Nigeria must avoid inflation pitfalls with its 2025 budget increase

The Nigerian government’s proposed increase in the 2025 budget, from N49.7 trillion to N54.2 trillion, is a double-edged sword. While an increase in the budget size might be crucial for addressing pressing national issues, it comes with a significant risk of exacerbating inflation if not carefully managed.

This proposed expansionary fiscal policy, outlined by President Bola Tinubu, requires exceptional discipline to avoid spiraling costs and to stimulate the economy effectively. The proposed 9.77 percent increase, while substantial, should not be viewed as an automatic solution to Nigeria’s development challenges.

For years, Nigeria has faced budget deficits, where budgetary allocations keep rising, but there is minimal corresponding performance. The increase in the national budget must not only be met with fiscal discipline but also with targeted, high-impact projects that are both realistic and sustainable. A concerning aspect of this budget increase is the risk that unchecked government spending could fuel inflation.

 Nigeria is already grappling with inflation at its highest in 28 years, surging to 34.6 percent as of November 2024. More government spending, especially without strict control, could inject excessive money into the economy, pushing prices even higher and undermining the efforts of the Central Bank of Nigeria (CBN), which has already raised interest rates to curb inflation.

In contrast to this, other economies such as South Africa and Morocco have reduced their interest rates in response to economic conditions, while Nigeria’s monetary tightening continues. The increase in Nigeria’s money supply, which rose by 51 percent in one year to N108.96 trillion, is a direct consequence of the government’s borrowing practices. By June 2024, the national debt had reached a staggering N138 trillion, up from N87.3 trillion when President Tinubu assumed office. This has implications for Nigeria’s fiscal stability and the future burden placed on the nation’s economy.

The proposed sources for the additional funding—namely the Federal Inland Revenue Service (N1.4 trillion), Nigeria Customs Service (N1.2 trillion), and other agencies (N1.8 trillion)—seem to suggest a more measured approach, as the expansion will not rely on printing new money. This is a positive shift in terms of avoiding hyperinflation, but it is not enough to offset the risks if the funds are not strategically allocated.

The government’s proposal to allocate these funds toward specific areas, such as solid minerals (N1 trillion), Bank of Agriculture recapitalization (N1.5 trillion), military infrastructure (N370 billion), and transportation infrastructure (N700 billion), is a step in the right direction. However, Nigerians remain wary due to the history of mismanagement and corruption in public sector projects. Transparency is paramount.

The government must ensure that every extra naira allocated in the budget is spent on productive and impactful projects, with clear oversight to prevent leakage of funds. To make the expanded budget meaningful, it must be directed toward projects that will have a direct, positive impact on the daily lives of Nigerians.

Critical sectors such as healthcare, education, energy, and transportation should be prioritized, rather than funding vague administrative expenditures or lavish government perks. Public service spending should undergo strict reviews to eliminate waste and ensure the focus is solely on essential services that benefit the people.

Moreover, this budget should be seen as an opportunity to reduce the economic burden on Nigerians by improving power supply to reduce business costs, expanding transportation infrastructure to lower logistics expenses, and enhancing food security through agricultural investments. These are areas that can generate long-term growth and help the country recover from years of economic instability.

The government’s ambition to reduce inflation to 15 percent in 2025 must be balanced with a more responsible approach to public spending. While the CBN continues to tighten monetary policies, excessive government borrowing or indiscriminate spending could undermine these efforts.

Greater synergy between fiscal and monetary policies is crucial for the country’s economic stability. The Ministry of Finance and the CBN must collaborate to ensure that fiscal policies do not conflict with the nation’s inflation control measures. Ultimately, the increased budget must not be seen as an excuse for reckless spending but as a tool to build a more sustainable economy.

With prudent management, the additional N4.8 trillion could help unlock long-term growth, provided it is channeled into areas that foster development and not into short-term, inflationary pressures.