## FISCAL FORECASTING ERRORS IN NIGERIA ## Source details **Canonical URL:** [FISCAL FORECASTING ERRORS IN NIGERIA](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025095-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025095-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025095-source-pdf.pdf.json) --- ### Motivation - Analysis covers the 2011-2023 period using budget appropriations compared with budget execution data from Nigeria’s Ministry of Budget and Economic Planning. - Forecast errors are defined as the difference between the budget forecasts and the actual outturns, expressed as a percentage of GDP outturn for the respective year. - Purpose: identify aggregates that deviate from appropriations, quantify impact on fiscal deficit and debt, and highlight need to improve forecasting quality and budget execution discipline. ### Revenues — Key Findings - Total revenues: - Budget forecasts exceed revenue outturn for all years except 2020. - Revenue forecast errors average 1.8 percent of GDP or 36 percent of actual revenues over 2011-2023. - Over 2021-23, revenue forecast errors average 1.1 percent of GDP or 28 percent of revenues. - Drivers: - Oil revenue forecast errors explain most of total revenue forecast errors. - Oil production projections are consistently optimistic. ### Oil Revenues — Details - Aggregate performance: - Oil revenues are consistently overestimated over the analysis period, except for 2020. - Oil revenue forecast errors average 1.1 percent of GDP and 61 percent of oil revenues over 2011-2023. - Actual oil production failed to achieve budget targets in 11 of the 13 years studied. - Oil prices and benchmarks: - The authorities’ benchmark oil price is systematically more conservative than actual oil prices, partially offsetting optimism in oil revenue forecasts. - WEO projections were closer to oil price outturns in earlier years; the gap has closed in recent years. - Narrative explanations in budget implementation reports: - Shortfalls attributed to combinations of low oil lifting volumes, crude oil theft and pipeline vandalism, illegal bunkering, and occasional low international oil prices. - Reports do not provide breakdowns separating operational/technical constraints from security-related leakages. - Fiscal deductions are cited as causes of net oil revenue underperformance; details on sources of deductions are often lacking. - In years with large explicit and implicit subsidies (e.g., 2011 and 2021/2022), forecast errors are commensurately large, suggesting subsidies may contribute to unbudgeted fiscal deductions. ### Non-Oil Revenues — Key Findings - Major components: VAT, CIT and Customs taxes. - VAT: - Optimism bias prior to 2020; VAT overperformance thereafter. - Forecast errors average 25 percent of VAT revenue, but only 0.2 percent of GDP. - CIT: - Optimism bias in 2015-2020 followed by strong CIT revenue growth not captured in projections, resulting in pessimism bias. - Customs: - Remains positive and large in recent years, with optimism bias particularly in 2022 and 2023. - Net non-oil revenues: - Forecast errors for net non-oil revenues are larger than for non-oil tax revenues, indicating that deductions and non-tax lines also exhibit optimism bias. - Report narratives attribute non-oil shortfalls to: - Lack of remittance from MDAs, weaknesses in tax collection, administrative challenges at FIRS, and delays in revenue-enhancing policy implementation. - Most reports lack in-depth analysis of sources of non-oil forecast errors. - Nominal GDP assumptions from MTEF documents: - No systematic evidence of optimism bias; outturn exceeds authorities’ projections. Forecast optimism in non-oil revenues does not arise from optimistic nominal GDP assumptions. ### Expenditures — Key Findings - Total federal government expenditures: - Budget projections consistently overestimate expenditures. - Total expenditure forecast errors average 0.8 percent of GDP over 2011-2023 and exhibit an upwards trend since 2020. - Expenditure forecast errors predominantly driven by optimistic capital expenditure projections. - Recurrent expenditures - Personnel: - Very small forecast errors on average, though errors have increased in recent years. - Overheads and other non-debt/non-personnel: - Large forecast errors as a percentage of those expenditures but average only 0.2 percent of GDP over 2011-23. - Debt service: - Mostly negative forecast errors (budgets underestimate interest payments). - Debt service errors average -0.1 percent of GDP over 2011-2023. - Reported causes: - Positive forecast errors in overheads and personnel reflect government efforts to limit recurrent spending amid weak revenue performance. - Reforms cited: electronic payroll databases, restrictions on unauthorized recruitment since 2021, efficiency unit actions, freezing overheads, IT systems for PFM, and use of the Treasury Single Account. - Capital expenditures - Persistent underexecution: - Forecast errors in capital expenditures average over 70 percent of the actual executed values, and 0.8 percent of GDP over 2011-2023. - Budgeted capital expenditures far exceed actual execution in all but one year. - Concurrent budgets and execution capacity: - Underutilized capital budgets can be extended to the following year, creating concurrent budgets and suggesting MDAs lack capacity to execute both years’ budgets simultaneously. - Underutilization alongside project-level financing constraints points to MDAs being capacity constrained, leading to incomplete and abandoned projects. ### Fiscal Deficit - Fiscal balance forecast errors: - Rose during 2017-2021, then shrunk thereafter; fiscal