Category: Special Report

The National Assembly has recently approved the 2024 budget, incorporating significant adjustments to key parameters, including an augmentation of the budget size to N28.7 trillion. In this comprehensive analysis, Assistant Editor NDUKA CHIEJINA navigates the complexities of the 2024 budget, shedding light on the nuances of its various components and implications.

The total budget size for the fiscal year 2024 has surpassed President Bola Tinubu‘s initial proposal by $1.8 billion, reaching $28.7 billion. This upward adjustment has sparked optimism, particularly fueled by the modification of the oil benchmark to $77.96 per barrel. However, this optimism is tempered by concerns about the sustainability of the budget, given the substantial deficit that exceeds $9 billion. 

To finance this ambitious budget, a securitisation of N7.388 trillion through Ways and Means is planned, alongside potential borrowings amounting to $7.8 billion and €100 million. Noteworthy is the budget’s strategic focus on enhancing infrastructure and fostering development, evident in the increased capital spending allocation of N9.995 trillion. In a bid to prioritise efficiency and instill fiscal discipline, recurrent spending has undergone a reduction, now standing at N8.76 trillion. Within the budget allocations, considerable funds have been earmarked for critical sectors such as education, defense, police, health, and agriculture. This strategic distribution reflects a concerted effort to address key areas contributing to national development and well-being. As the nation steps into the fiscal year 2024, the budget serves as a financial roadmap with the potential to shape economic trajectories and fortify essential sectors.

 The revisions made by lawmakers to the 2024 budget, particularly the adjusted exchange rate and other key parameters, present a nuanced scenario with potential implications for the Nigerian economy. The noteworthy increase in the exchange rate from N750 to N800 per USD suggests that lawmakers anticipate higher export earnings from government-owned enterprises (GOEs) due to a weaker naira, potentially enhancing government revenue. This adjustment reflects the prevailing economic conditions, aligning with the devaluation observed in both the official and unofficial markets. A weaker naira could attract more foreign investment and remittances, contributing to potential positive impacts on the economy.   

However, there are likely implications from this exchange rate adjustment. Inflation may ensue as the costs of imported goods and services escalate, potentially impacting the overall cost of living for citizens. On the flip side, the global affordability of Nigerian exports might rise, potentially bolstering export volumes and earnings. While the exchange rate adjustment is a notable change, maintaining other parameters such as oil production, price, and GDP growth introduces additional complexities. Achieving the 1.78 million barrels per day (mbpd) production goal could be challenging due to current production issues and OPEC quotas, which may impact budget revenue. Similarly, the set US$77.96 benchmark for oil prices could face challenges amid global economic uncertainties and oil price fluctuations, potentially leading to budget deficits.

 Achieving the 3.88 percent growth, as sanctioned by the National Assembly, hinges on the effective implementation of the budget and favorable economic conditions. However, both external and internal factors present potential hindrances. The alterations made to the original budget proposal, especially the revised exchange rate, introduce a mix of opportunities and risks, shaping the economy’s response. Several factors will influence the outcome, including the efficiency of revenue collection, prudent allocation, and effective debt management. These elements are pivotal for securing favorable outcomes and ensuring the intended growth. External influences, such as shifts in oil prices and global economic downturns, will play a significant role in determining the performance of the 2024 budget.

 Moreover, public trust in budget administration is a crucial component for sustainable economic progress. The modifications made by lawmakers to the 2024 budget underscore the complexities of economic policymaking, raising questions about their potential effects. Vigilant monitoring of budget execution and its economic impacts, coupled with a readiness to adapt to unfolding circumstances, remains imperative in the coming year.

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Growth versus debt

The decision to securitise Ways and Means in the 2024 budget carries both potential benefits and challenges. Ways and Means, a form of borrowing from the Central Bank of Nigeria (CBN) to address temporary funding gaps, has led to a substantial strain on the CBN’s balance sheet, accumulating a debt of N23.7 trillion. The proposed securitisation involves converting this debt into long-term bonds, which would then be sold to investors in the capital market. This strategy aims to provide fiscal breathing room for the government while alleviating the burden on the CBN.

