BY WAZIRI ADIO
Mid-week, the Budget Office of the Federation released the Budget Implementation Report for the last quarter of 2022.
The report, which also provided a snapshot of the budget performance for the whole of 2022, made for very grim reading.
It brings to the fore, again, the dire state of our public finance.
Most importantly, the report should remind us of the urgent need for course correction, starting from President Bola Tinubu’s first budget, which, by the way, should have been before the parliament by now.
Truth is: we have been goofing around in the name of budgeting. We pretend to be busy with diligently preparing, vetting, approving, signing and implementing annual budgets.
We dutifully go through the whole ritual. But it is more of a hollow ritual. It is time to stop the self-deception and stop making and passing budgets that we have no intention of implementing or that we have no plan of using as a mechanism for fiscal discipline.
I will highlight some of the data from the 62-page report and conclude with some issues and recommendations.
I will focus on the budget performance for the whole of 2022 because I think that portion is more appropriate for this intervention. This is not to say that the data for the fourth quarter of the year is not important for comparative and other purposes. Those interested can download the report here: https://www.budgetoffice.gov.ng/index.php/2022-fourth-quarter-budget-implementation-report.
To start with, the 2022 budget performance is not all doom and gloom. The Federal Government’s revenue for 2022 was 40% higher than the revenue for 2021. Non-oil revenue surpassed projection by 11%, especially with impressive numbers from Value Added Tax (VAT) and Company Income Tax (CIT).
Remarkably, the CIT surpassed its target by 42%. It is also significant that oil revenue was only 13% of FG’s revenue for the year, somewhat indicating less dependence on oil. We shall return to this shortly.
Overall, however, the report underscores what most people already know: our public finance is not in a good place.
Total revenue for the Federal Government in 2022 was N5.870 trillion. That was 35% lower than the N9.012 trillion projected as revenue for the year.
This is not an isolated event: it happens year in, year out. It is not that revenue projection constantly falls below target by a few points, but by a significant proportion.
There is definitely something wrong with a revenue forecast that is off by a third. It is either the forecasters are playing games or they are incompetent. Or both.
The Federal Government’s total expenditure for 2022 was N13.393 trillion. This is about 6% lower than the N14.225 trillion approved as expenditure for the Federal Government minus its enterprises for the year, which, in a way, is not bad. But the Federal Government’s 2022 expenditure outstripped its revenue for the year by N7.523 trillion.
That is a budget deficit of 56.17%. Put differently, more than half the money that the Federal Government spent in 2022 came outside of its revenue. But it gets worse.
The approved deficit for 2022 was N5.24 trillion. This means that the Federal Government surpassed its own projected budget deficit by 44%. That is a faulty or dodgy forecast at play again. There is the additional wrinkle that the 2022 deficit was 3.77% of the year’s GDP, clearly beyond the 3% mandated by the Fiscal Responsibility Act 2007.
But it gets untidier. Debt expenditure in 2022 was N5.656 trillion. That is 42% of the total expenditure and 96% of the total revenue for the year.
Read that again but in a different way: for every N100 that the Federal Government spent in 2022, N42 was devoted to debt service alone; and for every N100 earned by the Federal Government in 2022, N96 was swallowed by debt service. The report also shows that the N7.523 trillion deficit was financed through N3.654 trillion from domestic borrowing and N510 billion from external borrowing.
If you are wondering that the borrowing and the deficit do not add up, wonder no more. The report says there was a net negative financing of N3.359 trillion. Now, it all adds up.
This means that the balance, about 45% of the deficit, was not pre-approved borrowing. But it was covered somehow. The report didn’t say how the magic happened. But if you think it was through the Ways and Means tap that the Central Bank of Nigeria cranks open for the Federal Government, you may not be wrong. I can’t confirm or deny though.
One other part of the report I found quite rich is the comparative snapshot of the Federal Government’s budget from 2012 to 2022.
That table shows how much changed not just in the quantum of Federal Government’s budgets in eleven years but also in the structure of the budgets within the period.
Total budgeted expenditure went from N4.697 trillion in 2012 to N14.225 trillion in 2022, an increase of 203.48%.
The disaggregation is more telling, for as they say, the devil is in the detail: statutory transfer went up by 133.41%; recurrent non-debt expenditure, by 140.86%; capital expenditure, by 173.47%; then debt service, by 593.36%. There you have it.
In the last decade, debt has assumed a prominent position in our budgets. We use debt to bridge the gap between almost stagnant revenue and soaring expenditure. And because both capital and interests have to be paid, debt has also become a major expenditure line in our budgets. It has become a vicious cycle.
The more debt we take, the more the money we need to service the debts and consequently the higher the percentage of the budget devoted to debt service.
From my calculations, data from the report shows that allocation to debt service jumped from 11.91% of the budget in 2012 to 29.59% of the budget in 2020.
