Government must fix its deficit budget financing menace, and reduce debt to attract viable investment – Adebajo

Tilewa Adebajo, CEO CFC Advisory has faulted the Nigerian budgeting system, noting that it is inefficient and without any visible impact on the economy and the people. He lamented over the year in year out huge deficit due to the inability of the government to generate enough revenue to finance its ever-growing expenditure.

In this interview with Bamidele Famoofo, he noted that the way out for Nigeria is for the government to sell down some of its J.V assets to raise enough cash to write down its debt to place the country on a solid pedestal to attract viable foreign investments that will reposition the economy for growth. Excerpts…

What’s your take on the budgeting process, implementation and performance in Nigeria, especially as it concerns the proposed 2025 budget?

First of all, I think we need to understand that there’s a process to the budget and this part of the Fiscal Responsibility Act, and the process involves submitting a medium-term expenditure framework to support the budget. So what is important first of all, the first question we need to ask is, What has been the performance of the 2024 budget? As you know, there was a supplementary budget also this year, and we had several budgets running at the same time. So it’s time now to consolidate all these budgets and now close some of the other budgets and focus on a new budget for 2025 because we need to understand what the impact of the reforms is, understand what that performance is, and that’s the information that I think the Minister of Budget and planning needs to provide now. Because if you take a look at last year’s medium-term expenditure framework, they were off on all the targets, you know they were projecting 700 Naira, for instance, for exchange rates and a lot of all those projections for the next three years were far off targets. As you can see, we had a deficit of 13 trillion from 2023 which we carried over to 2024 and the deficit this year was projected at about 10 trillion. And now with the supplementary budget, that deficit should be close to about 18 trillion. So we have significant challenges in terms of deficit financing. And now with this huge budget, the question is, what revenues do we have in place to finance this budget? How are we going to raise the revenues to finance this budget, traditionally, we’ve only been able to meet 65 to 70% of our revenue targets. So there are serious challenges on the revenue side. So those are the questions that are still unanswered. So I think it’s important that we review this year’s budget performance, and then we’ll now begin to understand the details of this budget for next year.

Let us consider the proposed financing options by the government. Are they feasible?

And so 1.7 billion of that was going to come from a Euro bond, and about another 500 billion from a Sukuk type of a program. So the challenge you have with that is that in the last year or so, our domestic debt profile has moved from 50 trillion Naira to about 70 trillion naira. So we’ve put in about 20 trillion Naira on the debt profile. That’s nearly 50% of the existing debt. That’s pretty significant. On the foreign debt side, it stabilized at about $41 billion, so with these new borrowings and other borrowings, maybe by the end of this year, we should look at our external debt, borrowing close to about 45 billion US dollars, and it’s becoming unsustainable. And the reason why is that our credit rating is still C, double, A, one, although the outlook is positive, but that means that these bonds are non-investment grade, which you call junk bonds. So clearly that is why the premium we’re paying on financing is in double digits. So we’re paying between nine to 12, 13% on our bonds. That is quite, quite expensive, especially in an era where rates have been cut, where you take a look at the benchmark dollar prices being cut. So there are challenges there that we have to address because we are now struggling with inflation. The economy is still in stagflation. We need to go back to address the issues with petroleum pricing once and for all because it’s causing a lot of distortions in the economy. This issue with the Dangote refinery and the price of petroleum products needs to be resolved. The foreign exchange system seems to have stabilized, and we now have enough in the system. But if you recall last year, the central bank governor, in a speech at the Chartered Institute of Bankers, stated that they were going to create a new foreign exchange system, which was going to be backed by legislation. So we will need some clarity from the central bank governor if the NAFEM system is now the preferred one, and the proposals from last year have events overtaking that, so we need that clarity, but at least we have stability in terms of the foreign exchange market, and we have a lot of the international money transfer operators who have been assimilated into the system, and we have some sort of amnesty to get people to put money back into their domiciliary accounts. So the essence is that the the subsidy removal, which we talked about, and the foreign exchange liberalization, which was the highlights of the reform programs.  We need to know if the subsidy is no longer there as we haven’t seen the commensurate increase in the revenues of government so and again, with this talk of increasing oil production to 1.8 billion barrels a day, then we need to see that reflected in the foreign reserves, and we need to see a more transparent Federation account operation system which these oil revenues are going into. And of course, eventually, that will also be reflected in the level of our reserves. So if you had 1.8 million barrels a day your reserves should be at at least $45 billion.  But that is not yet reflected, so until we get to that stage, you know we are definitely in a critical stage right now.

