Introduction
President Bola Tinubu recently presented the 2025 budget proposal of the Federal Government of Nigeria (FGN) to the joint session of the Nigerian (10th) National Assembly (NASS) for consideration and passage into law. The proposed budget christened “Budget of Restoration” contains key objectives, revenue projections and proposed expenditures based on key assumptions about expected exchange rate, daily crude oil production volume, inflation rate and GDP growth forecast. The proposed budget is expected to impact different areas of the country’s socio-economic environment with developmental implications. In this article, the proposed expenditure and revenue and, the expected impact of the proposed budget on the macroeconomic environment in Nigeria are analysed.
Expenditure Analysis
A total expenditure of N49.7 trillion is proposed in the budget, making it the biggest in the country’s history in nominal naira terms. In international dollar terms at the naira-dollar currency pair rate of N1500/US$ budgetary forecast, the total expenditure is around $32 billion. At Nigeria’s forecast implied Purchasing Power Parity (PPP) conversion rate of 224.65 for the year 2025 based on IMF data, the PPP-adjusted dollar value of the proposed budget is approximately $7.19 trillion. In comparison with the 2024 proposed budget, while the 2025 proposed budget is significantly bigger in nominal naira terms compared to the N27.5 trillion of 2024, the 2024 proposed budget was higher in terms of international dollar value of $36.7 billion and PPP-adjusted value of $7.44 trillion (at the implied PPP conversation rate of 202.83 for 2024 based on IMF data). The approved 2024 budget was increased by N8 trillion, making the actual budget of N35.5 trillion for the period comparatively much higher than the 2025 proposed budget in PPP-adjusted dollar terms.
Thus, the 2025 proposed budget is less ambitious than envisaged by many analysts and experts as the budget is lower than the 2024 proposed budget in more realistic terms (such as the PPP-adjusted value). However, the 2025 proposed budget may be higher in real terms on the assumption of inflation moderation. For instance, inflation which stood at 28.93 per cent in December 2023 increased to 34.60 percent in November and is expected to increase slightly further in December 2024, depicting a year-on-year increase of about 6 per cent. The inflation-adjusted (the real) value of the 2025 proposed budget may however be slightly higher than the 2024 proposed budget if inflation is effectively tamed or be further lower if inflation significantly worsens further. Of the total proposed expenditure, N13.89 trillion or 28.99 per cent will be spent on debt servicing, statutory transfer of N1.37 trillion and a sinking fund of N243.66 billion, reducing the expenditure vote for development financing.
Revenue Analysis
To finance the proposed N49.7 trillion expenditure, a total revenue of N34.82 trillion is projected culminating in a budget deficit of N13.89 trillion or 3.89 per cent of projected annual GDP figures. The projected revenue is based on the assumptions of a benchmark exchange rate of N1,500/US$, a base crude oil production of 2.06 million barrels per day (mbpd) and an annual inflation rate of 15 per cent. The projected revenue looks realistic with the exchange rate and daily crude oil production base assumptions considering the positive global economic outlook, increased crude oil production capacity utilisation rate up to 1.8 mbpd base crude oil production as of November 2024 and the expected FGN’s monetary policy stance for 2025. But the assumption of reducing inflation from the current 34.46 per cent to 15 per cent in 2025 looks very unrealistic considering the FGN’s monetary policy stance in the near future, coupled with the inadequate budgetary provisions for agriculture, energy, mining, manufacturing and the MSME sector – the critical supply-side drivers of inflation.
Expected Impact of the Proposed Budget on Economic Growth
The Nigerian economy grew by 2.98 per cent in the first quarter, 3.19 per cent in the second quarter and 3.46 percent in the third quarter of 2024. This trajectory of slow growth is expected to continue through 2025 as the proposed budget does not seem to have adequately addressed key growth drivers, including consumer demand. For instance, the growths in the successive quarters of 2024 have been dominated by services. It is expected that this growth pattern will be sustained with possible moderate increase in the contribution of the Oil & Gas and a weak growth in Agriculture, Construction and Mining. Manufacturing is expected to be the weakest link. In 2025, the average growth rate is expected to be between 3.8 percent and 4.1 percent as against the 5.6 percent projected in the 2025 proposed budget.
Expected Impact on Interest Rate
The Central Bank of Nigeria (CBN) consistently increased interest rate and tightened money supply throughout 2024. The monetary tightening stance will continue in 2025 due to several factors. One of the factors is the excess money supply in circulation. Another reason is the current high inflation rate which constitutes a key component of market interest rate structure. High inflation rate, foreign exchange crisis and the objective of significantly increasing the foreign reserves will also force the CBN to continue to tighten money supply and the policy rate. Another potential driver is the budget deficit of N13.89 trillion part of which will be sourced domestically. This is expected to crowd-out private sector funds and increase market rates.
Expected Impact on Inflation
The proposed budget seeks to tackle inflation by increasing agricultural output. To this end, the budget has prioritised investment in security to secure farmlands and restore farmers’ confidence. While this is a necessary step in revitalising the agricultural sector, mere budgetary provision is inadequate to restore farmers’confidence and mobilise them back to the farm. Building confidence takes time and requires effective stakeholder engagement and communication. Moreso, while revitalising agriculture is crucial for lowering food inflation – a key component of the headline inflation, it will not significantly address the core inflation component. Also, the proposed budget has not adequately addressed transport and energy costs, which are the key drivers of headline inflation. In addition, exchange rate depreciation will continue to drive inflation. Thus, while it is expected that inflation will decline in 2025, the decline is expected to be slow. It is expected that inflation in 2025 will reduce to around 28 percent on the back of expected moderation in energy and food prices.
Conclusion
The 2025 proposed budget is less ambitious than it is widely perceived when compared with the 2024 budget in real terms. However, the revenue projections look realistic based on currently available information. The impact of the proposed budget on the macroeconomic environment looks gloomy as no significant divergence from the current macroeconomic realities are expected from the budget. Although expected to be lower, inflation will most-likely still remain high. In the same manner, the naira is expected to remain weak in anticipation of sustained local currency depreciation while interest rate is expected to remain high.
Author: Oluwafemi O. Toriola
Monetary/Financial Economist and Lead Consultant at RMBS. He holds Bachelor’s and Master’s degrees in Economics from the University of Lagos. He is currently studying for a PhD with specialty in Financial Economics. He is affiliated with leading accounting and management bodies in Nigeria.
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