balance outturn was higher than budgeted in the most recent year of data. - Years with large fiscal balance forecast errors are characterized by optimism in both oil and non-oil revenue projections. - Post-2021: declining oil revenue forecast errors have helped reduce fiscal balance forecast errors. - Offsetting errors: - Shrinking fiscal balance forecast errors partly reflect under execution of budgeted expenditures offsetting revenue shortfalls; fiscal balance errors mask large, offsetting component errors. - Central bank financing: - Relationship between fiscal balance forecast errors and central bank financing is not consistent. - A period of large fiscal balance forecast errors during 2017-2021 coincides with an increasing trend in the use of ways and means during 2018-2023, suggesting forecast errors may contribute to resorting to central bank financing. ### Conclusion and Policy Advice - Core issue: - Large and systematic optimism biases in revenue (primarily oil production) and in capital expenditure forecasts limit the budget’s usefulness as a framework for fiscal policy. - Suggested measures drawing on cross-country experience: - Enhance capacity of the macro-fiscal unit responsible for forecasting. - Publish internal and external forecast performance reviews. - Enhance political commitment to budget targets. - Expected outcome: - By improving the quality of fiscal forecasts and tightening the link between budget execution and fiscal targets, the authorities can enhance the credibility of the budget as a guide to fiscal policy in Nigeria. ### Additional findings, risks, and best practices - Comparative and regional context: - Analysis of 16 economies in Eastern and Southern Africa indicates the presence of positive forecast errors in revenue projections across the majority of the countries. - The size of forecast errors in Nigeria’s revenue place it at the top by size of average revenue forecast errors (Figure11, Battersby & Lienert, 2021). - Impact on fiscal deficit and expenditure compression: - Positive revenue forecast errors have had limited impact on the fiscal deficit due to expenditure compression. - Evidence for expenditure compression is seen in payroll and overheads and is indicated in budget implementation reports. - Risks from persistent forecast errors: - Risk of underfunding essential expenditures during the budget year when shortfalls occur, due to constraints on the borrowing envelope. - Expenditure compression on overheads and personnel can harm MDAs’ ability to finance personnel and operational needs and impede capital expenditure execution and quality. - Persistent shortfall of capital expenditure execution and use of concurrent budgets indicate capacity constraints at executing agencies; budget implementation reports note abandoned projects. - Cross-country examples and best practices: - Kenya: macro-fiscal department analyzes forecast quality and publishes analysis as an annex to its Budget Policy Statement. - Malawi: MoF calculated forecast errors for nominal GDP growth and government revenue and used them to present confidence intervals around macro-fiscal forecasts as part of their fiscal risk-statement. - Best practices include elevating the macro-fiscal function, ensuring coordination and data sharing (formal MOUs), staff training and compatible forecasting tools, publishing forecast performance reviews, and enhancing political commitment through periodic reviews and external scrutiny. - Benefits of reducing forecast errors: - Better alignment of annual spending with medium and long-term priorities; improved public expenditure management. - Enhanced debt management and reduced risk of unanticipated debt accumulation. - Reduced investor uncertainty and improved public trust in government institutions and the budget process. *Prepared by Salma Khalid (FAD). Sources: Nigeria Ministry of Budget and Economic Planning and IMF Staff calculations.* ### References ______________________________________________________________________________ 13 ### FISCAL FORECASTING ERRORS IN NIGERIA ### Motivation - Analysis covers the 2011-2023 period using budget appropriations compared with budget execution data from Nigeria’s Ministry of Budget and Economic Planning. - Forecast errors are defined as the difference between the budget forecasts and the actual outturns, expressed as a percentage of GDP outturn for the respective year. - Purpose: identify aggregates that deviate from appropriations, quantify impact on fiscal deficit and debt, and highlight need to improve forecasting quality and budget execution discipline. ### Revenues — Key Findings - Total revenues: - Budget forecasts exceed revenue outturn for all years except 2020. - Revenue forecast errors average 1.8 percent of GDP or 36 percent of actual revenues over 2011-2023. - Over 2021-23, revenue forecast errors average 1.1 percent of GDP or 28 percent of revenues. - Drivers: - Oil revenue forecast errors explain most of total revenue forecast errors. - Oil production projections are consistently optimistic. ### Oil Revenues — Details - Aggregate performance: - Oil revenues are consistently overestimated over the analysis period, except for 2020. - Oil revenue forecast errors average 1.1 percent of GDP and 61 percent of oil revenues over 2011-2023. - Actual oil production failed to achieve budget targets in 11 of the 13 years studied. - Oil prices and benchmarks: - The authorities’ benchmark oil price is systematically more conservative than actual oil prices, partially offsetting optimism in oil revenue forecasts. - WEO projections were closer to oil price outturns in earlier