PwC warns fiscal collapse looms amid Nigeria’s debt addiction

Onome Amuge

The growing reliance on debt instruments by the Nigerian government without corresponding increases in revenue-generating investments could have detrimental effects on the country’s economic outlook in the long run, according to analysis by PricewaterhouseCoopers (PwC).

PwC, in a recent report titled “Nigeria Economic Outlook: Navigating Economic Reforms”, observed that the imbalance between government spending and revenue is likely to persist in 2024, jeopardising the country’s fiscal sustainability. The multinational consulting firm noted further that the high government operating costs, substantial debt service burden, and inadequate revenue streams will continue to strain the Nigerian economy unless appropriate measures are taken to address these challenges.

In its assessment of the effects of President Bola Tinubu’s economic reforms, PwC  pointed to the far-reaching impacts of these changes on businesses and households in Nigeria. According to the report, the rapid devaluation of the naira, rising interest rates, and surging inflation have combined to create adverse shocks, upending economic expectations and disrupting everyday life for many Nigerians.

PwC’s analysis underscored the need for the Nigerian government to reevaluate its taxation policies, particularly in light of the widespread fallout from its recent economic reforms. The consulting firm cautioned against further increases in taxation, suggesting that such measures would only serve to exacerbate the existing difficulties facing businesses and households.

“Government may reconsider any planned increase in selected taxes to alleviate the financial challenges and unlock liquidity of certain businesses being impacted by the economic pressure points…any further increase in taxes will compound the decline in reinvestment and exacerbate possible exits of corporate from industry,” the report stated.

PwC highlighted the negative repercussions of Nigeria’s economic reforms on businesses, forecasting reduced revenue growth as a consequence. It also drew attention to the corrosive effect of inflation on businesses’ revenue streams, noting that the erosion of consumers’ purchasing power could significantly diminish sales. This reduction in sales, PwC posited, would have a direct and detrimental impact on businesses’ revenue, further compounding the difficulties faced by Nigerian companies in the current economic climate.

“The general rise in prices due to the removal of subsidy may increase expenses such as marketing, logistics, utilities etc, while “high interest rates may lead to higher borrowing costs for businesses, making it more expensive to fund operations and investments,” the report added.

Despite the grim findings of its report, PwC offered an optimistic projection in its economic outlook for the second half of 2024. According to the consulting firm’s projections, the inflationary pressures caused by the government’s economic reforms could see a marginal reduction towards the end of the year, stabilising at around 29.5 percent from the current 33.95 percent recorded for May 2024. PwC indicated that a combination of external factors, policy actions, and price movements in the food sector could contribute to this moderation in inflationary trends.

PwC’s report indicated a marginal improvement in Nigeria’s economic growth outlook, with a projected 2.9 percent GDP expansion anticipated in the second half of the year. Despite these positive projections, the consulting firm cautioned that growth potential could be restrained by lingering economic pressures.

“Fiscal sustainability concerns may remain slightly elevated, given debt servicing costs, that is, 89 per cent of the budgeted fiscal deficit is to be financed by new borrowings,” the report stressed.

The report highlighted three key considerations for the Nigerian government to keep in mind when implementing economic policies including: structured and focused policy, policy flexibility, and mitigation of policy’s impact.

PwC also emphasised the need for the government to prioritise macroeconomic stability through tackling security, inflation, and exchange rate volatility, while simultaneously seeking to mobilise capital through market-focused policies and increased investment promotion.

In addition, the consulting firm suggested that strategic bets on sectors such as exports, domestic substitution, and job creation, both in the short and long term, could be pivotal in steering the country towards sustained economic growth.

“Government must drive fiscal prudence by optimising spending on capital projects with the highest Return on Investment (ROI), rationalise public service spending and improve revenue diversification and collection efficiency,” it stated.

In light of the necessity for a responsive and dynamic policy environment, PwC underscored the importance of flexibility in government decision-making.

According to the report, the government should remain adaptable and capable of adjusting the timing and sequencing of policies to suit prevailing economic and social circumstances. Furthermore, the consulting firm emphasised the value of scenario planning and contingency planning in advance of major economic reforms, highlighting the need to anticipate potential roadblocks and ensure policies are robust enough to weather any unforeseen challenges.

In an effort to bolster economic stability and assist businesses in the face of prevailing economic pressures, PwC’s report advocated for the implementation of financial intervention schemes that would facilitate access to affordable financing through low-interest loan programmes or credit guarantees. The consulting firm also urged the government to create robust social safety net programmes, including unemployment benefits and workforce development programmes, with the aim of mitigating job losses resulting from business closures caused by the current economic turbulence.

PwC’s report addressed the urgent need for businesses to reevaluate and, if necessary, revamp their operational models and strategic priorities in response to the current economic landscape. It also recommended that businesses adopt a long-term, adaptable approach, urging them to be clear on  their priorities to win in the future regardless of any economic scenario.

To this end, PwC  stressed the importance of businesses undertaking a comprehensive evaluation of their operating models and cost structures in order to successfully navigate the challenging economic environment. The consulting firm encouraged businesses to engage in a thorough review of their cost structure, establishing short, mid, and long-term action plans to align costs with future expectations.

In addition, the report advised businesses to reevaluate their organisational structure and collaboration, utilising technology to accelerate processes and foster greater resilience.