The economy of Nigeria is set to face more pressure in 2025 after the International Monetary Fund (IMF) predicted that the country’s budget deficit will rise to 4.7 percent of Gross Domestic Product (GDP).
That would be a potential failure in the government’s initiative to stabilize the economy despite the fact that even different policy reforms on improving public finances have been embraced.
The increasing deficit, as the latest IMF staff report outlines, is caused by a combination of dwindling oil revenues and increasing government expenditure. Because budgets in Nigeria are heavily reliant on oil revenues, fluctuations in the world oil market and weak local output created a colossal chasm between the country’s revenue prospects.
On the other hand, there was relief in 2024 as the fiscal deficit dropped to 4.1 percent of GDP from 4.8 percent in 2023. The modest decrease resulted from improved collection of revenues supported by rebalancing of exchange rates, inflation, and a more aggressive revenue push. Nevertheless, the IMF warned that gains can be short-lived if the underlying trends are not rolled back.
The 2025 budget was originally planned on the assumption of high oil production and prices. Unfortunately, things have not turned out that way—oil prices have declined, and production is below target. This latest news, coupled with the overruns in the public sector, more so on capital spending, is such that Nigeria can very well find itself spending a lot more than it receives, once again.
As a response to increasing inequality, the IMF proposes wiser and more responsible fiscal policy. It proposes ceasing wasteful spending and investing in areas of high long-term growth potential. The institution also hinted at the potential savings of the phase-out of fuel subsidies, which could be up to 2 percent of GDP if done economically and invested in development.
At the core of the solution, in the eyes of the IMF, is expanding Nigeria’s avenues of non-oil revenue. This entails putting to completion ongoing tax reforms, which will include in express terms those aimed at streamlining Value Added Tax (VAT) and Company Income Tax (CIT) regimes. These are expected to improve compliance, expand the tax base, and reduce Nigeria’s exposure to volatility in oil revenues.
But these advantages are not short-run. During the short run, the government will have to practice budget restraint through constraining recurrent spending and raising the utilisation of available resources towards capital projects.
The IMF also refers to the role of Nigeria’s movement toward a more responsible and responsive fiscal policy regime. In the face of ongoing global economic uncertainty, the functionality for shock response, domestic and external, will be of overriding importance to maintain fiscal stability as well as investors’ confidence.
Briefly, while modest strides are being recorded toward balancing its deficit, the future is not certain. To turn around the 4.7 percent deficit projected and push the economy towards stability, change must continue, smart saving of subsidies, and smart spending will be the mantra.
