• Rising unfunded fiscal deficit threatens 2023 budget implementation
• Ministries directed to streamline operation
• MDAs freeze new hiring, consider revenue-generating measures
• Liquidity crisis worsened as CBN pulls the plug on cheap money
• Over N5b monthly wage top-up pushes up payroll burden
Ahead of the 2024 budget presentation, President Bola Tinubu’s administration may be putting finishing touches to a plan to pivot the government from a culture of oversized fiscal deficit and embrace fiscal consolidation practice as a necessary option for addressing legacy macroeconomic challenges.
As part of the grand plan, the Ministry of Finance and the Budget Office (an agency under the ministry) are said to have started working on new austerity measures that would drastically cut recurrent expenditures and rein in official waste in the operations of ministries, departments and agencies (MDAs).
After much push-and-pull on Sunday, the Federal Government agreed to give all categories of civil servants a wage top-up of N35,000 per month. At least, all federal civil servants under the Consolidated Public Service Salary Structure, which were estimated at 144,766, as at April, will benefit from the provisional salary increase in the next six months.
Tinubu’s administration would need, at least, N5.07 billion monthly to fund the add-on, which some experts said has laid the ground for a long-lasting wage floor in the coming months, and ultimately increased the burden of salary payment on the current administration.
Different ministries are said to have been informed, in clear terms, to streamline their operations and stop picking bills that would not add value to governance going forward.
Some MDAs, which are hitherto considered cost centres, are said to have also been handed the mandate of retooling their operations to be commercially relevant.
The radical departure being contemplated, The Guardian learnt at the weekend, is imposed by what sources described as harsh reality that is shaped by slow revenue growth, huge public debt liabilities and expanded personnel cost.
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, is said to have been given the task of coming up with a realistic plan for bridging the gaping hole between revenue and expenditure as the Federal Government embarks on the tough task of drawing the curtain on years of huge fiscal deficits.
Under ex-President Muhammadu Buhari, the fiscal deficit ballooned from N880 billion in 2015 to N9.3 trillion last year, which was about N2 trillion over the projected amount.
Each year, the actual deficit exceeds the projected sum, in some years over 50 per cent. In the running budget, the fiscal deficit was about 50 per cent of the expenditure outlay – N21.83 trillion.
Some economists had dismissed the appropriation as spurious and unimplementable. Shortly before the current administration assumed office, Ike Chioke of Afrinvest Group told The Guardian that Tinubu administration would also assume there was no budget on assumption of office.
There is no official communication on the performance of the budget yet. But sources with knowledge of the implementation told The Guardian the appropriation is threatened with unfunded fiscal deficits.
“If the government is not aggressively incurring fresh debt liabilities and tax revenues, which have not increased tremendously, only one thing could have happened to the budget – it is not funded. This means nobody would expect that administration to do any magic with the budget performance,” the source said.
Buhari’s eight-year administration relied almost 100 per cent on borrowing to plug the budget gap. Where conventional loans were not forthcoming, the government resorted to the Central Bank of Nigeria’s (CBN) overdraft for support.
From May 2015, when the administration assumed leadership, the value of CBN’s overdraft grew from N790 billion to N23.3 trillion as at December 2022 – an expansion of 2,850 per cent. The amount was N23.05 trillion higher than the limit of N252.27 billion based on a maximum of five per cent of prior year’s revenues allowed by the CBN Act, which the new CBN Governor, Dr Olayemi Cardoso, has pledged to protect. The new apex bank boss also pledged at the Senate screening to deal with reckless deficit financing with dispatch.
At an in-house engagement, the governor was said to have stressed the resolve to end irresponsible budget support and play by the rules as specified by the CBN Act. That suggests that days of cheap money are over for the FG.
The debt market, according to Dr Ayo Teriba of Economic Associates, currently lacks the capacity to absorb more debts. The economists told The Guardian that the federal and state governments have so far taken as much as 87 per cent of the total capacity of the market.
