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Debt service burden, subsidy may push deficit above N7tr this year

Debt service burden

• Deficit already N3 trillion at end of May
• Debt service ratio hits 97%

The possibility of the Federal Government resorting to further borrowings or ‘ways and means’ (government facility from the Central Bank of Nigeria) to cushion the effect of revenue shortfall is imminent due to the rising fiscal deficit, despite a rise in oil prices.

As observed in the 2021 performance up to May, the 2022-2024 Medium Term Expenditure Framework Fiscal Strategy document (MTEF/FSP) showed that inflation, subsidy payments, and weaker-than-expected economic performance continue to threaten government’s ambitious revenue growth targets.

Specifically, government’s revenue from January to May 2021 was N1.8 trillion, a 33.3 per cent shortfall of the budgeted amount, compared to an expenditure profile of N4.86 trillion, representing 92.7 per cent of the prorated budget. This has pushed the deficit to N3 trillion already at the end of May, over half of the N5.6 trillion projected for the year.

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If this trend continues, stakeholders worry that the deficit might exceed N7 trillion, just like it crossed N6 trillion in 2021. The Federal Government 2020 budget recorded very low revenue inflows, which resulted in a huge deficit that hit N6.598 trillion at the end of the budget implementation on May 31, 2021.

According to the Fourth Quarter and Consolidated 2020 Budget Implementation Report, “overall, a total of N6,598.96 billion deficit was recorded in 2020, representing a budget-to-GDP ratio of 4.33 per cent, which is above the target rate of 3.30 per cent.” The report said the execution of the 2020 budget was challenging due to the impact of COVID-19, which led to the collapse of the global economy and resulted in the revision of the budget.

The World Bank in its latest development update noted that though rising oil prices are easing fiscal pressures, Nigeria remains highly vulnerable to external and domestic shocks, adding that the high cost of debt service is increasing fiscal rigidity.

The bank had warned that over-optimistic revenue forecasts and the resulting shortfalls lead to larger-than-anticipated deficits, creating additional financing needs for which borrowing has not been approved by the legislature, which encourages the use of CBN financing.

Already, states are feeling the heat as Federation Accounts Allocation Committee (FAAC) shared N605.958 billion to the three tiers of government for the month of May, below the N650 billion that the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, described as the comfortable figure for sharing.

Though the Minister of State for Finance, Budget and National Planning, Prince Clem Agba, said the deficit was trending down with the increase in revenue and reduction in operating costs, there are concerns about government’s ability to sustain the increase going by zero surpluses from government-owned enterprises (GOEs).

Despite higher oil prices, government’s earnings have remained challenged as a result of its spending problems, especially on subsidies and unnecessary interventions that have been undermined by high inflation.

Also, total debt servicing (N1.80 trillion) was 30.1per cent higher than budgeted. This was mainly driven by the interest payment on ways and means (government facility from CBN), which settled at N480.52 billion (26.0 per cent of the revenue). Consequently, the total debt servicing to revenue ratio came to 97.7 per cent for the review period.

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According to the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries released earlier, a country’s debt service to revenue threshold should not exceed 23 per cent. Currently, the country’s debt service ratio has hit 97 per cent, raising concerns for sustainability amid new borrowings.

In the MTEF/FSP document, the Federal Government admitted that high costs, including PMS under-recovery and cost of securing oil pipelines are weighing down on oil revenues and need to be addressed wholly to free up much needed fiscal space.

Indeed, the gross oil and gas revenue for 2021 was projected at N5.19 trillion. As of May, N1.49 trillion was realised out of the prorated sum of N2.16 trillion, representing 69 per cent performance. Oil and gas deductions were N194.31 billion (or 45.8 per cent) more than the budget. This is mainly attributed to petroleum subsidy costs, which were not provided for in the 2021 budget.

After netting out deductions (including 13 per cent derivation), net oil and gas revenue inflows to the Federation Account amounted to N872.16 billion. This is N864.20 billion or 49.8 per cent less than the projection as of May.

In 2019, the Federal Government set aside N305 billion for fuel subsidy payments in the 2019 budget. It announced an end to subsidies in March 2020 through the introduction of a price modulation policy. The cost resurfaced after the COVID-19 pandemic hit the economy.