 Securitisation offers several potential advantages. It has the potential to lower interest rates, enhance fiscal transparency, and reduce immediate repayment pressure. By transforming short-term debt into long-term bonds, the government can spread out its obligations and minimize the strain on its financial resources. However, securitisation also presents challenges. While it eases immediate fiscal pressures, it adds to the overall debt burden of the government. This necessitates the development of clear and credible long-term debt repayment strategies to ensure sustainability. Successful implementation relies on attracting sufficient investors at favorable interest rates, underscoring the importance of continued commitment to fiscal discipline and economic reforms. Additionally, the 2024 budget outlines an increased reliance on government-owned enterprises (GOEs) for revenue as another strategy. This approach demands improved performance and governance within these entities to effectively contribute to the revenue stream.

 The effectiveness of securitisation in the 2024 budget depends on the specific terms of the bonds, transparency, and accountability measures. Continuous monitoring of its impact on the Central Bank of Nigeria (CBN) and the overall economy is crucial for informed decision-making. Prudent management and the implementation of effective long-term debt strategies, alongside revenue generation from government-owned enterprises (GOEs), will ultimately determine the success of this fiscal policy. Commendably, the prioritisation of capital spending in the 2024 Nigerian budget, especially the increased allocation to infrastructure projects and development, aligns with Nigeria’s National Development Plan. Investing in critical infrastructure has the potential to stimulate economic growth, create jobs, and enhance the quality of life for citizens. However, the success of these investments is contingent upon addressing challenges and mitigating associated risks.

Effective implementation and accountability stand out as critical factors in the success of infrastructure investments. Project selection should be driven by rigorous cost-benefit analyses and developmental needs rather than political considerations. Robust measures must be in place to prevent corruption and streamline procurement processes. The shortage of skilled personnel within government agencies poses a potential obstacle to project execution and quality control. To avoid mismanagement and public distrust, it is essential to establish adequate oversight mechanisms and ensure public access to relevant information. Diverse perspectives should be considered in this process. Some may express concerns about potential neglect of other critical sectors like education and healthcare. Striking a balance between infrastructure investment and human development is key to achieving comprehensive national progress. Additionally, questions may arise about the sustainability of increased capital spending in light of the government’s high debt burden. Therefore, maintaining fiscal discipline and exploring alternative financing mechanisms, such as public-private partnerships, are important considerations.

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 To ensure the success of capital spending, key recommendations include strengthening project selection and evaluation processes, implementing robust anti-corruption measures, investing in skills development within government agencies, enhancing public participation and information sharing, and exploring innovative financing models and revenue diversification. Adopting a holistic approach that addresses these aspects will contribute to the effective and sustainable implementation of capital projects in Nigeria. The government’s commitment to good governance, transparency, and accountability will ultimately determine the effectiveness of prioritising capital spending. If done right, these investments can fuel long-term economic growth and development in Nigeria.

Nigeria’s oil revenue dependency in the 2024 budget

A staggering 41.9 percent of Nigeria’s 2024 budget relies directly on oil revenue, signifying that nearly half of the government’s income is contingent on crude oil sales. This heavy reliance poses significant concerns for several reasons. Oil prices notoriously fluctuate based on global economic conditions, political instability, and supply chain disruptions, rendering oil revenue unpredictable. This volatility makes effective government planning and budgeting challenging.

 Oil, being a finite resource, poses a risk of depletion. Heavily depending on it jeopardizes future income sources, potentially threatening the country’s long-term economic sustainability. In addition, over-reliance on oil exposes the economy to uncontrollable shocks, such as oil price slumps or global recessions, amplifying economic vulnerabilities. Recognising these risks, the federal government has prioritised revenue diversification for years, aiming to reduce dependency on oil and explore alternative income streams. Key initiatives include: investments in agriculture, manufacturing, tourism, and the tech industry seek to expand these sectors and generate additional revenue.

 Strengthening tax administration and expanding the tax base emerges as a pivotal strategy to boost domestic income, fostering diversification beyond oil in export sectors. This multifaceted approach aims to fortify foreign exchange earnings and reduce dependence on volatile oil revenue. Despite concerted efforts, the progress in diversification has encountered obstacles such as corruption, bureaucratic inefficiencies, and inadequate infrastructure, hindering the growth of non-oil sectors. The high political risk and economic uncertainty have also deterred foreign investment, restricting capital inflow into alternative sectors. An aspect less frequently discussed is the resistance from powerful entities within the oil industry, who may actively oppose diversification efforts that challenge their economic dominance.

