**Nigeria’s Economic Struggles in Early 2024: Balancing Fiscal Reforms and Debt Management**
The first half of 2024 has been marked by significant economic challenges for Nigeria, stemming from weak government finances, low revenue collection, and high debt-service costs. These issues have been compounded by the adverse effects of currency depreciation, according to analysts.
Nigeria’s fiscal situation is precarious, with revenues amounting to less than 10% of GDP, approximately 40% of which come from oil. The high cost of fuel subsidies, which consumed 24% of fiscal revenue in 2022, adds to this fragility.
Analysts at United Capital report that the new government has prioritized fiscal consolidation, successfully reducing the fiscal deficit to 4.8% of GDP in 2023 from 6.7% in 2022. This was achieved through improved tax collection, increased non-oil revenue, and moderated government spending.
To further boost non-oil receipts, Nigeria’s Medium Term Economic Framework (MTEF) aims to improve domestic revenue mobilization and diversify the economy. The Presidential Committee on Fiscal Policy and Tax Reforms has developed a comprehensive revenue mobilization strategy, targeting the simplification of the tax structure and the overhaul of key tax legislation to be implemented in 2025.
Despite the announcement of fuel subsidy removal in May 2023, indirect subsidies have continued due to naira devaluation, impacting both consumers and the government. Fuel subsidies still represented 0.8% of GDP in 2023 and are projected to rise to 2.8% of GDP in 2024.
The government faces significant challenges in further fiscal consolidation given the social implications of aligning domestic fuel prices with global market rates amid high inflation.
The substantial rise in domestic interest rates has significantly burdened interest payments, which absorbed 35% of fiscal revenue in 2023. However, reforms and increased support from multilateral donors through concessional loans are expected to somewhat alleviate this burden.
In the first five months of 2024, the government raised N8.25 trillion in domestic borrowing, including N3.09 trillion from bonds and N5.16 trillion from treasury bills, to finance the budget deficit and reduce N4.91 trillion of the N7.33 trillion in Central Bank advances used in the second half of 2023.
This borrowing, coupled with significant interest rate hikes, has substantially increased debt servicing costs, likely pushing actual government expenditure beyond the pro-rata budget for the year.
The external component of Nigeria’s debt has become more significant, with the share of external debts for both federal and state governments rising from about 10% in 2010 to 46% in Q1 2024. Nigeria’s debt-to-GDP ratio, which fell to 7.26% in 2006 after securing debt relief from the Paris Club, has climbed back to 48.68% in Q1 2024.
Expressing Nigeria’s debt in US dollars reveals a decline from $108.30 billion in March 2023 to $91.46 billion in March 2024, a 15.54% decrease. However, this does not account for new domestic borrowing and currency depreciation. At the pre-devaluation rate of N460.35/$, Nigeria’s total debt effectively rose to $184.72 billion as of March 2024.
Despite high-interest payments, public debt remains moderate at 46% of GDP in 2023. The government plans to enhance social benefits to support households affected by economic pressures, but the potential for fiscal slippage remains high given the tense social climate and the challenges in maintaining fiscal discipline.
Looking ahead, analysts at United Capital project a modest increase in the budget deficit for the second half of 2024, though it will be lower than previously anticipated.
This widening deficit is attributed to higher non-oil revenue and the partial removal of fuel subsidies, counterbalanced by underperformance in oil profits from the Nigerian National Petroleum Corporation Limited, as well as increased expenditures for debt servicing, personnel, and capital projects.
Oil production is projected to improve in 2024-2025, driven by the ramping up of the Dangote Refinery to a 0.65 mbpd capacity, which will reduce transportation costs and lower refined oil imports, easing FX demand. Crude oil production, including condensates, is expected to average 1.75 mbpd in 2024-2025, up from 1.58 mbpd in 2023, aided by better onshore surveillance. However, this production level remains below the 2019 figure, reflecting ongoing challenges such as under-investment and production outages in the sector.
The government expects a supplementary budget of N6.65 trillion for the Accelerated Stabilization and Advancement Plan (ASAP), a six-month economic initiative. This intervention is expected to widen the fiscal deficit for 2024 to N16.42 trillion.
The rising debt from increased issuance of debt instruments without corresponding revenue-generating investments poses a risk of crowding out private investment and worsening the country’s long-term debt profile.
Government external debt service is expected to be moderate at $4.8 billion in 2024 and $5.2 billion in 2025, including $2.9 billion in amortizations and a $1.1 billion Eurobond repayment due in November.
The government plans to meet its external financing obligations through multilateral lending, syndicated loans, and potentially commercial borrowing.
**Monetary Policy: Analysts Predict Further Tightening**
As members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) begin their two-day meeting in Abuja, financial analysts expect no cut in rates, anticipating that the policy rate will remain unchanged throughout the year.
Olaolu Boboye, lead economist at CardinalStone Research, projects a hike in the monetary policy rate (MPR) of about 50-100 basis points. Nelson Abudah, a research analyst at Afrinvest, suggests the MPC may lean towards a 50-100 bps hike given the recent rise in month-on-month inflation in June.
Looking ahead, the Debt Management Office (DMO) may refrain from further increasing treasury bill rates as borrowing costs become a concern, and Open Market Operations (OMO) yields are expected to stabilize.
With the Cash Reserve Ratio (CRR) at a record high of 45.0%, banks’ ability to create credit is constrained as they balance the 30% liquidity ratio requirement with the pursuit of higher interest income. This high CRR is expected to continue to exert pressure on banks’ credit creation capabilities, reflecting broader challenges in the Nigerian financial sector amid ongoing inflationary pressures.
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