Increased Public Sector Wages and Rising Borrowing Costs are Expected to Contribute to Larger Budget deficit for Nigeria in coming year

Nigeria’s budget deficit is to widen this year on the back of Federal workers salary review, increased pension obligations, new minimum wage impact, and increased borrowing, according to research firm Chapel Hill Denham Limited.

That will leave policy makers scratching their heads on how to go about financing the balance-sheet, as the removal of subsidies on fuel and the unification of the exchange rate have magnified poverty in a country where over 50 percent of its citizens live on less than $1.98 a day.

Analysts at Chapel Hill Denham expect a deficit/GDP at 4.11 percent, exceeding 3 percent of Fiscal Responsibility Act (FRA) threshold, but lower than the 2023 level of 5.18 percent.

Before president Bola Tinubu was sworn in on May 29, 2023, the government had relied on heavy borrowing to finance a budget deficit as the country swims on an ocean of hefty financial obligations.

Former president Muhammed Buhari preferred to tap external and local debt markets for financing in the face of lower oil price, rising inflation, and foreign exchange scarcity than adopting market friendly policies to unlock the potentials in the economy.

The country’s total external debt now stands at N87.91 trillion ($114.35 billion), which translates to 39.50 percent of GDP, according to data from Chapel Hill Denham.

“We believe the massive fiscal slippage of Q1 2023 suggests that the initial 2023 budget was unrealistic, even before accounting for the impact of fuel subsidy removal and liberalisation of the foreign exchange market,” said analysts at Chapel Hill Denham led by head of research, Tajudeen Ibrahim.

“Volatility in the exchange rate market has driven the exchange rate difference on external debt to 2.30 percent of GDP but we see respite ahead, hinged on positive inflow outlook,” said the analysts.

There is a glimmer of hope on the revenue generation that hinges on higher crude oil production and fiscal restraint, which will lead to subdued deficit financing pressures in the first and last quarters of 2024.

However, the elephant in the room remains crude oil theft and pipeline vandalism that have been a drain on the revenue side of the balance-sheet.

The government intends to finance the projected budget deficit with new borrowing of N7.82 trillion; N6.06 trillion from the domestic market, and N1.77 trillion from external sources.

There are indications Nigeria will be tapping the Euro-bond market, which will be made much easier by the possibility of an interest rate cut by the Federal Reserve of the United States and the central banks of rich countries who are working hard to tame roaring inflation.

Stakeholders have clamored that there is an urgent need for the government to cut down on the cost of governance and profligacy in public office.