Addressing Nigeria’s rising fiscal deficit

Nigeria is facing a challenging economic landscape with its budget deficit reaching 7.6 per cent of GDP as of August 2024, surpassing the approved target of 3.8 per cent for the year. The shortfall between revenue generation and government spending has become a pressing issue, prompting discussions on strategies to diversify the revenue base and address the widening fiscal deficit. Paul Alaje, a Senior Economist at SPM Professionals, delved into these challenges during a recent interview on CNBC Africa. Alaje highlighted the significant gap in revenue generation, emphasizing that it falls short of subnational expectations. The mounting debts and debt service costs at the subnational level have escalated, posing a critical concern. Exchange rates have played a pivotal role in the economy, influencing the debt burden for both subnational entities and the federation. The federal government's expenditure on debt settlements has surged, with projections indicating a substantial increase by the end of 2024. The country's total debt stock has surpassed 130 trillion Naira, compounding the economic strain on subnational governments. Despite efforts by a few states to boost internally generated revenue (IGR), the overall financial position remains precarious, reliant on funds from the federation accounts. Tax reforms have been proposed as a potential solution to enhance revenue generation and address the fiscal deficit. While acknowledging the merits of the reform initiatives, Alaje expressed concerns about their timing amidst ongoing economic challenges. The impact of subsidy removal and naira devaluation could compound the effects of new tax measures, affecting national income adversely. Alaje cautioned against the abrupt implementation of reforms, advocating for a more gradual and considerate approach to safeguard the economy. The interplay between the widening fiscal deficit and the monetary policy environment has raised additional complexities for Nigeria's economic outlook. Alaje discussed the volatile exchange rate and its implications on revenue targets and debt service obligations. Despite a modest reduction in debt service to revenue ratio, the quality of earnings from these transactions has deteriorated significantly. Moreover, the inflationary pressures stemming from subsidy removal and currency depreciation have exacerbated the cost of commodities, leading to widespread price hikes. The exchange rate's pivotal role in economic stability was underscored, emphasizing the need for comprehensive strategies to mitigate its impact on various sectors. As Nigeria grapples with these economic challenges, the imperative to navigate the fiscal deficit while fostering sustainable revenue streams remains paramount. Effective policy measures, prudent financial management, and strategic reforms will be crucial in addressing the country's fiscal vulnerabilities and steering its economy towards a more stable trajectory.