On Wednesday, the Nigerian naira took a scary dance step towards a dangerous direction, sending many Nigerians into a panic mood. After days of heightened interest in its performance, the naira finally crossed the N700 to a Dollar mark as the country continues to suffer a shortage in the supply of the United States’ currency in the foreign exchange (FX) market.
Reports from forex dealers in different parts of Lagos, the nation’s commercial hub, showed that the Naira was exchanged for the greenback at N705/$1, while the hard currency was bought from holders between N697/$1 and N700/$1.
The naira-dollar disparity has raised concerns among Nigerians, creating unease in an already tense social atmosphere. Yet the conversations have remained on the surface, triggering endless “debates” on social media. As analysts and policy experts continue to interrogate the situation, the fundamental drivers of these economic uncertainties have remained largely under-discussed.
Dangerous Deficits, Devastating Results
While the peoples’ obsession with the poor performance of the naira has been quite understandable, the underlying dynamics at play are rather complex. Inevitably, their impact on the overall economy has been devastating.
Last week, the 2022 fiscal performance report for the first quarter of the year showed how the government deficit spending shot up to N3.09 trillion in the first quarter of 2022. The pro rata spending target for the first quarter of the year was N5.77 trillion, while the actual spending as of April 31 was N4.72 trillion. The huge deficit, expectedly, was funded by borrowing.
Interestingly, in the last few years, the nation’s budgets have been built around staggering deficits, a worrisome development that continues to generate ripples among observers and global rating agencies.
For instance, the government’s 2022 budget was projected to be N17.32 trillion, 18 per cent higher than the 2021 budget. Recurrent (non-debt) spending is estimated to amount to N6.91 trillion, which is 40 percent of total expenditure, and 20 percent higher than the 2021 Budget. Aggregate capital expenditure of N5.96 trillion is 35 percent of total expenditure, inclusive of the capital component of Statutory Transfers, GOEs (Government-Owned Enterprises capital), and project-tied loans expenditures. At N3.61trillion, debt service is 21 per cent of total expenditure, and 34 percent of total revenues.
The biggest worry, however, is that even on paper, the budget already has a deficit of N6.26 trillion. With the poor performance in the first quarter, the deficit is bound to shoot up significantly, throwing the nation into more debts.
Now, a breakdown of the actual spending for the first quarter of 2022 showed that N1.94 trillion was for debt service, N1.26 trillion for personnel costs, including pensions.
Shockingly, contrary to the globally recommended fiscal policy position, as at April, only a meagre N773.63 billion had been spent on capital expenditure—despite the huge money borrowed to finance the deficit!
Debt for Consumption
Despite the rising debt profile of the nation, it becomes more worrisome that much of the borrowings aren’t meant to finance infrastructure, or engender production. They are basically for overheads and consumption. Yet the number keeps ballooning.