On Wednesday, 29 November 2023, President Bola Ahmed Tinubu presented his first federal budget, the 2024 Budget, to the joint sitting of the Nigerian Parliament, with a capital component that exceeded the recurrent expenditures for the first time in 4 years.
This shift towards capital projects may be linked to the goals of the 2024 budget, named "The Renewed Hope Budget," which include poverty alleviation, increased access to social security, macroeconomic stability, improved investment climate, and economic growth that creates jobs.
However, just as the Capital Expenditure (CAPEX) is the highest in 4 years, so is the cost of Servicing the country’s accumulated debts the highest but one.
The 2024 CAPEX, which doubled that of the previous year, comes along with a Debt Servicing cost over a quarter of the approved N28.78 trillion budget, after an upward review of the proposed budget spend of N27.5 trillion.
The 2024 Debt Servicing Cost too, at 28.7% of the total budget, is the second highest in proportion in the last 4 years. This further presents risks of the impact of high debt servicing costs on the country’s long-term financial viability.
Yet, the concerns that the country’s accumulated debts impose on its 2024 fiscal outlook is counterbalanced by Tinubu’s government’s signalling of a lower (new) debt risk and a lower debt financing.
Higher CAPEX
Capital expenditure had the highest allocation in the 2024 budget, with a total of N9.995 trillion.
Besides, as a percentage of the entire budget, capital expenditures accounted for the largest component of Nigeria's spending in 2024, compared to the three previous years, when recurrent expenses constituted the bulk of the budget.
Next to the Capital Expenditure is Recurrent Expenditure.
Recurrent expenditure items account for the second largest most financed item at 30.47% of the 2024 budget. This is less than the average 38% recurrent expenditures in the last 4 years under review (2021-2024).
The recurrent budget component includes salaries, pensions, fuel for vehicles, and procurement of consumables.
Over the previous four years, debt servicing and sinking fund percentages averaged 26%. The highest percentage budgeted for debt servicing and sinking funds, at 32% of the overall budget, was recorded in 2023, while the Renewed Hope budget had the second-highest percentage in the reviewed years, accounting for 28.7% of the total budget.
Capital expenditure, an essential element in promoting economic development, includes investments in material assets like machinery, infrastructure, and technology.
According to the International Monetary Fund, a balanced approach that prioritises essential services, infrastructure, social welfare, and economic development is generally recommended.
On the other hand, governments that extensively rely on borrowing to fund these kinds of projects run the risk of increasing the nation's total debt.
Lower Debt Risk
When a country's revenue is insufficient to cover its expenses, a deficit occurs, which necessitates borrowing.
In the 2024 budget, the projected total revenue of N19.6 trillion more than doubled the N9.7 trillion of the preceding year.
The Federal Government expects a substantial increase of approximately N10 trillion over the 2023 budget revenue of N9.7 trillion.
One key metric highlighting fiscal resilience is the proportion of total revenue relative to total budget expenditure.
In 2024, this percentage reached its highest point compared to the preceding years, and suggests Nigeria can finance approximately 68% of its total expenditure from internal revenue sources alone, without.
For the past three years, Nigeria’s budget deficit and loan financing items have always been on the rise compared to the previous year except for the 2024 budget.
The fact that 2024 exhibits the highest revenue as a percentage share of the total budget expenditure among the past four years suggests a positive fiscal development.
It indicates the government's plan to cover a larger portion of its spending through internal (non-debt) revenue sources, which is crucial for fiscal sustainability and reducing budget deficits.
The revenue in the 2024 budget is derived from six distinctive sources, from which are expected notable increases compared to previous years, except for independent revenues, which slightly decreased to N1.9 trillion from N2.2 trillion in 2023, reflecting a N310 billion decline in independent revenue contributions.
A focus on huge capital expenditures can result in humongous budget deficits if government revenues fail to match the level of expenditures.
Great if the government can realise its non-debt revenue target without over-taxing current tax payers.
Otherwise, an increased deficit will contribute to the accumulation of public debt, posing long-term challenges to fiscal sustainability.
Lower Debt Financing
In the 2024 budget, the deficit stands at N9.18 trillion, a notable decrease from the N13.78 trillion deficit recorded in the 2023 budget, representing a reduction of N4.60 trillion.
However, the new debt component of the budget deficit amounts to N7.8 trillion, which is less than the N8.8 trillion last year.
The new debts are intended to bridge the deficit and support key government initiatives.
Nigeria's 2024 budget presents a promising outlook regarding revenue growth, composition, and its impact on fiscal sustainability.
The emphasis on higher capital expenditure, expanding revenue streams, and reducing dependency on new debt financing highlights the Tinubu 1-year old Federal Government’s proactive measures aimed at fostering economic resilience and achieving sustainable development goals.