The Federal Government is expected to borrow nearly half of its budgeted expenditures in 2023 as the government struggles with mounting debts amid low revenues. With planned removal of subsidy on Premium Motor Spirit (PMS), otherwise known as petrol, political risks exacerbate concerns about the 2023 budget. NewsClick Nigeria Media’s Board of Editors examines the underlying currents and the likely impacts of the 2023 budget on the populace
The 2023 budget is christened “Budget of Fiscal Consolidation and Transition”, highlighting the two dominant themes of the Appropriation Act. The N21.83 trillion 2023 budget, the last by the President Muhammadu Buhari administration, is symbolic; for the government and the populace. It is government’s wrap up of its economic policy stance; but also highlights possible major changes that will profoundly impact the general citizenry.
President Buhari on January 3, the first working day of 2023, signed the 2023 Appropriation Act. The National Assembly had passed the 2023 Budget into law on Wednesday, December 28, 2022, keeping the admirable budget cycle of January to December. The Finance Bill 2022, a supplementary executive instrument to support the 2023 budget implementation, was also passed by the National Assembly, though still awaiting Presidential assent. The Finance Bill 2022 contains key reforms to tax laws and other relevant laws that promise major changes in government’s financial management and the citizenry.
The non-oil sector is expected to generate 78 per cent or N8.18 trillion of the total revenue estimate of N10.49 trillion. Oil-related sources, hitherto the dominant sector of the economy, will provide some N2.2 trillion, about 22 per cent of total revenue. The balance of N11.34 trillion of the N21.83 trillion 2023 budget would be sourced mainly through borrowings. These include N7.04 trillion from domestic debt issuances, N1.76 trillion from foreign sources, N1.77 trillion from multilateral and bilateral loan drawdowns and about N206.18 billion from privatisation exercises during the year. Also, about N553.46 billion is expected to be financed by additional revenue from Spectrum fees and tax on the maritime sector.
Critical sectoral allocations in 2023 budget included Education, N1.79 trillion or 8.2 per cent of the budget; Health, N1.15 trillion or 5.3 per cent; Defence and Security, N2.98 trillion or 13.4 per cent and infrastructure, N1.24 trillion or 5.7 per cent of the budget.
Some budgetary provision of N967.5 billion would be made for statutory transfers in the 2023 budget, which represented an increase of N223.38 billion over the Executive Budget Proposal. These allocations included N228.1 billion to the National Assembly which will include severance and inauguration costs; N176.3 billion to the Independent National Electoral Commission (INEC) to prosecute this year’s general elections; N165 billion to the Judiciary to meet the judiciary’s financial needs that may arise from election cases; N119.9 billion to the Niger Delta Development Commission (NDDC); N103.3 billion to the Universal Basic Education Commission (UBEC); N59 billion to the North East Development Commission (NEDC).
The key assumptions and parameters that will guide the 2023 budget are oil price benchmark at $75 per barrel; real GDP growth projected at 3.75 per cent in 2023 compared to 4.39 per cent in the National Development Plan (NDP); growth is expected to moderate to 3.30 per cent in 2024 before picking up to 3.46 per cent in 2025.
Inflation rate is projected at average of 17.16 per cent in 2023 as against 14.93 per cent projected in the NDP for 2023; Oil production 1.69 million barrel per day (mbpd); exchange rates at N435.57 per dollar; non-oil contribution to GDP at N21.4 trillion; oil to GDP at N1.14 trillion and nominal GDP of N22.5 trillion.
At N6.31trillion, debt service will be 29 per cent of total expenditure, 71 percent higher than 2022 estimate. This includes interest payment of N1.2 trillion for Ways and Means, the overdraft facility taken by the government overtime from the Central Bank of Nigeria. After including the outstanding balance of CBN Ways and Means, the debt service-total expenditure ratio is expected to increase to 35.33 per cent.
Nigeria’s total national debt stock is expected to rise to about N77 trillion by May 2023, according to the Debt Management Office (DMO), a federal agency in charge of debt issuances and management. The estimated national debt stock includes N44.06 trillion total debt stock as at third quarter 2022, N22.7 trillion Ways and Means borrowed from the CBN, which government plans to convert to regular bonds, projected new borrowings of N10.57 captured in the 2023 budget and issuance of promissory notes.
Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, has said Nigeria was not planning restructuring of its debt as the nation remains committed to meeting its domestic and external debt obligations.