years; the gap has closed in recent years. - Narrative explanations in budget implementation reports: - Shortfalls attributed to combinations of low oil lifting volumes, crude oil theft and pipeline vandalism, illegal bunkering, and occasional low international oil prices. - Reports do not provide breakdowns separating operational/technical constraints from security-related leakages. - Fiscal deductions are cited as causes of net oil revenue underperformance; details on sources of deductions are often lacking. - In years with large explicit and implicit subsidies (e.g., 2011 and 2021/2022), forecast errors are commensurately large, suggesting subsidies may contribute to unbudgeted fiscal deductions. ### Non-Oil Revenues — Key Findings - Major components: VAT, CIT and Customs taxes. - VAT: - Optimism bias prior to 2020; VAT overperformance thereafter. - Forecast errors average 25 percent of VAT revenue, but only 0.2 percent of GDP. - CIT: - Optimism bias in 2015-2020 followed by strong CIT revenue growth not captured in projections, resulting in pessimism bias. - Customs: - Remains positive and large in recent years, with optimism bias particularly in 2022 and 2023. - Net non-oil revenues: - Forecast errors for net non-oil revenues are larger than for non-oil tax revenues, indicating that deductions and non-tax lines also exhibit optimism bias. - Report narratives attribute non-oil shortfalls to: - Lack of remittance from MDAs, weaknesses in tax collection, administrative challenges at FIRS, and delays in revenue-enhancing policy implementation. - Most reports lack in-depth analysis of sources of non-oil forecast errors. - Nominal GDP assumptions from MTEF documents: - No systematic evidence of optimism bias; outturn exceeds authorities’ projections. Forecast optimism in non-oil revenues does not arise from optimistic nominal GDP assumptions. ### Expenditures — Key Findings - Total federal government expenditures: - Budget projections consistently overestimate expenditures. - Total expenditure forecast errors average 0.8 percent of GDP over 2011-2023 and exhibit an upwards trend since 2020. - Expenditure forecast errors predominantly driven by optimistic capital expenditure projections. Recurrent expenditures - Personnel: - Very small forecast errors on average, though errors have increased in recent years. - Overheads and other non-debt/non-personnel: - Large forecast errors as a percentage of those expenditures but average only 0.2 percent of GDP over 2011-23. - Debt service: - Mostly negative forecast errors (budgets underestimate interest payments). - Debt service errors average -0.1 percent of GDP over 2011-2023. - Reported causes: - Positive forecast errors in overheads and personnel reflect government efforts to limit recurrent spending amid weak revenue performance. - Reforms cited: electronic payroll databases, restrictions on unauthorized recruitment since 2021, efficiency unit actions, freezing overheads, IT systems for PFM, and use of the Treasury Single Account. Capital expenditures - Persistent underexecution: - Forecast errors in capital expenditures average over 70 percent of the actual executed values, and 0.8 percent of GDP over 2011-2023. - Budgeted capital expenditures far exceed actual execution in all but one year. - Concurrent budgets and execution capacity: - Underutilized capital budgets can be extended to the following year, creating concurrent budgets and suggesting MDAs lack capacity to execute both years’ budgets simultaneously. - Underutilization alongside project-level financing constraints points to MDAs being capacity constrained, leading to incomplete and abandoned projects. ### Fiscal Deficit - Fiscal balance forecast errors: - Rose during 2017-2021, then shrunk thereafter; fiscal balance outturn was higher than budgeted in the most recent year of data. - Years with large fiscal balance forecast errors are characterized by optimism in both oil and non-oil revenue projections. - Post-2021: declining oil revenue forecast errors have helped reduce fiscal balance forecast errors. - Offsetting errors: - Shrinking fiscal balance forecast errors partly reflect under execution of budgeted expenditures offsetting revenue shortfalls; fiscal balance errors mask large, offsetting component errors. - Central bank financing: - Relationship between fiscal balance forecast errors and central bank financing is not consistent. - A period of large fiscal balance forecast errors during 2017-2021 coincides with an increasing trend in the use of ways and means during 2018-2023, suggesting forecast errors may contribute to resorting to central bank financing. ### Conclusion and Policy Advice - Core issue: - Large and systematic optimism biases in revenue (primarily oil production) and in capital expenditure forecasts limit the budget’s usefulness as a framework for fiscal policy. - Suggested measures drawing on cross-country experience: - Enhance capacity of the macro-fiscal unit responsible for forecasting. - Publish internal and external forecast performance reviews. - Enhance political commitment to budget targets. - Expected outcome: - By improving the quality of fiscal forecasts and tightening the link between budget execution and fiscal targets, the authorities can enhance the credibility of the budget as a guide to fiscal policy in Nigeria. *Prepared by Salma Khalid (FAD). Sources: Nigeria Ministry of Budget and Economic Planning and IMF Staff calculations.