Fed Govt’s Deficit Spending Rises By 51% To N5trn

The deficit spending of the Federal Government, FG, rose by 51 per cent, year-on-year, YoY, to N5.1 trillion in seven months to July 2021, driven by rising non-discretionary spending on security and COVID-19 mitigation measures.

The rise in non-discretionary spending triggered 16 per cent increase in the FG’s expenditure, which dampened the moderating impact of the 13 per cent increase in revenue recorded during the period, occasioned by the crude oil price rebound.

Public Finance analysis of data on the FG’s fiscal activities in the seven months to July (7mths-2021), showed that revenue rose to N2.45 trillion from N2.17 trillion in the corresponding period of 2020 (7mths-2020), indicating 13 per cent increase.

But expenditure rose faster, climbing 16 per cent to N6.43 trillion in 7mths-2021 from N5.53 trillion in the corresponding period of 2020.

The above resulted in a deficit of N5.1 trillion in 7mth-2021, representing, 51 per cent, YoY increase when compared to the N3.36 trillion recorded in 7mths-2020.

The deficit recorded during the 7mths-2021 represents 90.7 per cent of the budgeted full year deficit of N5.62 as contained in the 2021 Appropriation Act.

Consequently, the FG is projected to exceed the budget deficit of N5.62 trillion for 2021, as the average monthly deficit recorded in 7mths-2021, at N729 billion, translates to N8.74 trillion full year deficit.

Explaining the factors driving the FG’s deficit spending, which rose in June and July, the CBN, in its Monthly Economic Report for July 2021, said: “The impact of improved revenue out-turn in July 2021 was weakened by 8.9 per cent growth in expenditure, triggering an expansion of the fiscal deficit.

“Payoffs from expenditure rationalisation and revenue mobilisation efforts appeared subdued by new and rising non-discretionary spending, particularly on security and COVID-19 mitigation measures.

“Consequently, the provisional fiscal deficits of the FGN, at N699.48 billion, exceeded the position in June 2021 and the budget benchmark by 1.6 per cent and 49.8 per cent, respectively.

“Growth in FGN retained revenue was owing to the 60.4 per cent rise in receipt from the Federation Account. Retained revenue of the Federal Government increased by 24.9 per cent to N394.11 billion, relative to June 2021.

“Nonetheless, FGN receipts in July 2021 fell below the benchmark of N665.53 billion by 40.8 per cent, suggesting the prevalence of revenue challenge in the review period.

“Provisional aggregate expenditure of the FGN, at N1.093 trillion, rose by 8.9 per cent, relative to June 2021, but remained below the 2021 proportionate benchmark of N1,132.34 billion by 3.4 per cent.

“The increase was due to a 5.9 per cent rise in recurrent expenditure. Disaggregation of the expenditure reveals the dominance of recurrent spending, constituting 88.6 per cent of total government expenditure in July 2021, while capital expenditure and transfers accounted for the balance of 7.6 per cent and 3.8 per cent, respectively.

“Compared with the projected expenditure composition of 61.9 per cent (recurrent expenditure), 28.3 per cent (capital expenditure), and 6.7 per cent (transfers), the largely disproportionate share of recurrent expenditure in July 2021 is indicative of lags in capital releases.”

IMF, Fitch project further increase

The sharp increase in the FG’s deficit spending in 7mths-2021and the implication for the rest of the year, indicates the FG is poised to breach the deficit-to-GDP ratio of 3.9 per cent estimated for the 2021 Budget, a development in line with projections by the International Monetary Fund, IMF, the World Bank and Fitch Ratings.

In a report titled, “Nigeria Country Risk Report”, released last week, Fitch Ratings said: “We have revised our forecast for Nigeria’s budget deficit to 4.8% of GDP in 2021 from our earlier forecast of 4.2%. The revision reflects fiscal data – published by the Nigerian Treasury in October and covering the period January-August 2021 – indicating weaker revenue collection than we had previously anticipated.

“The shortfall was largely due to significant underperformance by the oil sector (45.6% of revenue in 2020), which saw oil revenue come in 43.7% below official revenue projections contained in the government’s 2021 budget (see chart below), largely as a result of weak oil production.

“While we expect both oil and non-oil revenue to rise in the final months of 2021 as oil production increases and economic growth gathers momentum, this will be insufficient to offset prior underperformance, and we expect federal government revenue to come in at a weak 1.6% of GDP (NGN4.0tn) over 2021, compared with NGN3.9tn in 2020.”

While projecting an increase in the nation’s fiscal deficit-to-GDP ratio to 6.3 per cent in 2022, the IMF in its 2021 Article IV Staff mission to Nigeria, called for reforms, including removal of the fuel and electricity subsidies, as a way of combating the rising fiscal deficit of the FG.

The IMF stated: “Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022.

“There are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle. Over the medium term, without bold revenue mobilization efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 percent in 2026.

“General government interest payments are expected to remain high as a share of revenues making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing.”

Supporting the projection of the IMF and its call for reforms, the World Bank in its latest, Nigeria Development Report, released last week, said: “Due to deteriorating revenues, our forecast for the consolidated government fiscal deficit has been revised upward. Nigeria’s fiscal deficit is now projected to reach 5.7 percent of GDP by end-2021, its highest level in over a decade.

“Despite rebounding oil prices, Nigeria’s oil output has fallen, and total fiscal revenues are expected to recover only modestly from 6.5 percent of GDP in 2020 to 7.1 percent in 2021, well below their 2014 level of 11 percent.

“Faced with a widening budget deficit, policymakers have increasingly turned to costly Central Bank of Nigeria, CBN, overdrafts (also known as Ways and Means financing), which are not properly integrated into the fiscal accounts. The high cost of servicing CBN overdrafts is compounded by large off budget expenditures—especially the Petrol Motor Spirit, PMS, subsidy—which crowd out much-needed investments in human and physical capital. While Nigeria’s debt burden remains manageable for the time being, maintaining sustainable debt dynamics will require curbing the use of CBN financing for the deficit and addressing fiscal pressures to break the cycle of low growth and rising public debt.”