For most Nigerians hopeful of a new lease of life with the coming to power of a new government after the 2023 general elections, the content of the last budget expenditure of the Federal Government may jolt them into harsh reality.
Jobs, food, regular pay, growth of business, security, power and life generally will hang in the balance.
Because, more than 60 per cent of the N21.83 trillion 2023 budget signed into law by President Muhammadu Buhari on January 3, will finance debt repayment at N6.31 trillion, personnel cost at N4.99 trillion and overhead cost at N1.11 trillion. This means that there will be little left for spending to keep the economy running fine and raise growth.
With mounting debts, structural deficiencies and rising inflation, the economy remains undiversified fuelling poverty and unemployment.
In a shocking revelation during a Public Presentation and breakdown of the 2023 Appropriation Act in Abuja on Wednesday, January 4, Finance Minister, Hadja Zainab Ahmed, disclosed that the Federal Government spent 80.6 percent of its revenue to service debts in 11 months of 2022.
Ahmed said that “a total of N5.24 trillion was spent on debt servicing between January and November 2022, out of its N6.5 trillion retained revenue” for the same period. She added that only N3.36 trillion was earmarked for fuel subsidy in Nigeria’s 2023 budget as fuel subsidy will terminate in the middle of the year.
What this portends for Nigerians, according to Professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, is that the huge deficit and subsidy provisions would elevate inflation and make the realisation of the 2023 objectives difficult.
In a note to THEWILL, he said; “The 2023 federal budget of about N21.8 trillion is weighted more on recurrent expenditure (N8.32 trillion) and debt service (N6.55 trillion). This has grave implications for inflation and interest rates given that the huge budget deficit will be financed chiefly through borrowing.
“So, fiscal conditions may deteriorate which will likely attract downgrades by Rating agencies such Moody’s, Standard & Poor’s, and Fitch, negatively impacting confidence and stock prices.
“A related issue is the government plan to securitise over N23 trillion government debt owed the Central Bank of Nigeria (CBN). What all these portend is a high interest rate environment in 2023 which will not augur well for the stock market.”
Hope Vs Reality
Christened ‘Budget of Fiscal Sustainability and Transition’ President Buhari said the government’s principal objective in 2023 is to maintain fiscal viability and ensure smooth transition to the incoming Administration.
“The expenditure policy of Government in 2023 is designed to achieve the strategic objectives of the National Development Plan 2021 to 2025, including macroeconomic stability; human development; food security; improved business environment; energy sufficiency; improving transport infrastructure; and promoting industrialization focusing on Small and Medium Scale Enterprises.
“Against the backdrop of the challenging global and domestic economic environment, it is imperative that we strengthen our macroeconomic environment and address subsisting challenges as a country. The 2023 Appropriation therefore is a Budget of Fiscal Sustainability and Transition. Our principal objective in 2023 is to maintain fiscal viability and ensure smooth transition to the incoming Administration,” President Buhari said at the budget presentation to the Joint Session of the National Assembly in October, 2022.
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. It is unclear how it will reduce the high unemployment and poverty rates in the country which might worsen as a result of the chaotic fallouts of the budget. The reason is that 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 in view of the external shocks and internal structural challenges the economy will be exposed to.
The structural defects would not easily address key challenges of high cost of doing business, exchange rate volatility, spiraling insecurity, election-related uncertainties, high rate of talent exodus, dwindling foreign investment and effects of the nation’s mounting debt.
However, experts express concern that the budget lacks the mechanism for effective implementation to achieve the stated objectives. This is against a poor resource base, severe fiscal challenges, huge debt profile, wasteful government spending and the 80 percent debt-to-revenue. This positions the budget in the most challenging juncture that makes life more difficult for the people.
The Achilles’ heel of the budget, according to many of the experts, is that the government does not have more than half of the money it plans to spend.
The budget of N21.83 trillion has a deficit of N11.34 trillion. This is 5.03 percent of GDP – higher than the 3 percent threshold specified by the Fiscal Responsibility Act. This points to the country’s worsening fiscal health since the beginning of the Buhari-led administration in 2015 when the nation’s debt profile was N12.06 trillion.