 The persistent reliance on oil revenue remains a significant vulnerability for Nigeria’s economy and long-term development. Urgent action is needed to accelerate diversification by addressing these underlying challenges and creating an environment conducive to the growth of non-oil sectors. This strategic shift will not only enhance economic stability but also reduce susceptibility to external shocks, fostering a more sustainable future for Nigeria.

The N9.18 trillion deficit in the 2024 budget

The N9.18 trillion budget deficit in Nigeria’s 2024 budget carries profound implications for the economy in the coming year, reflecting government borrowing to bridge the revenue-expenditure gap. This deficit adds to the existing debt load, currently accounting for around 38 percent of GDP. Excessive debt poses the risk of diverting funds from critical areas such as social services and infrastructure, potentially diminishing credit accessibility for businesses. Economic vulnerability increases, rendering the economy susceptible to external factors like rising interest rates or global recessions.

 Inflationary pressures are a significant concern associated with government borrowing, as it can strain the money supply, potentially causing inflation. This inflationary impact can affect citizens’ purchasing power and business profitability, while investment uncertainty may erode confidence in the economy, discouraging long-term planning. Another potential consequence of the 2024 budget deficit is the risk of crowding out private investment. Government borrowing, in this scenario, competes with private businesses for financial capital, limiting access to funds for businesses and potentially stalling economic growth.

 However, managed prudently, deficit spending has the potential to inject funds into the economy, stimulating demand and potentially leading to accelerated GDP growth. Increased investments in critical infrastructure and social sectors could yield long-term benefits and generate employment opportunities. The deficit underscores the urgency of diversifying the economy away from oil dependence. This diversification could increase revenue from non-oil sectors, enhance economic resilience to oil price fluctuations, and create new job prospects across diverse sectors.

 The success of managing the deficit depends on the government’s approach to borrowing, whether it’s done domestically or externally, impacting interest rates and inflation. Effective management and utilization of borrowed funds are crucial to prevent waste and corruption. External factors such as a global economic slowdown or geopolitical tensions can significantly influence the economy and budget outcomes. While the deficit as a percentage of GDP (3.88%) is lower than in previous years, maintaining fiscal discipline is crucial to prevent a continuous upward trend in deficits. The allocation of spending, particularly in sectors like infrastructure and education, will significantly impact the deficit’s long-term effects. Vigilant monitoring and adjustments are critical to mitigate risks and maximize potential benefits for sustainable economic growth in the new year. The Nigerian government’s borrowing plans and the utilisation of Ways and Means concerning the 2024 budget deficit pose a complex dilemma with multifaceted considerations, involving trade-offs and risks shaped by various factors.

Arguments for and against borrowing

Financing critical infrastructure through strategic borrowing plays a crucial role in fostering investment in essential sectors like roads, power grids, and transportation. This approach stimulates economic growth, job creation, and enhances productivity, competitiveness, and living standards. Strategic borrowing, especially during economic downturns, can provide a temporary stimulus, helping mitigate recessionary effects and supporting economic recovery when alternatives like tax hikes or spending cuts are not viable.

 However, arguments against borrowing highlight concerns about adding to existing debt, questioning its sustainability and potential adverse effects such as higher interest payments, resource diversion from social services, vulnerability to economic shocks, and credit downgrades. Increased borrowing may strain the money supply, potentially leading to inflation, reducing citizens’ purchasing power, and impacting business costs and investment confidence. Specific concerns arise with the reliance on Ways and Means, which can burden the Central Bank of Nigeria and potentially impede its ability to maintain monetary policy stability and manage inflation. Historical concerns about transparency and accountability in managing Ways and Means increase the risks of misuse and corruption. While Ways and Means is intended as a temporary financing mechanism, excessive reliance on it can create instability and jeopardize fiscal sustainability.

 The government’s borrowing plans and use of Ways and Means require a nuanced assessment of risks and benefits based on economic conditions, budget allocations, and debt management strategies. While borrowing can offer advantages for infrastructure and economic stimulus, responsible management, fiscal sustainability, debt reduction, and revenue diversification measures remain crucial for long-term stability. Transparent public finance management is essential for trust-building and responsible economic governance.

