A budget is a vital tool for achieving a country’s economic strategy. It is designed to shape its entire socio-economic landscape for the year and the future, with the budget allocation serving as a guide for the government’s long-term economic vision. Simply put, the budget is really about how much revenue the government collects, what the revenue will be used for, and how shortfalls – deficits – between revenue and expenditure will be met (in this case, through debt accumulation). It is a powerful tool for the assessment of the transparency of the management of public finances. In this regard, various constitutional and legal provisions require the government to meet certain bars, thresholds and limits to ensure that the budgetary process ensures economic stability, debt sustainability, and prosperity for all.

In this analysis, we will review President Bola Tinubu‘s proposed 2024 budget, assess the compliance of the budgetary process with legal and constitutional provisions, and conclude with a position on what the 2024 budget means for Nigeria’s economic revival. One should provide a caveat that the federal government budget is not representative of the aggregate fiscal stimulus in the economy. State and local governments also stimulate the economy through taxes, programmes and projects. Without the consolidated budget of the states and local governments, this analysis is focused on the federal budget, which accounts for around 85 per cent of aggregate fiscal stimulus.

Key Aggregates and Assumptions in the 2024 Budget

How much does the FGN expect to collect?

The aggregate FGN revenue is projected at N18.32 trillion. Oil revenue is projected to increase by 344 per cent, relative to 2023, while revenue derived from the non-oil sector – corporate income tax, VAT, import and customs duty, etc – is projected at a 54 per cent increase over the 2023 forecast.

How does FGN plan to allocate its expenditure?

Aggregate expenditure is estimated at N27.50 trillion. The 2024 expenditure estimate includes statutory transfers of N1.30 trillion and non-debt recurrent expenditure of N10.26 trillion. Debt Service and Sinking Fund to retire maturing bonds issued to local contractors/creditors will cost N8.25 trillion and N243 billion, about 45 per cent of the expected total revenue.

Under the recurrent category, a total of N6.48 trillion (inclusive of N1.02 trillion for GOEs) is provided for personnel and pension costs. The aggregate amount available for capital expenditures in the 2024 budget is N8.70 trillion, higher than the 2023 provision of N8.43 trillion. There are further breakdowns on allocations to specific ministries.

How does FGN plan to finance the revenue shortfall relative to planned expenditure in the 2024 budget?

The 2024 budget deficit is projected at N9.18 trillion or 3.88 per cent of GDP, lower than the N13.78 trillion deficit recorded in 2023, mainly because of higher projected oil receipts. The deficit is projected to be financed from borrowings totalling N7.83 trillion, N298.49 billion from privatisation proceeds, and N1.05 trillion from the drawdown on multilateral and bilateral loans secured for specific development projects.

The underlying macroeconomic assumptions in the 2024 budget estimates are as follows.

– The average price of crude oil in the international market for the year will be $73.96 per barrel (pb).

– Oil production will average 1.78 million barrels per day (mbpd).

– The exchange rate of the naira to the US dollar will hover around ₦700/$1.

– The Gross Domestic Product (GDP) will grow by 3.76 per cent after adjustment for inflation.

– The country’s inflation rate will average 21 per cent.

Key Takeaway: The Numbers in the 2024 budgets do not add up.

A close look at some of the estimates throws up some questions and concerns regarding historical performance, underlying assumptions and the economy’s direction.

Revenue

The projected increase in federal revenue is overambitious relative to past trends, but one can justify some of the increase. The projected increase in oil sector revenue can partly be explained by applying a depreciated exchange rate to a higher daily oil production target than in the 2023 budget. Furthermore, some new previously uncollected sources of revenue, such as from the Development Bank of Nigeria and Galaxy Backbone, also add to higher revenue in 2024.

Nonetheless, the revenue assumptions may not be realisable. First, the daily oil production target of 1.78 million barrels in 2024 budget appears ambitious in an environment where daily oil production has averaged 1.2 mbpd for over two years. Achieving a daily average increase of more than 500,000 barrels per day in one year is a substantial challenge, given the recent decline in oil production, activities of illegal refineries, oil theft, and a weak external market. Furthermore, an undisclosed amount of oil receipt is already tied to swaps and forward contracts that will not accrue to the federation account in the foreseeable future. Similarly, non-oil receipts, especially from corporate income tax, have been pre-collected over the past few years in the “infrastructure for tax swap programme”. These all show that the revenue assumptions are either mere book entries or unrealistic.

