Nigeria’s Fiscal Deficit Set to Rise to 4.7% of GDP in 2025, Says IMF

Nigeria’s fiscal deficit is projected to widen to 4.7% of GDP in 2025, reversing a modest improvement seen in 2024, the International Monetary Fund (IMF) has warned in its latest Article IV report.

The expected deterioration underscores deep-seated vulnerabilities in Nigeria’s public finance structure, still heavily exposed to oil revenue volatility and compounded by growing expenditure pressure.

The IMF’s projection is markedly higher than the 3.9% deficit outlined in Nigeria’s 2025 federal budget, revealing a likely revenue shortfall as global oil prices remain under pressure and domestic production underwhelms.

Already, the Fund estimates that budget assumptions—set around 1.78 million barrels per day at $77 per barrel—are far too optimistic. Instead, IMF staff forecast lower production levels around 1.45 mbpd and a global oil price average of $70 per barrel. This would severely undermine Nigeria’s federally retained earnings and constrain overall budget implementation.

In 2024, Nigeria managed to reduce its fiscal deficit from 4.8% of GDP in 2023 to 4.1%, largely due to exchange-rate-induced gains in oil-related revenue and improved non-oil tax collection. However, those gains are proving unsustainable in 2025, with the country likely to slide back into deeper deficit territory. Notably, interest payments already consume a staggering over 100% of federal revenue, according to the IMF’s debt sustainability analysis, raising fears about future borrowing and debt rollover risks.

Spending, Revenue Mismatch Persists

On the spending side, government wage bills and pension liabilities are projected to grow by double digits, especially following new wage awards and security force recruitment. At the same time, Nigeria’s fuel subsidy removal—hailed as a fiscal reform milestone—is yielding lower-than-expected savings. While the government expected subsidy savings equivalent to 2% of GDP in 2024, the IMF said only N1.1 trillion (around 0.6% of GDP) was realized, mainly due to reintroduced price caps and incomplete market liberalization.

The revenue side shows promise, but progress remains slow. The ongoing tax reform roadmap aims to expand the country’s narrow tax base by introducing measures like e-invoicing, VAT automation, and digital economy taxation. However, implementation has been patchy across Nigeria’s 36 states, many of which still lack the capacity to enforce modern tax collection systems.

According to the IMF, Nigeria’s general government revenue stood at 7.3% of GDP in 2024, far below the sub-Saharan African average of 13–15%. Although the Value Added Tax (VAT) and Company Income Tax (CIT) reforms have begun to improve non-oil revenue mobilization, their impact will only materialize in the medium term, the Fund said.

Structural Pressures, Mounting Debt

Nigeria’s public debt-to-GDP ratio remains moderate at around 46%, but the structure of the debt is becoming increasingly unsustainable. Over 70% of federal government borrowing is now done at double-digit domestic interest rates, with foreign investors still wary of macroeconomic uncertainty and FX volatility.

Efforts to raise funds through Eurobonds or concessional loans have so far been cautious, as authorities seek to avoid piling up expensive foreign currency liabilities. The IMF noted that the government has ruled out new borrowings from the Central Bank of Nigeria (CBN) via the Ways and Means facility, a previous source of deficit monetization that had stoked inflation and weakened the naira.

The Fund also emphasized the need for a flexible macroeconomic framework, calling on authorities to align fiscal and monetary policies, strengthen exchange-rate stability, and ensure better cash management across MDAs.

IMF Recommendations

To bridge the fiscal gap and ensure long-term sustainability, the IMF made several key recommendations:

• Fully liberalize the fuel market to capture the full value of subsidy removal, including implementing an automatic petrol pricing formula;
• Accelerate tax reforms, particularly by unifying VAT administration, expanding excise coverage, and removing inefficient tax exemptions;
• Rationalize capital spending, prioritizing projects with high economic returns while shelving low-impact ones;
• Cap recurrent expenditure growth, especially in non-essential sectors;
• Establish a fiscal anchor, such as a debt service-to-revenue cap, to guide borrowing and expenditure discipline.

The Fund’s warning comes as Nigeria grapples with rising inflation, volatile FX markets, and subdued growth, compounding fiscal stress. Analysts say that unless the government significantly scales up revenue and cuts wasteful spending, the projected deficit could even exceed 5% of GDP in a downside scenario involving further oil shocks or naira depreciation.

The Ministry of Finance is expected to revise its Medium-Term Expenditure Framework (MTEF) by September, possibly adjusting budget assumptions to reflect lower oil revenue. Meanwhile, the 2025 Tax Reform Bills – signed into law last week – are expected to enable additional revenue-generating measures.

The report concludes that while Nigeria has taken bold steps to reform its economy, the road ahead remains fragile. Sustaining reforms in the face of political pushback, revenue shortfalls, and inflationary pressures will be key to stabilizing Nigeria’s fiscal health.