Nigeria on fiscal edge, piles up N4tr unfunded deficit in 12 months

• Capital funding suffers neglect, underperforms by 55% despite multiple extensions
• Debt service to total recurrent expenditure exceeds 50 per cent for first time
• CBN overdraft takes N1.9 trillion in six months
• Servicing suspended despite reports of more borrowings

Nigeria’s over-reliance on debt funding may have hit the brink requiring a more creative financing model with the Federal Government’s unfunded deficit rising to as much as N3.95 trillion last year.

The amount, which is 16.5 per cent of the entire 2023 budget, may be much higher when the report is updated considering the capital expenditure’s full implementation, which is extended to December 31.

The implementation of the capital component had been extended three times, raising some questions, following its poor performance at the close of the original budget cycle.

Despite the multiple extensions, the important capital vote under-performed non-debt and debt recurrent components with large margins and its estimate by 55 per cent.

Of the N6.58 trillion voted for ministries, departments and agencies (MDAs), according to data gleaned from the budget implementation report (BIR), N3.65 trillion or 55.5 per cent was released. Still, only N2.96 trillion or 81 per cent was utilised. That puts the utilisation ratio at 45 per cent.

But the real value could be much smaller as the analysis does not account for budget padding, inflated value and other corrupt practices the country’s public finance is known for.

The unrealised capital votes (estimated at N2.93 trillion) account for 74 per cent of the unfunded deficit, coming from the government’s inability to leverage the international debt market throughout the budget cycle.

Plus, those executed by government-owned enterprises (GOEs), under bilateral/multilateral-tied project loans and with donor funds, the FG spent a total of N6.37 trillion as capital expenditure in the year under review. In nominal terms, the amount is over 180 per cent larger than N2.2 trillion spent in 2022.

The country only ended the Eurobond break in November where it raised $2.2 billion from a landmark auction to make a return to the funding window. The 2023 budget was executed at a time when global restrictive monetary policy peaked, piling funding pressure on emerging countries, including Nigeria. This may be pulling the country deeper into a funding drought and forcing the government to trigger an aggressive internal revenue mobilisation.

It was the first time an unfunded deficit, the margin of the total fiscal deficit the government is unable to finance, would hit or support N1 trillion. In close to a decade and a half, since the government adopted an aggressive deficit budget, the government has been able to scout funds from both domestic and international markets to plug the hole.

In 2020, for instance, the fiscal deficit of N7.03 trillion was matched with a blend of debt of N7.06 trillion, putting an unfunded deficit at zero. In the face of the tough challenge faced by President Muhammadu Buhari’s eight-year administration, the government was able to source funding for critical spending items.

The Guardian reported in 2022 that the contractionary monetary era and Nigeria’s rising sovereign risk pointed to a financial blockade for the country with dire consequences for budget implementation.

The report was validated by the inability of the country to secure the planned external debt to fund last year’s projected N13.78 trillion. Much as the government struggled to reduce the deficit through improved revenue and expenditure rationalisation when President Bola Tinubu assumed office, the estimate could only be shrunk by 23 per cent, which was a N10.55 trillion gap for the government to struggle to fill.

About five per cent of the amount, that is N5.63 trillion, was raised from the domestic market, while N974 billion multilateral/bilateral project-tied loans made N6.6 trillion budget-support debt incurred last year.

That left 37.4 per cent of the revenue shortfall unfinanced at the time of the report. The amount may increase before December 31 when the 2023 budget is due for closure, following the extended implementation.

The overall deficit, according to data, was 4.59 per cent of the country’s output, which is considerably above the three per cent threshold stipulated by the Fiscal Responsibility Act (FRA), a rule-based document that regulates government spending, revenue and borrowing activities as well as aims to raise fiscal discipline among government functionaries.

The shortfall, however, was considerably reduced with the improved revenue mobilisation, which was 13 per cent above the projected N11 trillion.  According to data, the aggregate FG’s revenue stood at N12.5 trillion, which was 60 per cent above the N7.76 trillion recorded in 2022.

The government also faced enormous pressure from the cost of debt service, with a 30.5 per cent overrun from the budget of N6.56 trillion projected by the Appropriation Act. The actual debt service cost stood at N8.56 trillion, bringing down the debt service to revenue ratio to 68.5 per cent.

The cost of debt service to revenue ratio was a modest improvement from 73 per cent recorded in 2022 but still miles above what is considered a sustainable level and the government target.

Overall, the debt service to recurrent expenditure ratio, for the first, exceeded 50 per cent. It was 54.7 per cent and the total recurrent expenditure was N15.64 trillion as against the budgeted N15.88 trillion. In the previous year, when the cost of debt was N5.66 trillion, the debt service to total recurrent expenditure ratio was 48.4 trillion.

Whereas the government succeeded in cutting the projected non-debt recurrent expenditure by 24 per cent, it lost control of the debt spending, which went up by over 30 per cent.

Ways and means (W&Ms) facility interest was estimated at N1.2 trillion. But the government spent N1.9 trillion in the first and second quarters. There was no provision for the controversial W&Ms interest in the third and fourth quarter of the year apparently as it was securitised into a long-term bond issued to the Central Bank of Nigeria (CBN) the debt holder.

The BIR does not explain how the government has related with the CBN on the portion of the W&Ms said to have been granted after the initial N23 trillion was restructured. The Guardian has reported that there was equally no provision for the debt in the first half of the year as per the document obtained regarding government releases.

The rising tension about debt sustainability may have been worsened by zero provision for sinking funds set up for maturing debt. Like its legacies, the 2023 budget provided for N247.7 billion for maturing debt. But the fund was diverted to more urgent needs with zero naira set aside for the year.

The non-funding of the sinking fund means the government would continue to put pressure on retiring mature facilities. In critical situations, as in recent history, such debt instruments would be refinanced, which implies postponing the evil days.