Budget 2023: Between Revenue Shortfall and Huge Borrowing 

The Minister of Finance, Budget and National Planning, Zainab Ahmed, last week revealed the federal government’s plans to borrow over N11 trillion and sell national assets to finance the budget deficit in 2023 at a period when all indices are pointing to a sharp fall in government earnings. Festus Akanbi, in this report, captures the fear of economic analysts, who warned that excessive borrowing will further hurt the economy, especially in a transition year

Unless something unexpected happens, the 2023-2025 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), unveiled by the federal government’s economic team headed by Minister of Finance, Budget and National Planning, Zainab Ahmed, during a public hearing with the House of Representatives Committee on Finance last week may not lead Nigeria to the “promised land” in a transition year.

As finance analysts put it, the document showed that come 2023, Nigeria’s sustenance will be dependent on the magnanimity of creditors, both local and foreign, a situation which they feared could be complicated by distractions to governance that are expected to come along the way as the current administration gears up for the transition to a new government next year. 

There is also the fear that going into an election year with the burden of mounting deficit in addition to a load of unresolved issues like the controversial policy of fuel subsidy, energy crisis, mounting debts, foreign exchange market instability, oil theft, and the attendant failure to maximise the current spike in crude oil price, may create a nightmare for the incoming administration. 

Revenue Shortfall

Nigeria’s pathetic situation is also underscored by the erosion of revenue from the sale of crude oil, Nigeria’s major revenue earner, prompting analysts to warn of a bleak future unless a major economic turnaround happens.

Their fear was said to have been kindled by the 29 per cent crash in crude oil revenue in the first quarter of 2022, according to statistics from the Central Bank of Nigeria. The CBN, in its latest economic and statistical report for the first quarter of 2022, stated that earnings from crude oil dropped to N790billion from N1.1trillion recorded in the previous quarter, which was from October to December 2021. 

Nigeria’s crude oil and gas earnings in the first quarter of 2022 were also 17.1per cent lower than the N956billion revenue recorded in the same period in 2021. According to the report, oil revenue for the first quarter of 2022 accounted for 38 per cent of the country’s gross revenue, which stood at N2trn in the period under review, while non-oil revenue, at N1.1trillion, accounted for 62 per cent of total earnings. In comparison, in the fourth quarter of 2021, oil revenue accounted for 46 per cent of gross revenue, the same as the first quarter of 2021.

On Borrowing Spree

Meanwhile, the Minister disclosed that the federal government will borrow over N11 trillion and sell national assets to finance the budget deficit in 2023. She also said the government’s budget deficit is expected to exceed N12.42 trillion if it should keep the petroleum subsidy for the entire 2023 fiscal cycle.

Explaining two scenarios of the budget deficit to the committee, the minister said the first option involves retaining the petroleum subsidy for the entire 2023 fiscal year. According to her, in the first scenario, the deficit is projected to be N12.41 trillion in 2023, up from N7.35 trillion budgeted in 2022, representing 196 per cent of total revenue or 5.50 per cent of the estimated GDP. In this option, she added, the government would spend N6.72 trillion on subsidy.

She explained that the second option involves keeping the subsidy till June 2023 and that this scenario will take the deficit to N11.30 trillion, which is 5.01 per cent of the estimated GDP. In this option, the PMS subsidy is projected to gulp N3.3 trillion.

She noted that the first option is not likely to be achievable based on the current trend while the second option would require tighter enforcement of the performance management framework for government-owned enterprises that would significantly increase operating surplus in 2023.

The projected deficit under the second option, the minister said, is expected to be financed through new borrowings from local and international sources. This will include a total of N9.32 trillion in new borrowings, comprising N7.4 trillion from domestic sources and N1.8 trillion from foreign sources. The government is expected to generate N206.1 billion from privatisation proceeds and N1.7 trillion in multilateral project-tied loans.

Hanging on Fiscal Cliff

In its analysis, Cowry Asset Management, in a report said the N19.76 trillion proposed for the 2023 budget by the federal government while its revenue underperformance and expenditure efficiency at both federal and states levels are at variance leaves Nigeria hanging on a fiscal cliff.

