Inflow into the Federal Account Allocation Committee (FAAC) account has increased from about N800 billion monthly to over N1.7 trillion since the implementation of fuel subsidy removal and foreign exchange (FX) reforms.
This higher inflow will improve fiscal deficit and debt sustainability ratio in the short term, according to a report by FSDH Research.
A fiscal deficit is a shortfall in a government’s revenue compared with its expenditure. A government that has a fiscal deficit is spending beyond its means.
FAAC disburses allocations from the revenues generated into the Federation Accounts, which comprise multiple accounts specific to an RGA or a sector/ business type. For example, Electronic Money Transfer Account and the Excess Crude Oil Account are two of many.
Public debt stock, which indicates the total amount of the debts of governments, rose to N87.4 trillion (US$113.4 billion) in June 2023. The Debt Management Office (DMO) recently included the N22.7 trillion ways and means in the country’s public debt stock for June 2023. Actual figures in June (N87.4 trillion) exceeded the DMO’s initial projection of N77 trillion earlier in the year.
The Central Bank of Nigeria (CBN) said the federal government’s domestic debt instruments remained the principal source of domestic financing with increased reliance on medium to long-term debt issuances in line with the debt management strategy.
In the first half of 2023, there was a build-up in FGN domestic debt stock due to increased borrowings and conversion of pre-existing FGN ways and means advances to FGN Bonds.
According to the World Bank estimates, with fuel subsidy removal, debt servicing is expected to reach a peak of 120 percent of revenue in 2023 and trend downwards thereafter.
Fiscal gains from subsidy removal and FX reforms will be more visible in 2024 and 2025, said analysts from FSDH Research.
Members of the Monetary Policy Committee (MPC) projected a continuous decline in the federal government’s fiscal deficit in the third quarter (Q3) and fourth quarter (Q4) of this year.
They based their projections on the recent efforts by the government to manage expenditures better and also improve oil and non-oil revenues.
“The fiscal deficit is expected to decline in the third and fourth quarters of 2023 on the back of recent efforts by the new government to manage expenditures better and also improve oil and non-oil revenues, Aliyu Ahmed, permanent secretary, Federal Ministry of Finance, budget and national planning, said in his statement at the last MPC meeting in July 2023.
“With expenditure reprioritization and fiscal wisdom at both the federal and state levels, there is an expectation that the government debt ratio may fall at least marginally by the end of 2023,” he said.
Festus AdenikinjuAdeola, a member of the MPC said total FGN expenditure as of May 2023, was N4.76 trillion, 27.8 percent lower than the budget estimate of N6.606 trillion.
“The shortfall came mainly from allocation for debt service, interest on Ways and Means, and capital expenditure. “Overall budget deficit reduced by -18.15 percent in the first five months of 2023’’, he said.
However, the high cost of governance remains a pending issue that needs to be resolved, according to the FSDH report. With an average of 20.9 percent of actual FGN budget expenditures allocated to capital projects in the last two years, the new administration must prioritise budgetary reforms.
“The government must reduce the over-bloated cost of governance – particularly overheads and transfers – to ensure enough funds are available for infrastructure and other development purposes. In addition, there must be significant efforts to block leakages and ensure transparency of government finances in the new administration,” the report stated.