Why does the federal government struggle to meet its revenue targets?

Jul 27, 2022|Adesola Afolabi

Budgeting may look simple—what you earn is what you spend. But it becomes even more crucial and takes on a multidimensional approach when we look at it from a country’s view. For instance, Nigeria’s budget determines how the lives of over 200 million people will fare for at least 365 days. It also shows how much money the government hopes to make from different sectors—usually oil and non-oil—and where the money will go.

Key takeaways:

The Nigerian budget is an essential document that shows how the government hopes to reach its financial and economic goals. For instance, the finance ministry expected to make nearly ₦11 trillion this year from oil and non-oil sources.
The ministry set these goals based on assumptions driven by global and local economic events. But, many of the assumptions do not help provide a realistic revenue projection. For example, the government derives VAT, CIT and customs revenue projections by assuming consumption, GDP and imports will increase.
Other times, the assumptions are counter-intuitive. For instance, expecting a lower inflation rate amidst expansionary fiscal policies is counter-intuitive and might distort revenue projections. This year, the government said it wants to spend 18% more than last year, suggesting that it will pump more money into the economy, which would inevitably lead to rising prices.

One place the federal government’s money is going is towards debt servicing. Last week, the federal government said it spent more than its revenue between January and April to service debt. This has put the country’s finance minister, Zainab Ahmed in the spotlight. Her role as the Minister of Finance, Budget & National Planning means she is in charge of drawing up and administering items in the budget. At the beginning of 2022, she told us that the total debt service for the year would cost ₦3.6 trillion—just 34% of total revenues. But the 2022 fiscal performance report for January through April showed the federal government spent ₦300 billion (or 20% more) than its revenue on debt servicing.

Debt service for the year could still be about ₦3.6 trillion—total debt servicing cost just ₦1.94 trillion in the first four months of 2022. It’s also too early to tell if federal government revenue will be lower or higher than debt at the end of the year—the federal government’s revenue has on average, been between ₦4 trillion to ₦5 trillion in the last five years.

But debt servicing is now more than the federal government’s revenue—at least as of April 2022. So, it is worth analysing how the government makes revenue projections. From the chart below, these projections are hardly met.