The recent disclosure by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, that the federal government’s deficit for its N19.76 trillion would be financed by borrowing another N11.03 trillion, thus adding to the country’s debt burden. With this proposal to borrow more than half of its 2023 budget, citizens are worried that this would further impoverish them; BENJAMIN UMUTEME writes.
Appearing before the House of Representatives’ Committee on Finance in Abuja to defend the 2023-2025 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), recently, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said the federal government had proposed an expenditure of N19.76 trillion for the 2023 financial year with a projected deficit of N11.3 trillion which is 54 per cent higher than the 2022 budget’s estimated deficit.
Speaking further, she said the deficit may further rise to N12.42 trillion if the federal government should stick with paying subsidies till the end of 2023.
A breakdown of the expenditure showed that projected total revenue will be N8.46 trillion, of that amount, N1.9 trillion is expected to come from oil-related sources while the remaining is to come from non-oil sources.
In the document, crude oil price was pegged at $70 per barrel with projected daily oil production fixed at 1.69 million barrels per day at an exchange rate of N435.57 per dollar, while real Gross Domestic Product (GDP) is projected at 3.7 per cent and inflation at 17.16 per cent.
However, many have questioned the budget saying daily oil production of 1.69 million barrels per day is unrealistic considering that the country has been unable to meet its OPEC+ production quota due to massive oil theft and pipeline vandalism.
Zainab, who used time to explain the two scenarios of the budget deficit to the committee, said the first option involves retaining the petrol 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 said the government would spend N6.72 trillion on subsidies.
Ahmed said the second option involves keeping the subsidy till June 2023 and that this scenario will take the deficit to N11.30 trillion, which is N5.01 trillion 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 (GOEs) 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.
Expanding deficit financing
Data from the Budget Office website showed that the federal government’s budget deficit from the third quarter of 2015 till the first four months of 2022 was N30.58 trillion.
The implication is that budget deficit financing has continued on its upward trajectory leading to increasing debt as most is down through borrowing.
According to the Debt Management Office (DMO), as at the first quarter of 2022, Nigeria’s debt stood at N41.6 trillion.
Section 12 (1) of the FRA states that Aggregate expenditure and the aggregate amount appropriated by the National Assembly for each financial year shall not be more than the estimated aggregate revenue plus a deficit, not exceeding three per cent of the estimated Gross Domestic Product or any sustainable percentage as may be determined by the National Assembly for each financial year. But the 2023 budget proposal exceeded the 3 per cent benchmark.
From the way it stands, funding the larger part of the budget through deficit is unsustainable.
Out of a projected revenue of N8.46 trillion, the federal government plans to spend 6.31 trillion for debt servicing.
The IMF estimated that 93 per cent of all revenue by the federal government is being spent on servicing debts, but finance ministry sources say the government has been spending 119 per cent of its earnings on debt servicing. According to the Bretton Woods Institute, Nigeria was facing an ‘existential threat’.
Borrowing to finance budget not ustainable
Many have argued that continually resorting to borrowing to finance is not sustainable in the long run.
And the Minister of State for Budget and National Planning, Prince Clem Agba did affirm this when he said that with the way things were going, it would be difficult for the federal government to execute capital projects. Many say even to pay salaries, the government may resort to borrowing also.
According to Economist Adesanya Moses, any borrowing that is not going into financing the capital component of the budget is not sustainable. Nigeria has steadily been borrowing to service its debts.
“If they keep borrowing not for capital projects, then it is not sustainable because part of it will go into recurrent expenditures and debt servicing. It will be more efficient if the investment can repay the loans— it is what we call derived demand. When you spend money on capital projects, it will help the economy to grow.
“The problem is that borrowing to finance subsidies is not sustainable because the vast majority of the subsidy goes to the high and middle income earners. It is not creating jobs or improving the life of the people. Borrowing to finance subsidies is not sustainable,” he said.
For financial expert, Professor Akpan Ekpo, “This shows that expenditure has eclipsed the revenue, because they have to borrow, which is why there is a deficit.
“They can’t raise enough domestic resources to finance spending. That gap is deficit. Talking about GDP, by the rules, it should not be more than a certain percentage of GDP, but it has exceeded that. And when you borrow, you have expectations of borrowing because if you are not transparent, we don’t know what you are borrowing for.
“If you are borrowing to finance recurrent and overhead, it is not good for the economy. If you borrow to finance capital projects, in the long run, even if you have a deficit, it will have a positive multiplier effect. The deficit, if it is used to finance recurrent, is problematic to the economy.
“One way of solving that is to raise more domestic revenue or cut down on expenditure that is not needed, especially the cost of governance. There is a need to check the expenditure profile and cut down on it. Or we could do expenditure switching, where unimportant items are switched with important items.
“We are spending more than we can raise resources and we are not spending it on hard infrastructure.”
In his view, an associate professor of Economics at the Pan-Atlantic University, Lagos, Olalekan Aworinde, said the deficit was being financed by either the government borrowing, sales of the government property, or printing money.
“Loans can be good and can be bad. A loan is good if it is used for productive expenditure, but if it is used for recurrent expenditure or consumption expenditure, this is not bringing back any returns.
“If the component of this deficit is majorly recurrent expenditures, it shows that we are unlikely to have any growth. There isn’t going to be any revenue coming out from there. The implication of this is that we are likely going to have stunted growth; stunted growth in the sense that we are not likely going to have an increase in the total values of goods and services that are produced in the country. If care is not taken, we are likely going to slide into recession.”
He added that financing the deficit through sales of government property would mean that the government was reducing its assets base, which would not speak well for the economy.
