Proposing a deficit management plan for Nigeria

The Nigerian government is preparing a N13.08 trillion Appropriation Bill for 2021, which will consolidate a 3% economic growth. While this expenditure is sufficient to reverse the majority of the economic losses caused by the COVID-19 pandemic and oil price shocks, the question at large remains: “where will the money come from?”. The proposal is predicated on a N7.9 trillion revenue target, which leaves a deficit of N4.48 trillion. This deficit would be financed by new borrowings. Considering an existing debt level of over N30 trillion and a debt service that gulps almost 25% of the national budget, Nigeria needs to sustainable deficit management plan.

To be clear, a deficit management plan is a strategy that is used to keep fiscal deficit pegged to the economic strength of a country, with stringent measures put in place to maintain this peg. The common measure adopted is the deficit to GDP ratio. The Irish economy is a great example of an economy that adopted a virile deficit management plan. Ireland slid into its latest recession in 2013, but the government proposed to keep its budget deficit at 3% of its GDP for the next five years. Ensuring expenditure cuts and the introduction of new and affordable taxes, the government was able to wriggle the economy round to recovery.

A strong deficit management plan is essential for the following reasons: it helps to reduce the level of indebtedness of a country; ensures fiscal discipline, especially as it relates to expenditure; restores the confidence of foreign investor in the economy as the credit rating of the economy improves and it creates a clear path for fiscal policy. Nigeria is several steps behind on these goals; hence, it requires a deficit management plan.

Designing the deficit management plan – below are suggestions on the framework for a deficit management plan for Nigeria

• Create a ten-year budget deficit-to-GDP ratio, pegged at a single-digit below 5%
• Create an alternative ten-year budget deficit-to-budgeted revenue, pegged at a single-digit below 5%
• Propose a deficit utilization structure at 80% to capital expenditure and 20% to recurrent expenditure
• Design the annual budget deficit to grow at a slower rate relative to inflation and exchange rate depreciation
• Intertwine the medium-term-debt-plan with the deficit management plan
• Introduce stringent expenditure cut to implement the deficit management plan
• Auditing the fiscal performance and evaluating this relative to the deficit management plan.

Written and edited by Michael Ogunremi