Nigeria Scales Back Capital Spending as Revenue Underperforms

Nigeria Scales Back Capital Spending as Revenue Underperforms

In the first half of 2023, Nigeria missed revenue targets amidst uncertainties in the economy. As a result, the government resulted in capital projects cutback but met recurring spending, a review of half year budget performance shows.

According to the Budget Office, the nation’s gross oil and gas revenue was projected at N9.38 trillion. However, as of July 2023, N4.16 trillion was generated, falling by more than 24% below the prorated sum of N5.47 trillion.

After accounting for deductions (including 13% derivation), the budget office report indicated that net oil and gas revenue inflows to the Federation Account amounted to only N1.69 trillion in the period. This is N1.01 trillion or 37% less than the target set by the government. However, Nigeria’s net non-oil revenue outperformed the prorate target by N962.70 billion or 23.2%.

The budget office revealed that the amount available for distribution from the Federation Account was N1.86 trillion. Of this, the Federal Government received N981.39 billion, while the state and Local Governments received N497.78 billion and N383.76 billion, respectively.

It also noted that Federal, State and Local governments received N167.68 billion, N558.95 billion and N391.26 billion, respectively from the value-added tax (VAT) Pool Account in the same period.

As of July 2023, FGN’s retained revenue was N5.19 trillion, approximately 80.5% of the pro-rata target of N6.44 trillion, according to the budget office. The document stated that the FGN share of oil revenues was N813.58 billion, which was a 62.6% performance, while non-oil tax revenues totalled N1.84 trillion a performance of 127.7%.

Corporate income tax (CIT) and VAT collections were N1.16 trillion and N234.30 billion, representing 212.4% and 104.8% of their respective targets. Customs collections recorded N432.96 billion out of N651.46 billion or 66.5% of the target.

The document explained that collection sources include import duties, excise and fees, as well as federation account special levies.

Other revenues amounted to N2.49 trillion, of which Independent revenue (mostly transfers from government-owned enterprises (GOEs) and ministry, departments and agencies (MDAs) was N1.04 trillion.

Budget Office reported that the Federal Government of Nigeria earned ₦5.9 trillion from oil and non-oil sources and spent ₦13.9 trillion in 2022.  Of this bill, recurrent expense was responsible for 79%, while the share of capital expenditure dropped to 14%.

The rise in recurrent expenditure was driven primarily by interest in Ways & Means advances, and personnel costs. Ultimately, Nigeria’s fiscal deficit rose to 3.8% of GDP, 0.2% above the prior year.

In addition, debt service-to-revenue climbed further to 95% from 90% in 2021. Overall, the fiscal record shows Nigeria earned less than it expected, spent less than it devoted to capital projects, and spent exactly its recurrent budget for 2022.

Vetiva Capital said in a commentary note that clear concerns from the records are the sustained trend of revenue under-performance, capital budget underperformance, rising debt vulnerability, and non-remittance into sinking funds meant for future debt repayments (considering the post-2024 debt maturity profile).

Over the near to medium term, analysts said they believe Nigeria’s deficit may remain above the stipulated limit until key austerity measures are implemented to stem the tide.

Improving domestic revenue mobilisation has been the thrust of reforms of the Federal Government. The poor government revenue has constrained the ability of the government to meet its fiscal obligations.

“Reform efforts have been targeted at addressing weak domestic revenue mobilisation, dwindling oil revenue occasioned by industrial scale oil theft, and inadequacies in the tax administration system”, Nigeria’s budget office said in the report. 

Nigeria’s tax-to-GDP ratio was recently revised to 10.86% from the 5- 6% estimates where it had hovered for about a decade.

This is due largely to the consistent growth in non-oil revenue since 2015 and the inclusion of federal and sub-national revenue items that had previously been left out of the computation.

Further improvement is expected as the reforms take deeper root, according to the budget office.  It also added that tighter fiscal prudence measures with emphasis on achieving value for money, process automation and efficiency are also being implemented.

“These measures are expected to optimise tax revenues and remittances by Government-owned enterprises. Institutional reforms to automate the revenue collection functions, implement tax harmonization to eliminate multiple taxation and improve voluntary compliance are also being implemented”.

Recent growth in government expenditure is attributable to the Federal Government’s expansive investment in critical infrastructures and ambitious social protection schemes through the Social Investment Programme (SIP).

Expansionary fiscal measures have been employed to spur economic activities by putting more money into the hands of consumers and businesses as a key part of the government’s policy response to accelerate recovery in the wake of two successive economic recessions.   

Social Investment Programmes, like the Conditional Cash Transfer (CCT), are targeted at alleviating poverty amongst the most vulnerable demography, thereby promoting more inclusive growth. The significant rise in nominal public expenditure without a corresponding increase in domestic revenue has however resulted in burgeoning budget deficits and public debt stock.

The aggregate expenditure for 2023 is estimated at N21.83 trillion, with a pro-rata spending target of N12.29 trillion at the end of July.

The actual spending was N8.60 trillion. Of this amount, N3.94 trillion was for debt service, and N2.68 trillion for personnel costs, including Pensions.  The budget office said only about N857.08 billion, translating to 25% of the pro-rata budget has been released for MDAs’ capital expenditure as of July 2023.   #Nigeria Scales Back Capital Spending as Revenue Underperforms Naira Devaluation Deepens Economic Crisis in Nigeria