What the experts say

The 2024 budget, recently approved by the National Assembly, presents a mixed scenario of promise and concerns for Nigeria’s economic landscape. The positive aspects include increased spending on infrastructure and a targeted focus on key sectors such as education and security, indicating a commitment to addressing critical needs. However, the significant concern arises from the substantial budget deficit and the reliance on debt to finance government activities. The expanding deficit raises questions about the sustainability of the budget, as it contributes to the already substantial national debt. Cautious optimism is warranted, as excessive debt levels can divert funds from essential areas, potentially limiting credit accessibility for businesses and making the economy more vulnerable to external shocks.

 The success of the 2024 budget hinges on effective management, transparent utilization of borrowed funds, and a commitment to fiscal discipline. Striking a balance between strategic borrowing for crucial investments and ensuring long-term economic stability will be crucial for navigating the challenges and opportunities presented by the budget. Vigilant monitoring and adjustments, along with proactive measures to diversify revenue sources and stimulate economic growth, will be essential in realizing the positive potential of the budget while mitigating risks associated with the deficit and reliance on debt.

 Economist Dr. Wahab Balogun, in a conversation with The Nation, provides insights into the intricacies of the recently approved budget and raises caution about potential pitfalls. Dr. Balogun acknowledges the positive aspect of increased allocations, especially for capital projects, considering it a welcome move. He emphasises the significance of investing in infrastructure as a crucial driver of economic growth and an improvement in living standards. The acknowledgment of the importance of capital projects aligns with the broader economic consensus that strategic investments in infrastructure can stimulate economic activity, create job opportunities, and enhance overall prosperity. Dr. Balogun’s perspective adds weight to the understanding that while there are positive elements in the budget, careful consideration and monitoring are essential to avoid potential challenges. This includes ensuring effective utilisation of funds, maintaining fiscal discipline, and addressing any risks associated with the budget implementation. Balancing the positive aspects with vigilant oversight will be instrumental in realising the intended benefits of the increased appropriations.

 However, he expresses concern about the widening deficit, exceeding $9 billion. “A deficit of this magnitude is unsustainable in the long run,” he cautions. “The government must prioritise efficient revenue generation and implement credible debt management strategies to avoid a fiscal crisis.” The securitisation of the N7.388 trillion Ways and Means, while providing temporary relief to the Central Bank, is not a long-term solution, Dr. Balogun stresses. “The focus should be on structural reforms that reduce reliance on overdrafts and promote fiscal discipline,” he advises. The increased allocation to the education sector, including N850 billion for basic education, finds favour with Dr. Balogun. “Investing in human capital is vital for achieving sustainable development,” he says. “An educated and skilled workforce is the backbone of any thriving economy.”

 However, he expresses concern about the balance in sectoral allocations. “While security is undoubtedly important,” he asserts, “significant allocations to defense and police must be weighed against investments in social sectors like healthcare and agriculture.” The National Assembly’s proactive role in revising the budget is commended by Dr. Balogun. “Their scrutiny and adjustments reflect their commitment to ensuring the budget aligns with national priorities,” he says. “However, effective oversight and transparency in budget implementation are crucial to ensure the allocated funds are utilized efficiently and for their intended purposes.” Dr. Balogun concludes by highlighting the challenges and opportunities ahead. “Inflationary pressures and global economic uncertainties pose risks to the budget’s projections,” he warns. “Diversification of the economy beyond oil dependence, strengthening tax administration, and tackling corruption are essential for boosting revenue and ensuring long-term economic stability.”

  Overall, Nigeria’s 2024 budget presents a complex picture. While its focus on infrastructure and human capital development is commendable, the sustainability of the deficit and reliance on debt raise concerns. Prudent financial management, efficient resource allocation, and sustained economic diversification will be key to translating the budget’s aspirational vision into tangible outcomes for the Nigerian people.

On his part, Mr Gbolade Idakolo, Managing Director/CEO SD&D Capital Management Limited stated that the “budget as passed by the National Assembly is insensitive looking at the additional N1.2 trillion added to the budget and the increase of additional $1.8 billion in the NASS budget. “Commendably,  Defence,  Education, Police, Health and Social welfare got the lion share of the budget. If properly implemented, these would increase security lift people out of poverty and cater for the decay in our educational system. The budget assumption of N800/$1 is realistic. However, deficit funding for over $9billion with our debt servicing of about N8.7 trillion are major challenges that could affect proper implementation of the budget. Following the footsteps of the past administration the President Tinubu has sort for and gotten approval for additional loans $7.8billion and €100m to fund the budget” he said.