“The 2022 budget fails to curtail the consistently rising cost of governance, personnel costs for a largely lethargic civil service.”
Last week, President Muhammadu Buhari presented Nigeria’s 2022 budget to the national assembly. The budget set total spending for 2022 at N16.39trillion (US$39.59 billion), which is a new budgetary record for Nigeria. Total expected revenue is estimated at N10.13 trillion (US24.47 billion), with oil revenue projected to provide N6.97 trillion (US$16.67 billion) and the balance of N3.16 trillion (US$7.63 billion) expected from the non-oil revenue sector. This indicates that Nigeria is targeting a budget deficit of N6.25 trillion (US$$15.10 billion) in 2022.
The budget was termed by the president as a “Budget of Economic Growth and Sustainability” and is backed by four main assumptions: (I) Average oil price benchmark of US$57/b, (II) Average daily oil output of 1.88 million bpd (includes condensates of around 300,000 to 400,000 bpd), (III) Average exchange rate of N410.15/US$ and (IV) Average GDP growth rate of 4.2% and 13% annual inflation rate.
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A flawed approach to budgeting
Nigeria consistently has passed budgets with unrealistic revenue assumptions and targets that have never been met. Take the 2021 budget for instance; as of July 2021, Nigeria only realised revenues of N2.61 trillion (US$6.30 billion) compared to a prorated target of N3.95 trillion (US$9.54 billion). This indicates that Nigeria is 34% behind target.
The scenario is similar over the past decade with Nigeria barely meeting 60% of the targeted revenue. If this trend is repeated in 2022, government may likely only realise a revenue of N6.08 trillion, which is less than the planned spending deficit of N6.25 trillion. All this points to, is the country’s weak earnings potential, compared with the government’s large spending appetite.
Nigeria’s consistently weak revenue is largely the government’s fault. Over the last five decades, investment into the oil sector has stalled largely due policy inconsistency. The oil sector currently accounts for about 70% of government revenues. Whilst President Buhari signed the Petroleum Industry Act (PIA) into law in August, analysts are of the opinion that Nigeria will likely struggle to attract new investments, owing to a shift in global focus to renewable or green energy.
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Nonetheless, the prospect for the global oil sector in 2022 is positive. The OPEC+ coalition and stronger oil demand from China will likely see oil prices rise above US$90/b (Goldman Sachs estimates that crude oil price will reach this benchmark by year-end), significantly above the FGN budget estimate of US$57/b. Nigeria’s oil output expectation is also more realistic at 1.8 million bpd (including condensates), given the likelihood for OPEC’s approval of slightly increased output for Nigeria.
With projected monthly subsidy cost of around N139billion (US$339million) in 2022, Nigeria’s oil revenue will likely come under further pressure unless government takes a bold decision. Two solutions are available: (1) raise current retail pump price to reduce the subsidy costs (with government still bearing some portion) or (2) eliminate all subsidies but with a clear-cut communication plan, engagement with labour unions and palliative measures to the vulnerable. However, this will unlikely be attempted until at least 2023.
Deficit budget and Nigeria’s debt sustainability
As established earlier, the 2022 proposed budget projects a total debt of N6.25 trillion, compared to a likely total revenue of N6.08 trillion. This points to borrowings higher than Nigeria’s revenue. It smacks of fiscal irresponsibility. This continues the trend over the last five years, with budget deficit to GDP exceeding the 3% mandated in the Fiscal Responsibility Act 2007. In 2020, for example, the fiscal deficit to GDP reached 4%, and has reached 6% as at Q1 2021.
Asides this, Nigeria’s debt service to revenue is spiralling out of control. (Debt service means the amount Nigeria spends on paying the interests on its debt). Based on data provided by the budget office, Nigeria’s debt service to revenue reached 72% in 2020, and rose to as above 100% in Q1 of this year. Nonetheless, the Nigerian government is yet to cut its debt appetite with total debt increasing by over N20 trillion (US$48.31 billion) since 2015. We estimate that Nigeria’s debt service to revenue could reach 90% by 2021 year-end.
Ballooning cost of governance still a concern
Like other budgets under the President Buhari leadership, the 2022 budget fails to curtail the consistently rising cost of governance, personnel costs (for a largely lethargic civil service) and overheads.
In the 2022 budget for instance, N6.83 trillion is earmarked for recurrent expenditure. This amount is 42% of the entire budget and represents spending for personnel costs and overheads. This budgeted amount for recurrent expenditure is higher than capex estimate of N5.35 trillion (US$12.92 billion) and debt service of N3.61 trillion (US$8.72 billion).
Nigeria’s continued high expenditure on unproductive ventures (like its recurrent expenditure) contextualises the weak economic growth profile of the country. Without reforms and the channelling of spending to economically viable sectors like education, health and infrastructure, Nigeria’s growth will continue to fall short of potential.
The proposed 2022 budget expectation for a 4.2% GDP growth is at best unrealistic, as the budget does not show any potential for spending that could spur stronger GDP growth. Consensus estimates for Nigeria’s 2022 growth rate is around 2.5% on average. The World Bank in its October 2021 update, projects Nigeria’s growth at 2.4% in 2021 and 2.1% in 2022.
Nigeria’s budgets should stimulate growth
It is time for Nigeria to end its annual fantasy budgets. Revenue estimates need to get realistic, and their use tracked efficiently. Growing government revenue via expanding the tax base should now really become a priority.
Reducing loopholes and “deals” in tax administration is very important. And more can be done to expand the tax net, especially to bring in players in Nigeria’s vast informal sector.
But the most sustainable means of expanding the tax base is the provision of a stable economic and political environment for businesses to thrive. This will stimulate large-ticket foreign direct investments into the economy that will create new jobs.
Fortunately, Nigeria has done this before. The telecommunications industry reforms in the early 2000s unleashed investment into GSM services. That singular policy reform has created a very vibrant Telco industry which according to recently published Subscribers/Network Data Report by the Nigerian Communications Commission (NCC), recorded a combined revenue of N2.88 trillion (US$6.96 billion) in 2020 (compared to N2.516 trillion in 2019). GSM operators’ revenues increased by 12.33% to N2.27 trillion (US$5.48 billion) from the N2.02 trillion (US$4.88 billion) in 2019.
Government taxes from this sector significantly adds to non-oil revenue and the sector has underpinned growth since at least 2017 (as other sector struggle under the weight of recession and poor policy direction).
Budgetary allocations to education, health and infrastructure needs to be increased. Whilst President Buhari attentiveness to infrastructure is commendable, actual spending falls behind recommended thresholds.
The Nigeria Investment Promotion Commission (NIPC) recommends that Nigeria spends at least N2.80 trillion (US$6.76 billion) on infrastructure over the next 20 years to bridge the infrastructure gap in the country. This translates to an annual average spend of N140 billion (US$338.16 million), which Nigeria can afford if it makes policy and spends wisely.