According to her, government will continue to utilize appropriate debt management tools to streamline the cost and risk profile in the debt portfolio, including through concessional loans, spreading out of debt maturities to avoid bunching, and re-profiling of the debt maturities by refinancing short-term debt using long-term debt instruments.
“Total Public Debt as a percentage of GDP now stands at 22.97 percent as at September 30, 2022, which is within the 55 percent threshold recommended by the International Monetary Fund (IMF)/World Bank (WB); as well as Nigeria’s self-imposed limit of 40 percent set in the Medium Term Debt Management Strategy (MTDS) 2020-2023,” Ahmed stated while outlining the highlights of the 2023 budget.
With low revenue and spiraling debts, the government plans to remove the petrol subsidy this year. Ahmed said the “the projected fiscal outcome in the 2023 budget is based on the PMS subsidy reform scenario”, noting that “in the 2023 budget framework, it is assumed that petrol subsidy will remain up to mid-2023 based on the 18-month extension announced early 2022. In this regard, only N3.36 trillion has been provided for PMS subsidy” in the 2023 budget.
Chief Executive officer, Center for Promotion of Private Enterprise, Dr. Muda Yusuf, said there was need for a reconsideration of government’s new borrowing proposal, describing the plan as a “not well thought out option”.
According to him, when borrowings from the Central Bank of Nigeria (CBN) and the stock of AMCON debt are included in the national debt stock, Nigeria’s debt profile could be in excess of N70 trillion by the end of 2023.
“The new borrowing proposal would worsen an already bad debt situation. Already, debt service has exceeded government revenue, going by the financial report of federal government as at April this year. We are already at a debt threshold that is not sustainable. The economy is on the verge of bankruptcy. The deepening of the debt crisis could crystallise the bankruptcy risk. Elevated debt burden should be avoided as much as possible,” Yusuf said.
Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, said rising subsidy payments and low oil production levels will continue to dwindle revenue despite the current oil price rally, prompting the government to borrow much more than earlier planned.
According to him, given the rising global interest rate, debt servicing will become more expensive, potentially keeping the country on a fiscal cliff.
The International Monetary Fund (IMF) warned that, by 2026, debt servicing might gulp 100 per cent of federal government revenue if the government fails to implement adequate measures to improve revenue generation.
National President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Ide Udeagbala noted the need for the legislative and executive arms of government to work together in taking urgent steps to reverse the current trend of increasing public debt and declining economic growth.
Udeagbala expressed fears that Nigeria’s debt levels had become worrisome because of their far-reaching implications for economic growth and development especially against the backdrop of the International Monetary Fund (IMF) projection that by 2026, all of Nigeria’s revenue would go into servicing debts.
Describing Nigeria’s current levels of debt service payments as “considerably high and unsustainable,” given the prevailing dwindling government revenues, Udeagbala warned of “a looming macro-economic instability if the trend of continued rising debt, without corresponding revenue increase remained”.
Analysts agreed that Nigerians, now grueling with queues, fuel scarcity and elevated fuel price; must brace for steep increase in petrol price. Citing diesel price, which has been fully deregulated, analysts said the price of petrol per litre might double from the current official pump price. Diesel had risen by more than 200 per cent over the past 12 months to about N800 per litre.
In its document titled: “Automotive Gas Oil (Diesel ) Price Watch October 2022”, the National Bureau of Statistics (NBS) stated that the average retail price of Automotive Gas Oil (Diesel) paid by consumers in October 2022 was N801.09 per litre, an increase of 215.30 per cent from N254.07 per litre recorded in the corresponding month of 2021. The price of diesel also fluctuates as the global market dilates. For instance, diesel price increased by 1.42 per cent from N789.90 per litre reported in September 2022 to N801.09 per litre in October 2022.
The Nigerian National Petroleum Company Limited (NNPCL) estimated that without federal government’s subsidy on petrol, consumers would be paying some N462 per litre. The official pump price now is between N169 to N170 per litre, while there are subtle indications of indirect official increase to N185 per litre. NNPCL said government was paying N297 per litre for the 68 million litres of petrol consumed daily by Nigerians.
Chief Operating Officer, GTI Capital, Mr. Kehinde Hassan, said the removal of subsidy, although desirable, would have immediate impacts on cost of operations of businesses, with the weight more on Micro and Small Business enterprises with less pass-through to consumers.
According to him, there would almost be an instantaneous increase in prices across the major sectors of the economy – from transportation to manufacturing and services.