The government’s chance at the international market is encumbered by fear of debt defaults. A report by JPMorgan put the total amount of forward contract debt owed by the CBN at $6.84 billion. Though the apex bank dismissed the claim, international creditors approach Nigeria’s debt instruments with extreme caution, a situation said to have affected private entities’ ability to source funds for developmental projects from the international market.
“The consequences of reneging on forward contracts are too dire to imagine. If it happens, a sovereign default would occur, drying up all forms of foreign credit to the economy. Already, Nigerian letters of credit are being dishonoured, setting transactions on a cash basis. Any defaults will also dry up capital inflow completely,” David Adonri, an investment banker, stressed.
In recent years, the government has blamed the country’s debt crisis on low tax revenue. The country’s tax-to-gross domestic product (GDP) ratio hovers around 10 per cent, which is far below Africa’s average estimated at over 16 per cent.
The new Executive Chairman of the Federal Inland Revenue Service (FIRS), Zaccheus Adedeji, said he would raise the tax-to-GDP ratio to 18 per cent in the next few years.
The current administration, recognising the importance of using taxation to stimulate growth, inaugurated the Presidential Fiscal Policy and Tax Reforms Committee headed by Taiwo Oyedele from inception. Interestingly, the Oyedele-led committee, which The Guardian learnt will be submitting an interim report in the coming weeks, is not all about raising tax revenue but creating an efficient fiscal space.
Oyedele, a former tax lead at PwC, is a long-standing advocate of using fiscal incentives (which means negative revenue in the immediate to short-term) to stimulate growth. It was learnt that the report that the Committee will be submitting soon leans heavily on how the government would leverage taxation as a means of incentive rather than as revenue to drive the much-need growth. That would align with the demands of different advocacy groups, who think the business environment is already overtaxed and currently in need of breathing space. Indeed, key performance indicators of the Nigerian manufacturing sector suffered negative growth in the first half (H1), according to the Manufacturer’s Association of Nigeria (MAN) review.
Capacity utilisation in the manufacturing sector in H1 declined to 56.5 per cent from 57.9 per cent year-on-year, said the report, which warned against further increases in the tax burden.
The national economic managers, led by Edun, are said to have considered recent negative reports as sufficient cautious signs and have call-to-action responses to stem a possible further plunge of the economy. The measures, according to multiple sources, include drastic cuts in spending, control of need borrowing and gradual implementation of leaner public payrolls.
At the weekend, sources at different MDAs disclosed that some new ministers have suspended new hiring. In some MDAs, the directive affects contract employees and consultants, which are said to be a major drain on the finances of some of the MDAs in recent years.
“Ongoing employment process has been suspended. Even cases that were completed with only appointment letters waiting to be issued have been affected. I understand the minister said he would personally review them on a case-by-case basis and that only indispensably useful individuals would be brought in,” a source knowledgeable about the issues and work in a paramilitary agency disclosed at the weekend.
The new move aligns with Edun’s position during a meeting with the President and other members of the cabinet. The federal government, he said “is not in a position to borrow at this time” but to focus on creating a stable and macroeconomic environment.
But the government may be contradictory in its search as it seeks ways to wriggle out of the self-inflicted crisis. The return of fuel subsidy payment may have thrown up a new fresh challenge to fiscal sustainability.
In August, the government reportedly paid N169.4 billion to keep the fuel pump price at its frozen level. With crude moving from the range of $80 per barrel to about $90 last month and the consistent depreciation of naira, the government would, certainly, have paid more last month. Except the federal government floats the retail price of fuel, subsidy may have added major leakage to the revenue-expenditure equation.
Tinubu has also not convinced his critics that he is, indeed, committed to reducing the cost of governance. Two newly-nominated ministers would be cleared by the Senate today to increase the number to 47 and consolidate his cabinet as the largest in the history of the country. Besides, he has created fresh ministries for sectors that were previously covered by other ministries.
THEGUARDIAN
