A swift recovery in Africa’s biggest economy will keep the budget deficit at 5 percent of GDP in 2021, according to research House Chapel Denham Limited.
That is an improvement from a deficit of -5.84 percent in 2020, when the coronavirus pandemic undermined energy prices, and subsequently, the country plunged into a second recession in four years.
A fiscal deficit is a shortfall in a government’s income compared with its spending. The government that has a fiscal deficit is spending beyond its means.
Over the second half of the year, analysts at Chapel Hill expect the oil revenue to improve, supported by crude oil prices and improved crude oil production as OPEC production cuts reduce.
Nigerian relies on crude oil for 90 percent of foreign exchange earnings and two-thirds of government revenue.
Brent crude oil now stands at stands at $75.69 a barrel as at July 02, thanks to the roll out of vaccines and the gradual reopening of the economy that supported consumption across sectors.,
While the government sees fiscal deficit at 3.60 percent of GDP, it has been borrowing to bridge a budget deficit while it prioritizes recurrent expenditure over capital expenditure such as building bridges, hospitals, and rail lines.
Africa’s largest economy requires at least $3 trillion of spending over the next 30 years to close its infrastructure gap, according to Moody’s Investors Service.
The country’s tax revenue as a proportion of gross domestic product is one of the lowest globally, according to the International Monetary Fund.
The national assembly had approved a N13.60 budget for 2021, which was 26 percent higher than 2020’s N10.80 trillion. Of course, there were increases in debt servicing. In fact, debt servicing was almost 3 times more than total allocation to education and health, combined, in 2021, and is 13% higher than in 2020.
However, the improvement in oil price has not improved the government fiscal position.
The 2022-2024 Medium Term Expenditure Framework Fiscal Strategy document showed that government revenue from January to May 2021 was N1.8tn, a 33.3 percent shortfall of the budgeted amount.
Analysts at Chapel Hill Denham expect a continued rise in oil price to result in increased subsidy payment.
“As such, if crude oil prices continue to soar, we expect fuel subsidy to total revenue to settle at 30% by year-end,” said the analysts.
Nigeria’s current account (CA) position stayed in a deficit position for the tenth consecutive quarter, with the balance in Q4-20 (USD5.26 billion or -4.5% of GDP) representing the largest CA deficit since Q4-19 (USD6.68 billion).