So what is the way forward with financing the budget and tackling growing deficits?

For me, what is important is that if you cannot fund your budget, you cannot budget for what you cannot finance. And I think if you continue to do that, you’re just going to continue to carry over deficits, because it is clear now, from the numbers we’re seeing that a lot of this, a lot of this budget, could not have been 100% implemented. After all, they couldn’t raise the financing even to do the deficit financing. But the danger we’re facing is the fact that if you take a look at all these expenditures and programs, there’s not a clear goal. So why do you do a budget that you cannot finance or you do not have the revenue? So what are the revenue numbers? The revenues for 2024 were projected at about 17 trillion. Okay, you do a budget of 17 trillion, and you’re constantly doing 50%, so your revenues will be 50% and your budget will be twice that. Okay, so basically, you are always looking at financing half of your budget. This is not sustainable, but even then, where is the impact? Okay, because the questions we are going to start asking from the central bank going forward will be very simple. The central bank has done close to a 900 basis point increase in interest rates in MPR since the beginning of this year, February, in an effort to control inflation. Okay, so it’s going to be a year in February, and what you find out is the fact that instead of inflation coming down, we find out that inflation trajectory is on the way up. So the central bank has gone through significant tightening. It has done about 7 trillion in open market operations. In the last nine months, CRR has been increased to 50%, so basically, you’re squeezing the economy and the government expenditure, the money supply has hit a record high of 100 trillion, and you are not seeing any results in inflation decline. Once, inflation dropped and all of a sudden you now come back with another pricing on the fuel. Then, of course, inflation comes back. So it’s a zero-sum game. If you do not sort out these issues with Dangote and the Independent marketers and others, the situation might grow worse. That is why I said inflation is driven by fuel prices.

Fitch was saying the other day that in the next two, or three years, foreign exchange could go as high as  N1900. Another thing to consider is that they penned $75 per barrel at a time, which we expect that if Trump comes into office in America, he is going to do a lot of pumping. Some analysts are saying it can go as less as $60 per barrel. Are these feasible?

Let me use the very funny Yoruba phrase, ‘Sebi o ti mo’, what it simply means is that you cut your coat according to your clothes. If we project revenue of 15 trillion, for instance, have a budget around that revenue projection and make it effective. Because, like I was saying, this one, the case of padding also comes in this last budget cycle. I needed to point out that after extensive work, we discovered that close to 2 trillion was padded in that budget. So there’s also the caveat for padding, and that’s why we don’t see the effectiveness of that budget like you’re talking about.

Well, let’s address these issues you raised about my main concern with the medium term. You see, what is very important is that, like I’ve told you, there are certain financial circuit breakers. You know, the Fiscal Responsibility Act is a significant act that guides fiscal management. There’s also the debt management office, and there’s also section 38 within the CBN Act. Now, these are financial circuit breakers that are supposed to help with fiscal management. And what a lot of people also don’t know is that there’s a fiscal responsibility commission. Now, unfortunately, this commission does not have a voice. This is where my concern is because the Fiscal Responsibility Commission is supposed to be voicing out a lot of all these things and getting things done. But if you take a look at the strategy paper that was done last year from the medium term, what you need to look at from the government is to take a look at their fiscal medium-term expenditure framework and fiscal strategy papers. They’re off. All those projections are off completely. It’s very unrealistic. It’s not close to reality. That is my concern. Because if you budget based on this and we are now in 2024, we look at that at the beginning of the year. Remember that we put together a guidance on the foreign exchange, which was correct today. Now we have changed that guidance to between 1800 to 2100 and we’re telling a lot of our investors and clients that when you’re budgeting next year, you should budget with 2000 to be able to maintain your value, and the reason is not far fetched, because we still feel that inflationary pressures are going to be there and it’s going to persist.

You were also looking at the fact that government expenditure is going to be deficit financing.  Now, while the government does have headroom on borrowing, you see the essence is the fact that you need to be able to get your revenue model. And like I’ve said before when we talked about this NNPC balance sheet if you take a look at the assets and the liabilities of the federal government of Nigeria, and you approach any bank, that is why we have a rating that is not investment grade but junk bond. The reason why that is so is that your liabilities profile is not commensurate. So what you need to do, like I’ve said, is that we need to sell down these JV assets. By selling down these JV assets, we can raise $50 billion. And that’s what you do. You restructure your balance sheet as a government.  You cannot continue deficit financing. It’s not possible. You need to sell down some assets. You need to raise that $50 billion in cash, and you need to pump it to reduce your debt profile, and you need to increase the efficiency of the NNPC.