from Nigeria budget 2023recently presented by President Muhammadu Buhari to the National Assembly caused a stir.
We are concerned about the impact on the country increasing deficits and debtas well as its inability to address some of the structural shortcomings that led to declining revenues and rise in inflation.
The 2023 Budget spent of 20.51 trillion naira ($43.7 billion) is the highest on record. More than half of this sum is money that the government does not have and must be financed by new debt. This will mean that the country exceeds the threshold of 3% of GDP provided for by the Fiscal Responsibility Act 2007 – an index of the deterioration of the country’s fiscal health.
Over 60% of the 2023 budget will fund debt repayment (6.31 trillion naira), personnel costs (4.99 trillion naira) and overheads (1.11 trillion naira). This leaves very little for spending to revitalize the economy and increase its growth potential.
Rather than a budget of hope, Buhari’s proposal is a budget of desperation. This will not significantly change the pace of the economy. Nor will it reduce the country’s high rates of unemployment, poverty and inflation.
In fact, it could worsen Nigeria’s cycle of deficits and debts, with no opportunity to foster structural transformation, diversify the economy, promote sustainable economic growth, and reduce unemployment and poverty.
Endless cycle of deficits
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The budget is in line with previous budgets of the Buhari administration.
More importantly, it fails to address the structural shortcomings of the Nigerian economy. These include lack of diversification and non-oil revenue sources. These were responsible for the cycle of high budget deficits and public debts.
The 2023 budgetary priorities investment in road and rail projects, energy projects, drinking water, construction of irrigation infrastructure and dams across the country, and critical health projects.
That’s all well and good, but it’s unclear how they’ll reduce the high unemployment and poverty rates in the country. These projects are not widespread and labor intensive enough to absorb millions of unemployed Nigerians.
It is also unclear how many projects will be completed, given the propensity of successive Nigerian governments to abandon projects.
The biggest problem is that the budget does not address the issue of economic diversification. This is clearly reflected in its title: Fiscal sustainability and transition.
You cannot have fiscal sustainability without structural transformation. This implies a reallocation of resources from low productivity sectors to high productivity sectors of the economy. The budget only made a lukewarm reference to the manufacturing sector. Still, it could offer a number of benefits.
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The first concerns jobs. The manufacturing sector uses more labor per unit of output and could absorb the High number of unemployed and underemployed Nigerians. The Nigerian informal sector contributes approximately 80% employment in the country, making it difficult to collect taxes. An increase in the number of Nigerians in formal sector jobs would increase income tax and reduce the need to borrow. Manufacturing companies also tend to be more stable.
Nigeria has to borrow because of two major weaknesses – neither of which is addressed in the budget.
The first is the persistent economic problem of the country’s “double gap”. This is a situation in which domestic savings are not sufficient to finance a country’s desired level of capital investment – the savings-investment gap.
In addition, the country does not generate enough foreign exchange earnings to pay for its imports – the foreign exchange deficit. It is difficult to estimate the extent of the foreign exchange deficit in Nigeria. But this is manifested by the fact that the foreign airlines present in the country have not been able to repatriate approximately $450 million in ticket sales due to severe currency shortages.
Nigeria does not generate enough foreign exchange earnings to meet the needs of the economy. This has led to a parallel foreign exchange market, with most businesses and individuals turning to the parallel market to source major foreign currencies such as the US dollar.
The 2023 budget is based on an exchange rate of 435.57 naira per 1 US dollar, against more than 700 naira in the parallel market. Buhari made no mention of the government’s intention to shut down this huge gap between the official exchange rate and the parallel market rate.
The only sustainable way to close this gap is to increase the capacity of the economy to generate foreign exchange earnings.
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This gap has serious implications for public spending outcomes. Many government ministries, departments and agencies purchase goods and services from companies that source foreign currency from the parallel market.
This automatically makes the spending estimates in the 2023 budget unrealistic, as suppliers of goods and services will require revision of their contracts to cover the higher costs of foreign exchange procurement. This would then require additional budgets and additional borrowing, which, in turn, would make spending projections unreliable.
The first and second quarters of 2023 will be dominated by elections and political transitions. This can have the effect of disrupting economic activities and fueling uncertainty, especially among domestic and foreign investors.
The economy could therefore fall short of the 3.5% growth rate assumed in the budget parameters, which would subsequently translate into lower revenues and additional borrowing.
Deficits and debts imply that taxes will be increased in the future to pay debts, making investments less profitable. It may also encourage nervous investors to move their capital to more fiscally stable countries.
There are also fears that rampant borrowing could push the country’s debt portfolio into the realm of unsustainability, which could then lead to debt defaults and a sharp drop in new lending. Government obligations to contractors and other investors would be compromised.
The lip service given by the 2023 budget to structural transformation and sustained economic development will temper investor optimism about the Nigerian economy. The lack of clarity about the future direction of the economy under a new administration, as well as the continuing security problems in the country, will only make matters worse.