Nigeria’s fiscal deficit has significantly exceeded projections, reaching 7.6% of GDP as of August 2024, far above the initially approved target of 3.8% for the year. This was highlighted in statements from members of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), who expressed concern over the growing imbalance between government revenue and expenditure.
The National Assembly had approved a 2024 budget of N28.7 trillion, with an anticipated revenue of N19.5 trillion, projecting a budget deficit of N9.1 trillion, or roughly 3.8% of GDP. However, the deficit has surged due to underwhelming revenue performance and the introduction of a supplementary budget of N6.2 trillion.
Insights from the Monetary Policy Committee
According to MPC member Aloysius Uche Ordu, Nigeria’s revenue collection fell far short of targets, achieving only 37.9% of the year’s goal by mid-2024. The revenue gap was attributed mainly to shortfalls in receipts from the Federation Accounts Allocation Committee (FAAC), limiting the federal government’s ability to meet its obligations. Even with a reported 33.31% improvement in retained revenue from January to June over the same period in 2023, revenues still lagged by 62.1% against targets, underlining the country’s fiscal challenges.
Another MPC member, Lamido Yuguda, emphasized the fiscal pressure caused by Nigeria’s low revenue base, which has contributed to weak fiscal performance. By June, the fiscal deficit had already reached 91.94% of the full-year target, raising concerns about how the federal government will finance remaining expenditures without further increasing the deficit.
Ordu further noted that Nigeria’s spending heavily favors recurrent costs, especially debt servicing, while capital expenditures—critical for long-term economic growth—remain limited. This focus on recurrent spending has been exacerbated by a reluctance to prioritize capital projects that could drive sustained economic progress.
Calls for Policy Adjustments and Economic Stability
CBN MPC member Muhammad Sani Abdullahi highlighted the need for proactive monetary policy to counter the fiscal deficit’s potential impact, especially as discussions about implementing a new minimum wage continue. Abdullahi pointed out that, while the deficit stands at 7.6% of GDP, efforts to improve revenue collection and reduce spending could gradually help stabilize Nigeria’s fiscal situation. A narrowing deficit, he noted, would enhance macroeconomic stability and ease current pressures on the economy.
The MPC also noted the fiscal authority’s restraint in avoiding Central Bank “Ways & Means” financing, though concerns remain about how long this stance can be maintained amid revenue shortfalls and rising obligations. Heavy dependence on FAAC distributions has strained liquidity within the banking sector, impacting the naira exchange rate.
Encouraging Signs in the External Sector
In contrast to domestic fiscal challenges, Nigeria’s external sector has shown resilience. A reduction in import bills, driven by the CBN’s tight monetary stance, has resulted in a balance of payments surplus of $2.47 billion. External reserves increased to $37.44 billion by September 2024, providing over seven months of import cover, and further grew to $40 billion by November. This growth in reserves has supported the naira’s slight appreciation, buoyed by improved reserves and reduced import demand.
Implications for Policy and Market Stability
Nigeria’s fiscal challenges reveal structural issues in its financial framework, mainly due to revenue volatility and imbalances in expenditure. While strong external reserves and a positive balance of payments position offer some buffer, the domestic fiscal environment remains fragile.
The MPC’s commitment to tight monetary policy has helped manage import demand and mitigate external shocks. However, if the federal government does not address revenue generation and spending discipline, sustained fiscal deficits could undermine these efforts, impacting economic stability in the long run.