Finally, the fiscal framework is unclear about the impact of subsidy removal on the budget. So, it is not immediately apparent that the sector has additional revenue due to subsidy removal. For example, the 2023 budget assumes a net oil revenue of 49 per cent after expending 51 per cent on cost, which included subsidy and operational costs of the oil company, 13 per cent derivation, and transfer to the Nigeria Police Trust Fund. In the 2024 budget, the projected ratio of net revenue to cost is 70 per cent to 30 per cent. While this appears to be an improvement, to the extent that other factors such as exchange rate and higher daily production assumptions contribute to the increase in the oil receipt, it is unclear whether or not the subsidy removal is making its way into the budget.

The same lack of realism is betrayed in the numbers on the non-oil revenue. A 45 per cent projected increase in income and consumption taxes in 2024 appears to be detached from the current economic realities. Projections for companies’ income tax (CIT), value-added tax (VAT), Import and Customs duties, the tax base of which are primarily driven by domestic demand pressures, appear oblivious of the decline in economic activities, closing down of factories, and lower consumption of VAT related goods due to ongoing economic hardship. Under the circumstances, the potential of achieving a 58 per cent increase in CIT or 225 per cent in consumption-based taxes is unrealistic, to say the least.

Expenditure

On the capital budget, in dollar and real value terms, the N8.7 trillion capital budget is much less than the N8.4 trillion capital budget of 2023. If one assumes that half the capital budget is based on imported components, which is now affected by a steep devaluation, and the other half is domestic input, which is now costlier due to domestic inflation of over 22 per cent, then the real purchasing power of the 2024 capital expenditure is about 67 per cent lower than the 2023 capital expenditure. In this event, it will be misleading to suggest that the capital budget has increased over that of last year. From the point of view of costs alone, citizens should brace for reduced government services and stimulus.

Some curious patterns in the capital expenditure budget merit further clarification. Some items, such as the capital expenditure of ministries, departments and agencies (MDAs), and state-owned enterprises (SOEs), appear to have increased in the predictable and realistic trend of around 10 per cent from the previous year. But the increase in some items defies economic logic. Grants and donor-funded programmes are projected to increase by 1,400 per cent (from N43 billion in 2023 to N585 billion) relative to 2022. Similarly, 100 per cent growth for capital expenditure of statutory transfers and TEFUND capital expenditure. Given these substantial growth trends, it would help to explain further why projects can be ramped up so quickly in a 12-month time frame.

Deficit

The projected fiscal deficit of 3.88 per cent of GDP will likely be underestimated at the end of the day, given the over-optimistic revenue projections and if the ambitious benchmark assumptions adopted do not materialise. Thus, the projected borrowing requirement of N7.8 trillion may require supplementary loans in 2024. Evidently, such additional loans will seriously challenge the government’s capacity to service current debts.

More importantly, it is concerning that a new government prefers to ramp up deficit spending in its first full-year budget. The realistic and prudent thing to do is to spend the first two years stabilising the economy by incentivising production. Higher production levels will increase the revenue base, create employment and enlarge people’s purchasing power. Subsequently, the momentum from these policies will put the economy on a path of fiscal responsibility as the tax base expands.

Constitutional and Legal Public Finance Management Regulations

The 2024 budget process breaches a few requirements of public finance management, including the Fiscal Responsibility Act (FRA) in a few areas. It is as if, at every step of the way, the government was determined to sidestep the law with the connivance of a supportive legislature. A few highlights are as follows:

The borrowing plan for the MTEF: In November, the President sought Senate approval for $7.86 billion and 100 million euros ($105.40 million) for the 2024-2026 borrowing plan. Key provisions of the FRA were disregarded in the process. The request did not indicate the potential sources of the debt and their potential uses. The borrowing plan may also have violated the FRA in other areas: critical supplementary details on the repayment plan, with pre-project and feasibility studies, cash flow statements and Environmental Impact Analysis were not made available. These are documents that would have to be produced by both creditors and line ministry and FMF officials before creditors part with their money and reach agreements. The Senate should have rejected a borrowing plan that does not satisfy these basic requirements in the first place. Furthermore, there is no way to assess whether the process complies with the FRA provision on what the government can finance by debt since the information was not provided to the Senate.

The 2024 budget is in breach of the FRA with respect to the size of the deficit, which at 3.88 exceeds the legal limit of 3.0 per cent.

Renewing the prospect for economic revival and revitalisation

A review of Mr Tinubu’s proposal suggests that any hope of a better future cannot be based on the 2024 budget. Nothing in the budget indicates that the government is about to set Nigeria in a direction different from the recent past. The lack of commitment to reviving private investment and production is too glaring. There is hardly any concern about the inflationary consequences of the fiscal policies, or at least there is no discussion of it. Citizens should brace for a more challenging year ahead.