Budget Deficit-to-GDP Hits 7.5% Amid Rising Government Expenditures

Budget Deficit-to-GDP Hits 7.5% Amid Rising Government Expenditures

The Federal Government’s budget deficit has surged to 7.5% of Nigeria’s Gross Domestic Product (GDP) as of August 2024, illustrating a growing divide between government revenue and spending. This development was revealed by Muhammad Abdullahi, a member of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), in his statement at the 297th MPC meeting, which was later published on the central bank’s website.

The CBN’s recent economic report also highlighted a significant fiscal deficit, which increased to N4.53 trillion in the second quarter of 2024 from N3.88 trillion in the previous quarter. A fiscal deficit occurs when government spending exceeds its revenue, necessitating borrowing to cover the shortfall. This often leads to a rise in public debt, reflecting the government’s increased dependence on borrowed funds to meet its expenditure needs.

Abdullahi noted that this widening deficit underscores the challenges the government faces in boosting revenue, while also suggesting a growing reliance on borrowing. This dependency raises concerns about long-term fiscal sustainability and the potential impacts on Nigeria’s national debt levels.

He emphasized that the MPC needs to proactively manage the potential repercussions of this deficit, particularly with the recent implementation of the new minimum wage. “The Federal Government’s fiscal operations resulted in a budget deficit of 7.6% of GDP as of August 2024,” he said. He added that monetary policy must remain vigilant to mitigate the deficit’s effects as the new minimum wage takes effect.

On a positive note, Abdullahi highlighted that efforts to enhance revenue generation and reduce expenditure may eventually narrow the fiscal deficit, potentially improving the country’s overall macroeconomic stability.

Senior Fellow at the Brookings Institution and MPC member, Aloysius Ordu, echoed similar concerns, pointing out that the fiscal challenges conflict with the CBN’s anti-inflationary goals. Ordu noted that FGN revenues underperformed, reaching only 37.9% of the target in the first half of 2024, largely due to lower-than-expected FAAC receipts. Recurrent spending also exceeded targets, primarily due to debt service costs, while capital spending lagged. By mid-2024, the overall fiscal deficit had exceeded budget projections by more than 85%, underscoring the need to prioritize capital projects over recurrent spending.

CBN Deputy Governor for Operations, Emem Usoro, also highlighted the challenges posed by the expanding fiscal deficit, which is compounded by revenue constraints, exchange rate fluctuations, and climatic factors disrupting supply chains.

MPC member Lamido Yuguda, former Director-General of the Securities and Exchange Commission, noted that revenue generation remains a persistent struggle. From January to June 2024, revenue retained by the government showed a 33.31% improvement over the same period in 2023 but fell 62.10% short of the target. This lower revenue base has contributed to Nigeria’s fiscal deficit reaching 91.94% of the projected amount for the entire year by mid-2024.

The CBN report further revealed that the federal government’s revenue remittance rose marginally to N2.3 trillion in the first half of the year—a 57.66% increase from the first quarter—yet it still fell short of the target by 52.49%, intensifying the government’s reliance on deficit financing.

Meanwhile, the report also shows that the government’s spending increased significantly to N6.83 trillion, largely due to high-interest payments on loans and other financial obligations. Recurrent expenditures made up 89.7% of this spending, with capital and transfer payments accounting for only 3.66% and 6.37%, respectively.