On funding sources for the 2023 budget, Minister of Finance, Budget and Planning, Zainab Ahmed, said 22 percent of projected revenues will come from oil-related sources while 78 percent will be earned from non-oil sources.
She said the overall budget deficit for the 2023 budget is N11.34 trillion, representing 5.03 percent of the country’s gross domestic product (GDP).
The minister further explained that the budget deficit would be financed mainly by borrowings, noting that N7.04 trillion would be borrowed from domestic sources, N1.76 trillion from foreign sources, N1.77 billion from multilateral and bilateral loan drawdowns, while privatisation proceeds would provide N206.18 billion.
Experts say the optimism of the government is anchored on uncertainty. Analysts and professional bodies believe that the budget could lead to chaos and despair due to its unrealistic outlook that shows it as unworkable.
They express concern that the budget lacks the mechanism for effective implementation to achieve the stated objectives. This is against a poor resource base, severe fiscal challenges, huge debt profile, wasteful government spending and the 80 percent debt-to-revenue. This positions the budget in the most challenging juncture that makes life more difficult for the people.
The Achilles’ heel of the budget, they say, is that the government does not have more than half of the money it plans to spend. The budget of N21.83 trillion has a deficit of N11.34 trillion. This is 5.03 percent of GDP – higher than the 3 percent threshold specified by the Fiscal Responsibility Act. This points to the country’s worsening fiscal health since the beginning of the Buhari-led administration in 2015 when the nation’s debt profile was N12.06 trillion.
Paul Alaje, Senior Economist and Partner at SPM Processionals thinks the government’s explanation about the performance of the budget is misplaced optimism.
He said that the budget deficit is far in excess of revenue projections and the fundamentals of achieving the economic objectives are not there.
Alaje expressed concern over the challenges the budget would create for Nigerians who would bear the brunt of bad leadership and bad policy. He noted that the 2023 Finance Bill could not be signed by the President over protests by the organised private sector against multiple taxation. He stressed that the budget does not create the required enabling environment for the private sector, especially the SMEs.
The Abuja-based Economist said that repaying loans without a proper plan on how to generate the revenue is a major problem with our economic management. He expressed pessimism that 2023 will not be different because, according to him, the attitude of government officials has not changed.
He recalled that the government approached the National Assembly with a supplementary budget of over N800 billion in 2022 when the revenue target had not been met. “I cannot see this attitude change any time soon because we have the same politicians dominating our governance space,” Alaje said, adding that the 2023 budget is already doomed except something is done about the fundamentals.
“When we borrow internally, we are telling the labour market to prepare for a higher rate of unemployment”, Alaje explained, adding, “We are going to witness higher unemployment figures in the coming days ahead.”
OPTIMISM vs PESSIMISM
However, the Debt Management Office (DMO), says there is no cause for alarm.
It said Nigeria’s debt profile stood at N44.06 trillion as of the third quarter of 2022, while the Ways and Means advances by the Central Bank of Nigeria (CBN) over the life of this administration stands at N23.8 trillion.
The government is pushing for the securitisation of the CBN loan into a 40-year Treasury Bill in violation of the CBN Act, which the National Assembly is dilly-dallying.
Director-General of DMO, Mrs Patience Oniha, said that the next administration will inherit a public debt of N77 trillion, adding that the CBN securitization of the Ways and Means advances would remove N1.8 trillion in interest on the loan.
Nigerian Economist and CEO, BIC Consultancy, Boniface Chizea, agrees to this reasoning by the DMO boss. He told THEWILL that the President’s request to the National Assembly for approval to securitise the CBN loan is the way out.
“The National Assembly has no option but to give its approval. That will be the best thing to happen now in the greater interest of the national economy,” Chizea said in a note to this newspaper.
Alaje is unamused. He condemned the accumulation of over N23 trillion through Ways and Means under Buhari, saying securitising the facility into a 40-year Treasury Bill would not help the economy without fixing the fundamental problem of productivity.
The organised private sector believes that this could worsen Nigeria’s cycle of deficits and debts. They argue that without fostering structural transformation and attaining full diversification of the economy, promoting sustainable economic growth, and reducing unemployment and poverty would remain a mirage.