According to the document, the aggregate federal government revenue available for budget for the fiscal year 2023 is projected at N8.46 trillion (15.1% or N1.51 trillion less than the 2022 Budget), while the aggregate expenditure level is projected to be N19.76 trillion.

 A breakdown of the aggregate expenditure shows that there are Statutory Transfers of N722.11 billion, Debt Service of N6.31trillion, Sinking Fund of N247.73 billion, N1.20 trillion to service borrowings from CBN, and Recurrent (non-debt) expenditure of N8.52 trillion. 

 Meanwhile, a total of N6.15 trillion is provided for personnel and pension costs and then N4.37 trillion has been set aside for capital expenditures in 2023, representing 15% of the total expenditure (short of the 30% target set by the current administration), and is 25.4% less than the 2022 provision of N5.86trillion.

The minister, who lamented that the federal government may be unable to provide for treasury-funded capital projects next year, especially due to dwindling revenue and payment of subsidies on PMS, also pointed out that crude oil production challenges and PMS subsidy deductions by the NNPC constitute a major threat to the country’s revenue growth targets.

Furthermore, the budget deficit is projected to be N11.30 trillion in 2023, up from N7.35 trillion in 2022 which is 5.01% of the estimated 2023 GDP and defies the three per cent threshold as enshrined in the Fiscal Responsibility Act, 2007. 

 Analysts said the two proposals have budget deficits far above the stipulated threshold in the Fiscal Responsibility Act. According to the existing Act, the deficit must not exceed three per cent of the GDP. However, the law makes provision for the President to cross the threshold with the approval of the National Assembly.

Naira Devaluation in the Offing?

According to further analysis from Cowry Asset Management, “Key assumptions of the proposed 2023 budget raise the flag that more Naira devaluations will be made a reality as the federal government hopes for an exchange rate of N435.57/USD as against 2022 (revised) projections of N410.15/USD. Also, with projected daily oil production at 1.69mbpd and the oil price benchmark at $70, subsidy payments (N6.7 trillion) may likely gulp earnings from oil sources as the federal government has failed to take advantage of the current rise in the oil price which is above the $73/b in the 2022 revised projections.”

According to the report, “The above is predicated on the upward-pressure swings in prices which are heavily driven by the current and lag effect of the global price surge due to the Russia-Ukraine war, domestic insecurity, rising costs of imports, exchange rate depreciation as well as other supply-side constraints.”

The analysts believed the recourse to the international debt market will put the Debt Management Office (DMO) under serious pressure in 2023 (election year) dampened by rising yields. 

Some observers alleged that the document submitted to the National Assembly has all the features of a budget capable of causing serious upsets for the coming administration. According to them, the CBN Governor will bear the brunt of the heavy reliance on domestic debt given the current level of liquidity within the system and the attendant pressure on commercial banks. They, therefore, wondered why all the National Assembly did was endorse the document without the expected rigorous scrutiny.

Although many Nigerians appear uncomfortable with the latest borrowing plan, the minister was confident that Nigeria has been able to consistently without defaulting, service her debt, adding that the country does not have any projections even in the near future, to fail in its debt obligation.

Speaking further, Ahmed said although the amount currently used to service the country’s debt had overshot what was appropriated for in the budget, measures have been put in place to manage the situation.

While lamenting that revenue generation had remained a major fiscal constraint for the country, she said efforts would however focus on improving tax administration and collection efficiency.

Given the heavy burden of the oil subsidy policy on the 2023 budget, one wonders why it is still difficult for the outgoing administration to do the needful since the majority of Nigerians have come to realise that the subsidy regime is fraught with corruption and it has continued to be a major economic drain pipe.

A school of thought argued that although the present administration may find it difficult to be decisive about the issue of oil subsidy as doing so may be a political suicidal on the eve of a major election, they believed that government can step up efforts at putting an end to revenue leakage through crude oil theft.

She added that there would be tighter enforcement of the performance management framework for Government Owed Enterprises (GOEs) that would significantly increase operating surplus/dividend remittances in 2023.