And we just saw from 2022, there could be extra-budgetary borrowings and payments.
Over time, government officials have aggressively been pushing two narratives on our mounting debts: one, we need to borrow to invest in infrastructure; and two, our debt as a portion of our GDP is within manageable limits. On the first count, the report shows that debt service started getting close to the approved capital budget from 2016 but by 2019, debt service surpassed the capital budget and has maintained the gap.
So, it is not just infrastructure that we are borrowing to finance as our borrowing is more than what we budget for capital expenditure (and by the way, there are some capex elements that are not for infrastructure).
On the second point, while debt-to-GDP can be a useful metric, it is not particularly useful in our low-revenue reality.
Debts are not paid or serviced with GDP but with government’s revenue. The Federal Government spending more than 90% of its revenue to service debt shows that it will not have enough left to pay salaries and provide for overhead and capital.
It would need to borrow to cover those. Borrow, then spend. Borrow more, then spend more. Rinse and repeat. This is what has passed for budgeting in Nigeria.
A major reason we have found ourselves in the high-debt/low-revenue bind is the gross mismanagement of our oil and gas sector.
“Even if others are not seeing through the lies of our voodoo acts, we should stop lying to ourselves”
Yes, we should celebrate the fact that non-oil revenue surpassed expectations in 2022 and that we are increasingly less dependent on oil. But the progress in the non-oil sector should not be at the expense of the oil sector, especially at a time of historically high oil prices and when other major oil producers are enjoying surpluses, and bolstering their foreign reserves.
In 2022, the Federal Government’s projected oil revenue was N3.362 trillion but its actual oil revenue was N776 billion. That is a revenue underperformance of 76.92% in that sector. There goes faulty/dodgy forecasts again, and a perplexing one at that.
Daily average oil production was 1.4mbpd, against the 1.6mbpd projected in the budget. The oil and gas sector shrank by 19.22% in 2022 and the sector’s contribution to GDP fell to 5.67%. Oil theft and vandalism have consistently been singled out as the main culprits here.
But those two alone do not fully explain a 77% or more than three-quarter revenue underperformance in a year when crude oil sold for about 40% above our budget benchmark oil price of $73 per barrel.
The BIR didn’t mention petrol subsidy (secured via Direct Sale and Direct Purchase, DSDP). It was another major culprit. But even beyond that, more than met the eye went on in that space in the past few years, and proper fixing is needed.
One thing that sticks out from the 2022 budget performance is that we need to be more pragmatic in our budgeting.
We have been budgeting to create an optical illusion.
Even if others are not seeing through the lies of our voodoo acts, we should stop lying to ourselves.
Our budget implementation reports show at a glance that we have many problems that are compounding. We have a revenue problem, as we are not generating enough for our size and needs. We have a debt problem.
Debt is crowding out other important expenditures, and we should stop living under the illusion that we can borrow our way out of the hole. We also have a spending problem. We need to align our spending more to our priorities and cut out leakages and wastages.
Clearly, we need more realistic and more honest revenue forecasts. My sense is that we set unrealistic revenue targets to disguise the extent of the budget deficits.
Relatedly, we end up with distorted budgets because we want to give the impression that we are allocating more money to capital when in actual fact the bulk of our budgets end in recurrent (personnel, debt service and overhead).
Consistently, capital expenditure has the lowest performance rate, even when the capital budget gets rolled into the following year while personnel budget gets implemented 100%.
We need our budgets to reflect the harsh reality. And we need to live within our means (slash some budget lines) or significantly raise revenue (generate more taxes). These may be difficult to do in the immediate term. But they should be prioritised.
The fiction that we can continue to borrow to plug the gaping hole is just what it is: one fat fiction. And the lie will soon catch up with us.
Some of the areas in which we can impose more discipline and improve revenue include: discontinuing the service wide votes (let everything be budgeted for instead of hiding money in contingency line that will end being spent in a way that avoid scrutiny), ending the idea that revenue-generating can retain a portion of the revenues for their operations and slashing or stopping the costs of collection for FIRS, NUPRC and Customs (in 2022, FIRS alone collected N211.54 billion as cost of collection), stopping unbudgeted/off-budget borrowings, reducing overhead allocations to the actual for the previous year and releasing overhead every month of the year for better planning, and giving binding revenue targets to NNPC Limited and other government-owned entities.
We need to adopt a project-finance approach to funding infrastructure and we need to prepare supplementary budgets when the assumptions behind the forecasts change rather than binging on overdrafts from the CBN and compounding both debt and accountability issues.
The removal of petrol subsidy and the devaluation of the Naira should result in more revenue to the Federal Government in 2024. But these by themselves will not bring our public finances to good health.
We should not allow the fiscal headspace to deceive or distract us. We still have a lot of grounds to cover on the road to recovery. And big doses of discipline and pragmatism are needed. The 2024 budget proposal will show how serious we are about turning the corner.