In its reaction, the Lagos Chamber of Commerce and Industry (LCCI) has painted a gloomy picture of the global economy in 2023 which will, by extension, impact on the implementation of the budget.
In its New Year statement on the economy, signed by Director-General, Dr. Chinyere Almona, the chamber predicted a recession or substantial global economic slowdown owing to a number of limiting factors.
On the domestic front, the Chamber identified; rising inflation rate, tight monetary policies, an unstable currency, foreign exchange scarcity, debt burden, currency management, food supply disruptions, exchange rate volatility, and election spending as major factors that would drive economic indicators in 2023.
The Chamber also expects further hike in the Monetary Policy Rate (MPR) in the first month of the New Year to check inflation and capital flight, noting that in 2022 the apex bank applied a tightening policy to steady prices in the system.
“During the year 2022, the Central Bank of Nigeria (CBN), in response to the spiraling inflation rate, deployed a tightening monetary policy to stabilize prices. The rates rose from 11.5% in January and peaked at 16.5% as at November 2022.
“This is expected to rise further during the MPC meeting in January to 17% to curb the persistent inflation and prevent capital flight,” LCCI said.
The Chamber warned that rate hikes alone would not curb inflation apart from tackling the main factors that trigger it such as, food supply disruptions, high energy cost, scarcity of FOREX, and the security challenges around agricultural production locations that have fuelled low production and high logistics cost.
“In 2023, we need fiscal interventions to support strategic sectors like manufacturing, agriculture, transport logistics, and more allocation of FOREX to productive sectors,” LCCI stated further.
Although Ahmed had declared that the economy is fully diversified with oil and gas accounting for only 22 percent of the government revenue, the declining rate of agriculture as the largest employer of labour is a matter for concern.
The Manufacturers Association of Nigeria (MAN) stressed on rescuing the sector from the grips of forex volatility, high cost of doing business, multiple taxes, insecurity to enable it boost the economy. The group noted that Nigeria’s informal sector contributes about 80 per cent 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.
In addition, the country does not generate enough foreign exchange earnings to pay for its imports and it is the forex scarcity that led to a dual exchange rate. “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,” MAN said.
The debt burden resonates in the devaluation of the Naira because when Nigeria borrows to fund consumption, pay salaries, settle fuel subsidy expenses it weakens the value of the local currency because no production has happened. Amid lingering infrastructural deficit, companies cannot produce optimally, employ workers and grow the GDP. The 2023 budget is therefore a package of uncertainty and only time will tell.
Meanwhile, the Director, Centre for the Promotion of Private Enterprise, (CPPE), Dr. Muda Yusuf, has urged the government to urgently address the tax regime that he said is stifling investment and economic growth, and would frustrate any good objectives that the 2023 budget might have.
The policy think-tank said that an economy that desires job creation, economic inclusion, investment growth and poverty reduction, should have an accommodating tax regime for investors.
He said; “Corporate tax in Nigeria is 30 per cent. But effective corporate tax is much more than that. There is a tertiary education tax of 2.5 percent of profit; NITDA Levy of 1 percent of profit; NASENI Levy of 0.25 percent of profit; Police Trust Fund Levy of 0.005% of profit. This brings effective corporate tax to about 34 percent.
“This rate is one of the highest in the world. Average corporate tax rate for Africa is 27.6 percent;
“The multitude of taxes is crippling investment in the Nigerian economy and there is need for an urgent review,” Yusuf said.
Alaje agrees. He said that “Any country like ours with a large population must embrace manufacturing. What thrives the economy is manufacturing. That is what happened to the US, Brazil, Germany, Russia and China. We are not doing what these countries do: integrating manufacturing in their economy. But the infrastructure must be got right, and we must find a way of supporting them instead of killing them with multiple taxes.”
However, tax review is not in the books of the government for now. However, the federal government has decided to abolish all the tax waivers and exemptions enjoyed by specified businesses, including the SMEs. This will come into effect when the postponed 2023 Finance Bill is signed by President Buhari in the coming days.