Borrowing To Finance 2016 Nigeria’s Budget Deficit

The violent movements in the chaotic oil markets have severely punished the largest economy in Africa which remains undeniably dependent on crude oil exports for a noticeable portion of its government's revenues. While government expenditure in Nigeria continues to follow a negative path amid declining oil prices, eroding oil revenues have left the Naira under immense pressure with currency vulnerability lashing at most sectors in the nation. This awful combination of a weakening Naira, depressed oil prices and mounting fears over a potential deceleration in economic momentum has left the Central Bank of Nigeria under immense pressure to act swiftly . What exacerbated the situation further is the swelling budget deficit of $11 billion in 2016 which has prompted Nigeria to borrow as a means of plugging the record shortfall while also promoting economic stability.

  With President Buhari signing the delayed 2016 record budget into law, optimism has risen towards the possibility of the nation digging itself out of the deep hole cause d by plunging commodity prices. This positivity may be commended , but it should be understood that for an extended period Nigeria's poor infrastructure sector such as manufacturing, power and roads have historically obstructed economic development which consequently has left t he nation heavily oil dependent . Although China offered Nigeria a loan worth $ 6billion to fund infrastructure projects that could ultimately boost the nation's overall growth, there are still concerns if this was the right step s taken . While logically this loan could provide a welcome boost in the quest to steering away from oil reliance, fears continue to linger if the funds will be used in the most efficient fashion as previous instances of corruption have left most anxious.

Financial heavyweights , such as the World Bank , have wasted no time in highlighting the risks in Nigeria borrowing to finance its budget with concerns mounting over the Federal Government's ability to maintain the 40% threshold of debt to GBP. This coupled with the negatively morphed economic landscape has already exposed Nigeria to downside risks and the possible implications on inflation levels is a topic which cannot be swept aside. Rather than adding more exposure to risk by borrowing, the Nigerian government has taken the wise decision to remove the fuel subsidy which could help Nigeria cumulate a stable reserve that may shield the economy from the violent movements in oil prices. If the nation can create more revenues from having relinquish ed fuel subsidies and   temporar il y augmenting taxes, then there could be a lesser need to reach for external aid.

The question remains if a nation with an abundance of natural resource s and young population really needs external aid and borrowing to jumpstart its economic growth? There has been talk that the Federal Government of Nigeria is currently in the process of recovering trillions of Naira from the previous ly looted treasury , while the Inland Revenue Services is set to recover a 3 billion Naira tax bill from Cross River. It almost seems that the tax reclaimed for year coupled with local borrowing could provide Nigeria some of the budget needed but at a slower pace. In the best case scenario of borrowing to promote growth, Nigeria runs the risk of running a deficit for the next two to three years as the heavy investment in infrastructure may require consistent streams of hard cash.

2016 has served a complicated challenge to Nigeria with the combination of record high budgets, low oil prices and borrowing to induce growth weighing heavily on sentiment. The projected deficit may require the nation to significantly boost non-oil revenues this year to plug the gaping shortfall created by the painful declines in crude oil prices. While non-oil revenues from agriculture and services could patch parts of the deficit, these sectors should have been granted more attention when oil prices kept the Nigerian economy buoyed. Although the era triple digit oil prices have come to an end, this painful wake-up call should force the nation to seek other means of economic growth thus reducing its vulnerability towards declining oil prices. Nigeria's economy has been left in the capable hands of P resident Buhari and only time will tell if borrowing to finance 2016 Nigeria's budget deficit was the right move taken, especially in such turbulent periods.  

Written by Lukman   Otunuga , Research Analyst at FXTM .