The 2023 budget expenditure of 20.51 trillion naira (US$43.7 billion) is the highest ever. More than half of this is money the government doesn’t have and has to be financed with new debt. This will mean that the country exceeds the 3% of GDP threshold stipulated by the Fiscal Responsibility Act of 2007 – a pointer to the worsening of the country’s fiscal health.
More than 60% of the 2023 budget will finance debt repayments (N6.31 trillion), personnel costs (N4.99 trillion) and overheads (N1.11 trillion). This leaves very little for spending to revitalise the economy and raise its growth potential.
Rather than being a budget of hope, Buhari’s proposal is a budget of despair. It won’t significantly change the tempo of the economy. Nor will it reduce the country’s high unemployment, poverty and inflation rates.
In fact, it could worsen Nigeria’s cycle of deficits and debts, without the possibility of fostering structural transformation, diversifying the economy, promoting sustainable economic growth, and reducing unemployment and poverty.
An endless cycle of deficits
The budget is consistent with previous Buhari administration budgets.
Most importantly, it doesn’t address structural deficiencies in the Nigerian economy. These include the lack of diversification and non-oil sources of revenue. These have been responsible for the country’s cycle of high budget deficits and government debts.
The 2023 budget prioritises investment in road and rail projects, power projects, clean water, construction of irrigation infrastructure and dams across the country, and critical health projects.
These are all well and good, but it’s unclear how they will reduce the high unemployment and poverty rates in the country. These projects are not widespread and labour-intensive enough to absorb millions of unemployed Nigerians.
It is also unclear how many of the projects will be completed, given the propensity for successive governments in Nigeria to abandon projects.
The biggest problem is that the budget fails to address the issue of diversifying the economy. This is vividly reflected in its title: Fiscal Sustainability and Transition.
One cannot have fiscal sustainability without structural transformation. This involves resources being reallocated from low-productivity to high-productivity sectors of the economy. The budget made only a tepid reference to the manufacturing sector. Yet this could deliver a number of benefits.
The first is jobs. Manufacturing uses more labour per unit of output and could absorb the high number of unemployed and underemployed Nigerians. Nigeria’s informal sector contributes about 80% of the country’s employment, making it difficult to collect taxes. An increase in the number of Nigerians in formal sector jobs would raise more income taxes and reduce the need for borrowing. Manufacturing enterprises also tend to be more stable.
Nigeria is having to borrow because of two key weaknesses – neither of which are addressed in the budget.
The first is the country’s lingering “dual-gap” economic problem. This refers to a situation in which domestic savings aren’t adequate to fund a country’s desired level of capital investment – the saving-investment gap.
In addition, the country doesn’t generate enough foreign exchange earnings to pay for its imports – the foreign exchange gap. It’s difficult to estimate the magnitude of the foreign exchange gap in Nigeria. But it’s manifested by the fact that foreign airlines in the country have been unable to repatriate about $450 million in ticket sales because of acute shortages of foreign exchange.
Nigeria isn’t generating enough foreign exchange earnings to meet the economy’s requirements. This has led to a parallel market in foreign exchange, with most businesses and individuals turning to the parallel market to source major foreign currencies such as the US dollar.
The 2023 budget is based on an exchange of rate of 435.57 naira to US$1, compared to over 700 naira at the parallel market. Buhari made no mention of the government’s intention to close this huge gap between the official exchange rate and the parallel market rate.
The only sustainable way to close this gap is to raise the capacity of the economy to generate foreign exchange earnings.
The gap has serious implications for government expenditure outcomes. Many of the ministries, departments and agencies of government buy goods and services from companies that source their foreign exchange requirements from the parallel market.
This automatically makes expenditure estimates in the 2023 budget unrealistic, as the suppliers of goods and services will require a revision to their contracts to cover the higher costs of sourcing foreign exchange. This would then require supplemental budgets and additional borrowings, which in turn, make expenditure projections unreliable.
The first and second quarters of 2023 will be dominated by elections and political transitions. This may have the effect of disrupting economic activities and fuelling uncertainties, especially among domestic and foreign investors.
The economy may therefore fall short of the 3.5% growth rate assumed in the budget parameters, which would subsequently result in lower revenues and additional borrowings.
Deficits and debts imply that taxes will be raised in the future to pay for debts, making investments less profitable. It may also prompt nervous investors to move their capital to more fiscally stable countries.
There are also fears that unrestrained borrowing could tilt the country’s debt portfolio into the realm of unsustainability, which may then lead to defaults in debt repayments and a steep decline in new loans. Government obligations to contractors and other investors would be jeopardised.
The lip service paid by the 2023 budget to structural transformation and sustained economic development will dampen investors’ optimism about the Nigerian economy. The lack of clarity about the future direction of the economy under a new administration, as well as the lingering security challenges in the country, will make matters even worse.