Expansionary budget will worsen inflation, FX crisis, NES warns FG

•‘2025 budget smallest in purchasing power term since 2018’
An expansionary budget as contemplated by the proposed 2025 – 2027 Medium-Term Expenditure Framework (MTEF) would increase liquidity, a possibility that could increase pressure on prices and naira, the Nigerian Economic Society (NES) has warned.

A position statement issued by the President of the society, Prof. Adeola Adenikinju, said with a planned deficit of N13.8 trillion, though lower than 2024 shortfall of N9.18 trillion in terms of percentage of aggregate expenditure, as well as 64.39 per cent nominal growth in the estimated sending, next year’s budget would continue on expansionary fiscal stance.

The plan coming in the face of fuel subsidy removal and exchange rate market deregulation, it said, may “undermine the CBN’s monetary tightening policies to bring down the prevailing high inflation and rising costs of domestic production”.

With the country also battling with weak foreign exchange reserve buffers, the body noted that the embedded high system liquidity may also feed into more depreciation pressure on the naira.

The statement also called for a rework of the proposal as well as its core priorities clearly defined to achieve implementation traction along explicit lines of fiscal consolidation.

While the NES acknowledged the modest increase in the nominal value of the budget proposal, it noted that in real purchasing power at a constant dollar, it is the smallest since 2018.

“As per the above dollar values for 2023 and 2024 budgets indicate, the dollar values for the 2022, 2021, 2020, 2019 budgets were ($39.8 billion (for 2022 budget of N16.39 trillion), $35.66 billion (for 2021 budget of N13.6 trillion), $35 billion (for 2020 budget of N10.59 trillion) and $28.8 billion (for 2019 budget of N8.83 trillion). This nominally bloated 2025 budget expenditure figure is a result of high inflation and significant naira depreciation,” the analysis pointed out.

It rationalised the dollar value analysis, saying the economy is substantially dominated by the external sector, largely import-dependent with the growth driven by petrodollar and external debt financing.

From January and October 2023, Nigeria spent 50 per cent or $3.07 billion out of its total external inflows of $6.11 billion on external debt service with the total external debt standing at $41.59 billion as of the third quarter of 2023.

“In terms of aggregate revenue projections, we note that the average revenue performance on Nigerian budgets in the last decade is about 70 per cent. Thus, given government optimism about revenue performance in 2024 against the backdrop of the overage in deficit from 3.8 per cent to 7.5 per cent as of October, we project a budget deficit of 25 per cent for the 2025 budget.

“This implies that 25 per cent of current projections or N4.5 trillion. When added to the proposed deficit, this will result in a projected actual budget deficit of N13.76 billion or 29.16 per cent of expenditure. This will imply more borrowing above the $2.2 billion. We note, however, that revenue should remain the most critical determinant of projected expenditure. Hence, we consider the 2025 budget’s size ambitious as the economy is already strained by the 7.5 per cent deficit average of the 2024 budget,” it submitted.