The Organised Private Sector (OPS) said rather than exploring fiscal reforms that would aid productivity, diversification, and stimulate private sector contribution to the economy, the government continues to explore the easy approach to financing its budget.

An economist and immediate past Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, said the country is clearly faced with a major challenge of fiscal sustainability, namely revenues and expenditure.

According to him, the way to fix this challenge is to examine the key drivers of these critical variables and determine how they can be positively impacted, adding that this is what should shape the strategy for fiscal sustainability and ensure fiscal consolidation.

“There are reforms needed to boost revenue and reduce governance costs. Some of these reforms have been the subject of debate over the years, while some progress has been made in others.  Examples are the Petroleum Industry Bill (PIB), which has only recently been passed by the National Assembly after about two decades of prevarication.

“Privatisation programme, promotion of public-private partnerships model in the infrastructure space, deregulation of the downstream petroleum sector, power sector reforms, ports and customs reforms, tax reforms, trade policy reforms and regulatory reforms are key. We need a strong political will to achieve the desired outcomes from these reforms,” Yusuf added.

Yusuf also noted that private capital is critical to the achievement of fiscal consolidation, but stated that the investment environment must be right to attract private capital into the economy.

“The truth is that if private investment grows, the GDP will be enhanced and ultimately government revenue will grow.  It is important to recognise the nexus between private sector prosperity, economic growth, employment generation and growth in government revenue,” he said.

A professor of Economics at the University of Ibadan, Adeola Adenikinju, acknowledged that it is true that the government is facing challenges with respect to the fiscal side. Revenue is not growing as expected. According to him, the Minister’s MTEF presentation showed that there is a significant shortfall from the oil sector.

“We may need to look at our expenditure side to cut everything that is frivolous and not adding to output growth. Areas of inefficiencies and waste should be cut off. Our expenditure/GDP ratio is very low and that in itself shows that government is unable to perform its developmental role.

“We need to find ways to grow our revenue and reduce dependence on oil revenue due to the volatility of the sector. We have not been able to meet our revenue estimate despite high prices, due to production quotas. There are many areas in the economy from which tax base can be expanded. We can be more efficient in our revenue collection. Luxurious and exotic commodities can be taxed as the World Bank has shown. There are areas that can be exploited without hurting the poor people.

“We need to provide incentives for economic activities to take place. The more economic activities that take place and the creation of an enabling environment, the more jobs that will be created and opportunities for the expansion of the tax base. We need to find a way of expanding our revenue-GDP ratio. I know the government mentioned the use of technology to check revenue leakages. Government should also look at GOEs to see how much of what they are bringing into the economy,” he added.

Analysts at CSL Stockbrokers note that: “Over the second half of the year, we expect the oil revenue to improve, supported by increasing crude oil prices and improved crude oil production as OPEC production cuts reduce. Overall, we expect the fiscal deficit to print at 5per cent of GDP in 2021. Furthermore, Nigeria currently pays about N140 billion per month as fuel subsidy, which translates to about N1.7 trillion yearly. As such, if crude oil prices continue to soar, we expect fuel subsidy to total revenue to settle at 30 per cent by year-end.”

Past President/Chairman of Council of Chartered Institute of Bankers of Nigeria (CIBN) and Professor of Economics at Babcock University, Segun Ajibola, stated that the fiscal deficit is a complex issue that affects the overall economic management of the country.

He noted that fiscal deficit is just a reflection of economic dislocations that need to be addressed. He stated that
the country is running short of the revenue target for 2021, while debt service obligation is increasing.

“The gap between the total budget figure and revenue is rising. The problem of subsidy is also there and the question borders on the sustainability of the practice. The issue of subsidy is a welfarist argument as a sizeable number of Nigerians are living below the poverty line.

“If subsidies are removed, in the midst of stagnated income where most states are unable to pay, alongside high inflation and unemployment, I don’t know how at least 70 per cent of the people will be able to balance their lives in terms of meeting the basic necessities of life. This makes the removal of subsidies difficult, despite being unsustainable.

“We need to address the issues of vulnerability to exchange rate fluctuations by exploring local production and refining. Secondly, we need to provide infrastructure and electricity for businesses and people to ensure they generate a means of livelihood. This has made reliance on subsidy huge. We need to improve people’s earning capacity. Labour is ready to slug it out with the government on subsidy removal,” he added.

 

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