He called for a guided removal of the subsidy with a bouquet of reforms and incentives that lessens the adverse impact of the removal while simultaneously redirecting savings from subsidy removal to high-impact capital and social projects.
The Finance Bill 2022 is expected to also play centrifugal roles in the 2023 fiscal year. Under tax reforms, the government will be harvesting taxes of capital gains from individuals who acquire and dispose of interests in cryptocurrencies, digital art and other digital assets into the tax net; ensuring under-taxed/not-taxed sectors, taxpayers, etc. are brought into the tax net in line with extant laws and regulations; and will clarify that 35 percent of electronic money transfer levy receipts should be paid to local governments.
According to Ahmed, government will phase out antiquated Corporate Income Tax Incentives for mature industries; and through Economic Governance Reforms, reduce tax expenditures and revenues foregone and gradually transition away from expensive as well as redundant tax incentives like the pioneer tax incentive.
She noted that as at 2021, the federal government had lost over N6 trillion from tax incentives granted to companies venturing into new areas, as such, government will exempt some industries from pioneer status tax incentives.
Nigeria’s largest economic think tank, the Lagos Chamber of Commerce and Industry (LCCI), has already called for caution with the Finance Bill 2022. Director General, LCCI, Dr Chinyere Almona said in recognition of the potential impact of the 2022 Finance Bill on the operations of various sectors of the economy, LCCI had reviewed the Bill and was cautious about many of the issues.
According to her, recent statistics reveal that Nigeria has struggled to attract investments into the oil & gas industry as investments in the Nigerian oil and gas sector have declined significantly in the last seven years with operations overheads of oil and gas companies remaining abovr 40 per cent which is above the global benchmark.
She said the oil and gas sector requires a sensitive regulatory environment to avoid disruptions to investments in the sector.
“With the divestments by some IOCs from the oil and gas sector, we need to reposition the industry through a steeply implemented Petroleum Industry Act (PIA) to pave way for new investments and also encourage indigenous companies to reflate the sector with required investments,” Almona said.
She called for retention of the Tertiary Education Tax (TET) rate at 2.5 per cent, since it was just recently increased from 2.0 per cent to 2.5 per cent noting that at the proposed rate of 3.0 per cent, Nigeria’s corporate income tax rate would rise to about 36 per cent which is one of the highest rates in the world.
Director Genera, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr. Sola Obadimu, described the 2023 budget as “a non-performing budget”.
He condemned the federal government’s idea of budgeting and putting borrowing as part financing. “It’s a habit that we have to drop. Continually borrowing to finance your budget shows lack of discipline. Even on household basis, if you have your monthly income and you are continually projecting to keep borrowing, it means you are living a life that is not sustainable,” Obadimu said.
Director, Centre for Social Justice, Eze Onyekpere, also toed the same line, describing the budget as unrealistic.
According to him, the prospect of raising more income through taxation is limited, because of the poor state of the economy and manufacturing sector.
He said the budget will only end up pushing the country into bigger debts and debt service costs.
Yusuf said the deficit could be much bigger by year end because of the track record of revenue underperformance over the last couple of years, while there could also be an acceleration of CBN financing of fiscal deficit given the revenue performance trajectory.
He outlined that a number of issues need to be addressed to achieve fiscal sustainability. He said government-owned enterprises managing huge economic assets need to justify the value of assets at their disposal to discourage what is obtainable now where Returns On Investment (ROI) on those assets, have been consistently sub-optimal for many years.
“There is a need for budget reforms. The budgetary appropriations must reflect urgent national economic priorities. There are also concerns about value for money and other forms of fiscal leakages. The Auditor General of the federation had severally raised these concerns.
“We agree with the President that funding of tertiary education cannot be adequately and sustainably supported exclusively from government budget. New funding models need to be urgently explored for adequacy and sustainable funding. Current budgetary provisions need to be augmented from new innovative funding windows,” Yusuf said.
He noted the need for enabling macroeconomic and regulatory environments to attract and inspire investors’ confidence in private-public partnership (PPP) development of key infrastructure.
According to him, current macroeconomic and foreign exchange policy regimes are major disincentives to investors in infrastructure, especially foreign investors.
As the political campaigns hot up for successor to President Buhari, tough choices beckon on the nation and its citizenry. All candidates have promised tough policy changes in major sectors. Nigerians must brace up for these changes. 2023 appears to be the year of a major redirection for the nation, with the budget 2023 echoing through the challenges and possible changes facing the nation and its citizens.
