Nigeria’s Fiscal Deficit to Shrink in 2023 – Analysts
Nigeria’s fiscal deficit has been estimated to decline in 2023 as a result of the apex bank’s decision to devalue the local currency early in June. The estimate was anchored on an expectation of improved government revenue as a result of a higher exchange rate.
In its explanation of the impacts, analysts at LSintelligence Associates said using a higher exchange rate on foreign receipts that account for a significant chunk of government income would raise revenue size in naira terms.
Fiscal slippage remained one of the major challenges facing the country, by extension; government spending which often results in large borrowings to support the budget. Unimpressively, non-oil export revenue as a portion of total government income is low when compared with the size of the budget.
Lack of productive advantage keeps Nigeria tight to deliver reasonable economic growth that could push per capita income higher, from an average of $2,200 over the years. Rather than by strategic push, revenue is estimated to surge due to a decision to devalue the naira – transferring government fiscal pressures to the masses.
In its country risk report, BMI Research said reform impetus is gaining traction in Sub-Saharan Africa (SSA), with Nigeria doing the heavy lifting. It recalled that President Bola Ahmed Tinubu broke away from previous President Muhammadu Buhari’s sluggish reform agenda, the report said.
As a result of a deliberate effort to set Nigeria on a growth path, Tinubu cancelled the country’s costly fuel subsidy and removed the naira’s peg to the US dollar: two vital reforms that will improve economic fundamentals over the coming years.
“We have made a substantial upward revision to Nigeria’s reform score to 6.5 in the third quarter of 2023, from 3.0 in the second quarter”, BMI said in the country’s risk and industries research.
Tinubu embarked on a rapid reform agenda since his inauguration on May, 29. 2023. The report noted that on his first day as president, he cancelled Nigeria’s long-standing fuel subsidy, which had become a significant drag on public finances.
“We estimate that the federal government forwent N4.6 trillion – translating to 82% of federally retained revenues – in 2022 to fund the subsidy, severely limiting its ability to provide public services and spend on growth-generating investment projects”, the report reads.
While increasing inflation in the short term, analysts said these reforms will improve Nigeria’s macroeconomic fundamentals.
BMI report said that from a fiscal perspective, the removal of the fuel subsidy will improve the ability of the Nigerian National Petroleum Corporation (which funded the subsidy) to remit more funds to federal accounts. Meanwhile, analysts said the sharp devaluation of the exchange rate will push up revenues (in local currency terms) from the vital oil and gas sector.
“These developments inform our view that the fiscal deficit will shrink from 4.0% of gross domestic product (GDP) in 2022, to 3.6% in 2023 and 2.9% in 2024” The report said both reforms will also have positive implications for Nigeria’s external position.
The fuel subsidy had fostered an extensive network of smugglers funnelling fuel to neighbouring countries, which inflated the demand for imported petrol in Nigeria, according to the BMI report. >>> Naira Devaluation Deepens Economic Crisis in Nigeria
However, it added that as the fuel price gap between Nigeria and its West African peers narrows, smuggling networks should collapse, leading to lower demand for imported fuel. This will keep the trade balance in surplus over the coming years, improving foreign exchange availability. #Nigeria’s Fiscal Deficit to Shrink in 2023 – Analysts