raises concerns over the country’s capacity to achieve sustainable economic development. The MPC members pointed out that this spending pattern, exacerbated by the lack of a strategic shift toward capital projects, has further hindered Nigeria’s progress toward long-term economic goals.

In the first half of 2024, provisional data indicated that the fiscal deficit already reached 91.94% of the full-year target by June, sparking questions on how the government plans to fund the remaining expenses without inflating the deficit even further. Ordu stressed the need for a redirection of resources towards productive investments that could foster economic resilience and stability.

CBN MPC member Muhammad Sani Abdullahi highlighted the critical role of proactive monetary policy in countering the negative impact of Nigeria’s fiscal deficit. As discussions on implementing a new minimum wage gained momentum, Abdullahi underscored the importance of revenue generation and disciplined government spending to help stabilize Nigeria’s fiscal outlook.

“A narrowing deficit would support macroeconomic stability and relieve some of the pressures currently weighing on the economy,” Abdullahi stated.

The MPC commended the government for refraining from using the CBN’s Ways and Means financing option—a form of overdraft from the central bank—as a stopgap measure. However, committee members remain concerned about how long this restraint can be maintained, especially given the mounting revenue shortfalls and spending obligations.

Heavy reliance on FAAC distributions has also raised liquidity concerns within the banking sector, which impacts the naira’s exchange rate. Should the federal government continue with a high level of dependency on FAAC for revenue, it risks placing additional pressure on the financial sector and further straining the naira.

Optimism in the External Sector

However, Nigeria’s external sector offers a rare glimmer of hope. The CBN’s tight monetary policy has contributed to a decline in import bills, resulting in a balance of payments surplus of $2.47 billion during the period. This, along with other measures, has bolstered the nation’s external reserves, which rose from $37.44 billion in September to $40 billion by November, providing over seven months of import cover. The naira also recorded a slight appreciation, driven by these improved reserves and reduced demand for imports.

The MPC’s continued commitment to a stringent monetary policy has helped maintain external stability, but experts warn that this progress could be jeopardized if fiscal deficits are not brought under control. Although external reserves provide some buffer against economic shocks, the unsustainable domestic fiscal situation remains a substantial risk.

The Impact on Market Stability

The growing deficit sheds light on structural weaknesses in Nigeria’s financial framework. Revenue collection remains erratic, while government spending is heavily skewed toward servicing recurrent expenses rather than investing in capital projects that could boost productivity and growth. Low revenue collection levels, coupled with high debt obligations, underlines the fiscal constraints hindering Nigeria’s economic development.

Experts argue that while Nigeria’s balance of payments remains stable for now, the unchecked growth of the fiscal deficit poses a major threat to macroeconomic stability. Lamido Yuguda, another MPC member, noted that Nigeria’s low revenue base underpins weak fiscal performance, which could create a dangerous cycle of borrowing and reliance on FAAC distributions.

The MPC’s report highlights that without a balanced approach to revenue generation and expenditure discipline, the federal government risks not only deeper economic imbalances but also potential future crises in sectors reliant on public funding. To prevent further instability in Nigeria’s financial markets and economy, Abdullahi added that a concerted effort is essential to bolster revenue and trim excessive spending.

The MPC advocates for more structural reforms that go beyond short-term monetary adjustments. Improving the efficiency of tax collection, widening the tax base, and enforcing spending limits on recurrent expenditures are among the recommended steps. Additionally, prioritizing capital expenditure could help foster economic growth and reduce dependency on external borrowing in the long term.