* ### 22. Forecast errors in Nigeria’s budgeting process indicate persistent optimism with ### 22. Forecast errors in Nigeria’s budgeting process indicate persistent optimism with ### Findings on revenue forecast errors - Analysis of 16 economies in Eastern and Southern Africa indicates the presence of positive forecast errors in revenue projections across the majority of the countries. - The size of forecast errors in Nigeria’s revenue place it at the top by size of average revenue forecast errors (Figure11, Battersby & Lienert, 2021). - Text Figure 11. Average Revenue Forecast Errors (2012/13-2018/19, Percent of GDP) is cited as the basis for the comparative statement. ### Impact on fiscal deficit and expenditure compression - Positive revenue forecast errors have had limited impact on the fiscal deficit due to expenditure compression. - Despite revenue shortfall, forecast errors in the deficit are relatively contained in most years, which can be attributed to in-year expenditure reduction. - Evidence for expenditure compression is seen in payroll and overheads and is indicated in budget implementation reports. - Use of ways and means is proxied by evaluating the change in net central bank claims on the central government, in the monetary and financial account statistics (footnote reference). ### Risks from large and persistent forecast errors - Large and persistent forecast errors in budget revenue projections run the risk of underfunding essential expenditures during the budget year when shortfalls occur, due to constraints on the borrowing envelope. - Expenditure compression on overheads and personnel can harm the ability of MDAs to finance their personnel and operational needs and exert a direct impact on the ability of MDAs to execute on their capital expenditure allocations and can compromise the quality of their spending and investment. - Persistent shortfall of capital expenditure execution, and the use of concurrent budgets, indicate capacity constraints at the level of executing agencies, with budget implementation reports indicating weakness in expenditure management and cash flow. - Budget implementation reports note capital expenditures projects that are abandoned before completion. - With capital expenditures constrained by MDA capacity, correctly budgeting limited resources to the most pressing needs and the most capable ministries for execution is critical; this requires more accurate and realistic accounting of government revenues and expenditures. ### Cross-country experience and examples - Kenya: the macro-fiscal department analyzes the quality of macro-fiscal forecasts and publishes their analysis as an annex to its annual Budget Policy Statement; the analysis includes a table discussing the size of divergences between forecasts and outcomes and their main causes. - Malawi: the MoF has calculated the forecasts errors for nominal GDP growth and government revenue, and used these to present confidence intervals around their macro-fiscal forecasts, as part of their development of their fiscal risk-statement. ### Best practices for improving the budget forecasting function - Recognizing the importance of producing clear and credible forecasts of fiscal aggregates and placing the macro-fiscal departments responsible for budget forecasts on par with other MoF and Budget departments. - Ensuring coordination between all fiscal departments to ensure data sharing and collaboration and enhancing quality and timeliness of data. Formal memoranda of understanding for data exchange can be drawn up between relevant agencies. - Ensuring staff training and use of tools for forecasting which are compatible with the skill sets of staff. - Conducting and publishing forecast performance reviews, to enhance transparency, create incentives for improving accuracy, and build public and market confidence in the credibility of the budget documents as a guide for fiscal policy. - Enhancing political commitment to budget targets, by conducting periodic reviews of forecasts, internally highlighting the fiscal cost of different policy choices, and encouraging reviews by external consultants or stakeholders to mitigate political pressure on forecasters. In the case of Nigeria, these reviews can be conducted by the Fiscal responsibility Council on a regular basis and presented to the Ministries and to Parliament. ### Benefits of reducing errors in the budget forecasting process - Enhancing public expenditure management by aligning annual spending with medium and long-term spending priorities, and ensuring spending plans are subject to macroeconomic constraints; credible budgets can enhance the efficiency of resource allocation and improve public service delivery. - Enhancing debt management: persistent deviations between the budget and execution as a result of revenue underperformance or expenditure over execution can result in unanticipated debt accumulation and put fiscal sustainability at risk; lack of fiscal transparency can also influence borrowing costs by increasing risk perceptions. - Reducing uncertainty among investors regarding the direction of economic policies; timely, transparent, and credible budgeting, accompanied by effective implementation are crucial for engendering private sector confidence and allowing greater public-private partnership. - Enhancing public trust in government institutions and the budget process; credible budgeting, upholding budget commitments and clearly demonstrating why deviations from these commitments occur can help deliver greater trust in government and greater public willingness for policy reforms. *Source: sipea2025095-source-pdf — Extract from IMF chapter text (canonical URL: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025095-source-pdf.pdf).* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025095-source-pdf.pdf_