How Nigeria plans to raise ₦3tn to fund subsidy payment

With the planned petrol subsidy removal now shelved by the Nigerian government, about three trillion Naira is expected to be paid for subsidy this year. This amount will be captured in the 2022 budget, contributing to a budget deficit of 6.4 trillion Naira. Victor Aluyi, a financial market analyst, discusses the additional borrowing sources Nigeria can explore to fund the subsidy payments and manage its growing debt burden. Aluyi highlights the challenges posed by perennial Naira weakness and rising global oil prices, which have led to a tenfold increase in subsidy payments over the last five years, reaching 1.4 trillion Naira in 2021. The government has allocated 4.43 trillion Naira for subsidies in the 2022 budget, emphasizing the need for alternative funding options. Aluyi suggests that widening the tax net could provide a viable solution to generate additional revenue for the government. Despite the government's initial plans to remove subsidies in July, the decision has been rescinded, indicating a continued reliance on subsidies throughout the year. As a result, the fiscal deficit is expected to surpass 6.4 trillion Naira, prompting the government to consider local debt issuances and bilateral funding to bridge the gap. However, Aluyi notes that rising interest rates in developed markets may make international borrowing more expensive, leading to a greater reliance on domestic market borrowing. The increasing debt service payments further strain government revenues, highlighting the need for prudent fiscal management and efficient tax collection. The Finance Act 2021, which introduced new taxes such as the sugar tax and levies on digital companies, aims to boost government revenue diversification. Aluyi emphasizes the importance of tax efficiency and administration to maximize revenue collection. Amidst Nigeria's macroeconomic challenges, including high inflation, currency depreciation, and elevated debt levels, Aluyi points to examples from countries like Ghana that have faced similar fiscal difficulties. He underscores the importance of fiscal discipline and prudent expenditure management to improve revenue efficiency and reduce wastage. Aluyi acknowledges the political constraints in implementing austerity measures in a pre-election year but underscores the need for sustainable fiscal policies to navigate Nigeria's economic challenges effectively.